Mark Howard

On a plane trip some years ago, I sat next to an insurance company executive who gave me an interesting, if abbreviated, perspective on his business.

One thing he talked about was the impact of big claims from hurricanes or other catastrophes on insurance companies. Sure, he said, insurers moan and groan when hit with a big chunk of claims and losses, but over the long haul they need "crises." Reason: In the heavily politicized, heavily regulated insurance environment, there is no constituency for actuarially sound rates -- premiums that accurately reflect risk. Consumers, of course, want premiums as low as possible. And regulators, for all the accusations about them kowtowing to the industry, tend to err on the side of lower rates. Why? Their bosses -- elected officials -- may not know or care if rates are actuarially sound, but they do know they won't get far trying to convince voters that their premiums are actually too low. Other business interests like low rates because they support their own profits and subsidize other growth that benefits them. Meanwhile, if there's enough competition, insurance companies themselves may suppress rates a bit to hang on to market share.

That confluence of interests, over time, creates an equilibrium in which companies usually get only bite-sized rate increases from regulators; the longer that equilibrium lasts, the less the price of insurance comes to reflect the real risk, the executive said. So companies look for ways to trim their exposure -- and await the inevitable storm or other "crisis'' that produces losses severe enough to justify a good-sized rate increase that will put them ahead of the curve for a while.

A cynical description, maybe, but our state will be lucky if we get back to a market that works that well.

With state-run Citizens Property insurance now the state's biggest insurer and the only insurance option for many, the state is in a dangerous place. Some Floridians now seem to see Citizens as a state agency with the duty of keeping their premiums at traditionally low levels -- transforming property insurance into an entitlement rather than a commodity purchased in a market.

It will do no good at this point to remind folks that they enjoyed artificially low rates for years. Or that the state has experienced a passel of hurricanes in the past several years and may be in a cycle of increased storm activity. Or that their homes are worth substantially more than they were just a few years ago. And it's politically irrelevant at this point to ask them why, if they think rates are exorbitant, insurance companies aren't pouring into Florida to write policies here.

Those policyholders are angry and scared, and legislators, when they take up the insurance issue this spring, will have to be careful not to let that fear push the state further into a full takeover of the property insurance market.

By the time you read this, a task force headed by Lt. Gov. Toni Jennings will likely have presented detailed recommendations for a program of reforms. I don't know what it will recommend, but fixing insurance over time will almost certainly involve incentives -- possibly along with requirements -- to further harden Florida's housing stock. The task force recommendations will likely involve the state participating in some fashion in the reinsurance market beyond the existing CAT fund as an incentive to get private insurers back in the state. They will also possibly involve the creation of some kind of fund that can be used to reduce assessments by Citizens after a big storm. The state was lucky last year to have a few extra billion in the general fund so that Citizens ended up assessing everybody at 2% of their premiums rather than 12%.

The recommendations also should involve significant changes in the way Citizens operates. It's getting out of the business of insuring multimillion-dollar waterfront homes, which is appropriate, and I think Citizens ought to quit offering builders risk insurance to developers building condos on the coast. Those are exactly the kinds of growth subsidies that send all the wrong messages about where we should and shouldn't build, and which have gotten us into trouble in the first place.

The task force's recommendations should also involve some additional changes in rate regulation to make the market more responsive to changing conditions -- and to keep risk and price more closely aligned. It's not an accident that in the largely unregulated reinsurance market, the ability to charge higher premiums led a number of reinsurance firms this season -- including two divisions of Warren Buffett's Berkshire Hathaway -- to increase their exposure.

Outside the legal reforms, the state will have to keep pushing for the creation of some kind of federal CAT-type fund. And cooperation with nearby coastal states on some kind of a regional disaster fund -- a good idea advanced by CFO candidate Alex Sink -- could be part of the picture as well.

This is a matter of more than usual urgency. The shrunken school enrollments in many districts around the state this fall are a sign that Florida's increased cost of living, including the cost of property insurance, is driving families from the state. In addition, the inability of businesses to find property insurance could ripple through the still-healthy economy in a hurry. (It would be ironic indeed if the state got its biggest dose of "growth management" via the private sector -- the insurance market.)

But even if the Legislature is inclined to be bolder than I think it will be, the bottom line is that the citizens of Florida won't get lower insurance rates out of the legislative session. The cost of insuring homes here, whether it comes straightforwardly in the form of higher insurance premiums or indirectly through some kind of tax, assessment or fee that subsidizes those premiums, is going to keep rising. The days of inexpensive living in Florida may be behind us. The best the Legislature can do in the short run will be to give those not in Citizens a better chance of having their policies renewed by their private insurer. Longer term, it has to begin setting the stage for stability via a healthy private insurance market.

You can reach Mark Howard at mhoward@floridatrend.com