Florida Chief Financial Officer Jeff Atwater is right and wrong when he says Floridians should be seeing savings in their property insurance bills. In a letter to Insurance Commissioner Kevin McCarty, Atwater asked him for his input on the failure of the state’s private insurers to pass along significant costs savings they have enjoyed as their reinsurance costs have fallen recently.
Citing a poll of insurance underwriters and brokers in The Insurance Insider, Atwater told McCarty insurers had seen reinsurance costs savings between 15 percent and 20 percent. “Can you please explain why a significant drop in reinsurance costs worldwide has not yet corresponded to a significant drop in property insurance rates for Floridians?” Atwater inquired.
McCarty responded with a letter that defended the insurance industry, saying many companies are being forced to buy more reinsurance coverage to strengthen their financial bottom lines and retain high credit ratings, according to a report in the Orlando Sun-Sentinel.
Part of the reason for that, according to a report in the online trade publication Insurance Journal, was a requirement that insurers pay into its Florida Hurricane Catastrophe Fund, or Cat Fund. That fund was mocked for providing “phantom coverage” due to its projected $1.5 billion funding shortfall. The Cat Fund has $17 billion in reinsurance exposure, but only $8.5 billion in cash. To make up the difference, it would have to issue bonds, but Cat Fund executives told legislators it could expect to raise only about $7 billion.
There are a number of factors at play in the private insurance market that could eventually produce lower rates for customers. Primarily, a dearth of landfalling tropical storms and hurricanes in the past six years has enabled insurers to reap millions of dollars in premiums while avoiding catastrophic payouts. Second, the Legislature has passed measures in the past two years that have allowed the state-run Citizens Property Insurance to raise premiums and “depopulate” its customer base. The intended effect of those measures is to force property owners into the private market, where increased competition should drive prices lower.
While we support Atwater in his effort to focus attention on stubbornly high premiums, McCarty and others are correct in pointing out the mitigating factors that make his analysis flawed. For example, a report by the Insurance Information Institute found non-catastrophic claims leapt 80 percent since 2005’s Hurricane Wilma. The report notes that claims often increase during economic downturns.
Atwater should also press the Legislature to redouble its efforts to reduce the size of Citizens, the largest property insurer in the state and continue to reduce the exposure of the Cat Fund.
If accurate, the industry’s contention that the Cat Fund’s inadequate funding forced insurers to buy more private market reinsurance, the Legislature is as much to blame for stubborn premium levels as private insurers, who must also compete with Citizens’ below-market rates.
Getting insurance coverage “right-sized” is key to the state’s rebounding real estate industry. That means getting more private companies back into the game at profitable premiums levels. It won’t always be popular, but it’s better policy than the hurricane crap shoot Florida has been playing for nearly a decade.