"Florida's Coming Insurance Hurricane - Lessons for Healthcare"

Sydney M. Williams

Thought of the Day

“Florida’s Coming Insurance Hurricane – Lessons for Healthcare”

August 29, 2011

Whenever government intervenes into the free markets’ natural method of determining price, unintended consequences can ensue.

In 1993, a year following the $25 billion devastation caused by Hurricane Andrew, insurance companies attempted to raise prices. Premiums based on previous actuarial tables proved inadequate. The insurance industry is profit-driven; they are not eleemosynary organizations. Competition keeps them honest. Following Andrew, Florida state insurance regulators demurred when it came to granting higher rates; thus were born the Florida Hurricane Catastrophe Fund, a reinsurance company, and the Florida Citizens Property Insurance Corp., both state backed businesses.

The “Cat Fund,” as the reinsurance company became known, is funded by premiums charged to participating insurance companies, by investment income (they currently have $7.3 billion in liquid assets,) by the ability to issue bonds. Taxes on insurers would pay for the bonds. Of course if it is unprofitable to write insurance, private companies simply won’t do so. As the Wall Street Journal put it in an editorial on Saturday, “The fund was supposed to be a safety net, not a reinsurer of last resort.”

Over the past few years the Cat Fund has grown, first because of its pricing advantage – this is a state owned fund, meaning that there are built-in expectations that shortfalls can be made up through bond issuance and taxation – and second because the state mandated that all property and casualty companies operating in Florida purchase reinsurance from it. Former governor, Republican Charlie Crist elevated the risk to taxpayers in 2007 when he raised the Cat Fund’s cap. Citizens has grown because, like the Cat Fund, its rates are set by law below those of its private competitors – virtually assuring it will operate at a loss.

One of the great ironies of the situation in Florida is that many of the coastal homes are owned by the wealthy. The fact that some, if not all, of their home property insurance costs are subsidized by taxpayers seems inherently unfair. Eli Lehrer, a vice president of the Heartland Institute, has written that “a prohibition of state subsidies for building in environmentally-sensitive, hurricane-prone areas would help reduce insurance rates while making residents safer.” That sounds sensible.

Floridians, though not politicians, are beginning to acknowledge the potential risks. The Journal’s editorial quoted Jack Nicholson, Chief Operating Officer for the Cat Fund: “We would like to be able to say to the legislature that we can pay 100% of our losses, regardless of what happens. Right now we can’t honestly say we can.” The CFO of Citizens, Sharon Binnum, appears equally aware of the problem. She indicated that in the event of losses, and the Cat Fund is unable to make up losses incurred by Citizens, “taxpayers would take a double hit – first to shore up the Cat Fund and then to shore up Citizens.” However, a bill to reform Citizens by raising rates and re-invigorating competition died at the hands of Republican Mike Fasano, and a populist scare campaign.

Newly elected Governor Rick Scott has thus far failed to tell the public the bad news – higher rates and more private insurers are needed. Mr. Lehrer suggests a compromise: “The legislature should take a middle course and work to shrink Citizens 60% over four years. That would cut the potential liability imposed on taxpayers.” The sooner the state acts the better. Florida largely escaped Irene, but there is no assurance she will elude the next one. The ones who will be dinged are Florida residents and tax payers.

Charlie Crist, when he was governor, simply wanted to pass the hot potato to Washington. His concept was to have the federal government establish a disaster fund, from which Florida and other states could draw. That may sound like a good idea in theory, but in practice passing the buck does not solve the problem, and it discourages commonsensical behavior?

The situation in Florida is symptomatic of a bigger problem facing our country. Increasingly, government has assumed responsibility for the negative outcomes of the personal actions of its people – the best example being the mortgage market. Wall Street, in the aftermath of the credit crisis and with the creation of TARP, was accused – rightly, in my opinion – of a “heads I win; tails, I don’t lose” attitude. Unfortunately that perspective has permeated our society. One of the more debilitating consequences of a paternalistic government is that the people become used to looking to Washington to cure all ills. Until our society has been re-instilled with a sense of personal responsibility, it is difficult to see it achieving its past successes.

Government does have a role. Repairing harbors, roads and bridges resulting from storms such as Irene can only be handled by government. But people who build in disaster-prone areas, against the advice of authorities, should assume personal responsibility for the costs they incur. Why should the prudent pay for the excesses of the prodigal?

Florida did escape Irene, but there will be others. Despite the promises of politicians, there is no such thing as a free lunch. Somebody has to pay. The Cat Fund and Florida Citizens Property Insurance Company raise the question: who is better at setting prices – the market or the government? The answer to that question has implications for other government programs, including the Patient Protection and Affordable Care Act, which will likely be next in the docket.