Carrot and stick, or bail-out?

Insurance debate in the Florida Legislature wound down to the final hours of the 2006 spring sessions in Tallahassee, with the final decision ending in the passage of a bill viewed by bystanders as a band-aid approach in an attempt to cure a major disease.

During the discussions, the Legislature considered rebates to homeowners of $140. It wisely abandoned rebates for a plan that will kick in $715 million toward Citizen’s Property Insurance Corp.’s $1.7 billion deficit. Consumers still have to make up the $900 million difference, but at least the legislation cut the amount they will have to pay in half.

The bill has two provisions that provide a carrot-and-stick, albeit a small one: $250 million in loans to encourage private insurance companies to expand in Florida; and the allocation of funds to provide catastrophe coverage for small insurance companies. If there is a hurricane or other natural disaster, $250 million is a drop-in-the bucket and won’t begin to approach the funding that would be needed.

To offset the remaining Citizens deficit, consumers will still have to pay a 2.5 percent assessment, or $25 for every $1,000 of premium paid. And even that won’t get them off the hook because the Legislature also approved a second, 1.5 percent, or $10.70 for every $1,000 of premium paid, spread out over 10 years.

With the hurricane season already underway, the insurance industry views the measure as insufficient because it does not encourage new carriers to come to Florida, and might even push some to decide to leave.

And what happens to Citizens budget if the 2006 hurricane season repeats what happened in 2005?

One of the provisions implemented by the Legislature would encourage Citizens, over a three-year time-span, to charge high-enough rates to cover its losses after a catastrophic hurricane. That means that while policyholders now covered by Citizens would not see an immediate increase in rates, within three years the costs of switching a policy over to the insurer of last resort would increase dramatically.

Florida homeowners are anxiously awaiting their free property assessment and promises to receive as much as $5,000 in matching funds to hurricane-proof their homes. The Department of Financial Services has employees hurriedly preparing to implement the plan within 60 days of when the bill passed–but it looks like Citizens policyholders will be first in line, leaving few dollars left over for homeowners not covered by the state’s insurer of last resort.

The key question the Legislature, Citizens officials and Florida state officials have to consider is how to make Florida’s insurer of last resort self-sufficient. Even with an infusion of $715 million dollars, Citizens seems to be dragging policyholders and even innocent homeowners who can find insurance and do not live on the coast, deeper and deeper in debt.

The best way to prepare for future catastrophes and the huge financial burden they entail would be for the state to run and finance a program that would build an emergency fund to pay for such occurrences. At the same time, on a federal level, the bailout program now being considered would provide a necessary helping-hand which, combined with a state program, would bail out both carriers and consumers.

Topics Catastrophe Carriers Florida Hurricane Homeowners