Property Insurance

Property insurance is a big problem for the Florida Legislature. There's something of a miniature crisis going on with insurance companies filing for rate increases when they had been expected to decrease. Around now people are starting to get letters from their insurers letting them know how much they're going to be paying next year - and it can be more than double. State Farm, the worst neighbor, wants to drop 50,000 policies. And this is just the beginning of the insurance problem.

Lets start at the beginning. The Florida state legislature is not the ideal policy making body for property insurance. It has to due with the structure of the legislature: legislators are part time employees, make around $30,000 a year, and are term limited to eight years. In other words, they're amateurs. They're expected to have a regular job (no possibility of conflict of interest there!) that provides the majority of their income, and yet are expected to attend a 60 day regular session, an indefinite number of special sessions, and interim committee weeks. Legislators have only a handful of aides (an aide and a secretary for regular state representatives) who don't make much more than the legislator for the full time job.

I hope you can see the picture I'm trying to paint here: legislators are not experts, and don't have expert staff. They're amateurs with general housekeeping staff. To be fair, the legislature does employ experts for the committee/councils, and leadership positions are rewarded with more and better paid staff. But, the average legislator is not anything more than, at best, an educated amateur.

And yet they think they can fix insurance for the state of Florida! Insurance is, I hardly need to say, a massive, complicated, and most importantly, RICH industry. They have more experts than you could shake a stick at. So, of course, Florida's insurance policy is written, or at least guided, by the industry.

As the link I posted above mentions, the legislature allowed insurance companies to create pups back in the 90s. Pups buy their reinsurance from their parent companies. Think about that for a moment: it basically means that the company gets to profit from selling things to itself. What a deal! I'm sure they would never abuse that power.

So, in January, the legislature pumped up the CAT fund and offered it as cheap reinsurance to companies operating in Florida, as a way to decrease rates. That sounds good in theory. Thats why, when the industry offered that idea to the legislature, it ate it right up. Now, it looks like it was a con the industry pulled on a legislature that didn't know any better. Pups bought reinsurance from the state, and then proceeded to buy more from their parent company. You can see where the profit is.

Whew, six paragraphs and I'm not even done laying out the background of the situation!

Meanwhile, insurance companies are dropping all the policies in the state that are most risky. This shouldn't come as a surprise - all of Florida is prone to hurricanes, and since pups insure only Florida, there's no way to spread out the risk (to people who can't get hit by hurricanes - you know, in Ohio or where-ever). In response, the legislature created CITIZENS, the state-backed insurance agency that covers whomever the companies won't. Used to be that Citizens couldn't compete, and so it charged the highest rates possible, but recently the legislature dropped that requirement, and citizens, as a socialist program (no way around it! it's socialized insurance) is the cheapest option in most places. So, this year Citizens is growing like crazy, and by the end of the year will have two million policies.

So here we are. People around the state are pissed about their raising insurance rates. There's a battle growing between the insurance commissioner McCarty and the pups. Citizens is way larger than the CAT fund can support. If a big hurricane hits, it won't just be a natural disaster, it'll be a financial crisis.

Now, to the politics.

That bit at the top about how we have an amateur legislature is relevant again: no legislator has any idea how to deal with the problem. In a professional legislature, like the US Congress, legislators tend to specialize in policy areas, and so there are a congressmen and senators in DC who are experts on insurance policy. Not so in Florida - the best we might have is some educated amateurs, or insurance industry shills. As much as I am for European Style Big Government (bring it on, Rubio!), I do no want amateurs or the insurance industry designing a socialist insurance policy (although, I have to say, it makes a lot of sense to me for the government to handle insurance [if we want it to do health care insurance, why not property insurance?]). Likewise, more insurance reform guided by the insurance industry is just asking to be conned again. Insurance regulation approved by the industry is just going to result in guaranteed profit, which is A) not going to help in the long run and B) not free market.

So what can we do about property insurance? One thing is to wait for the national government to help us out. Florida congresspeople have been pushing for the federal government to instate some kind of windstorm insurance program. Hopefully that will pan out, because it spreads the risk and the cost across the whole nation. But it'll probably be a while before that happens, and anyway, this blog is focused on state politics.

Another option is create a regional cat fund with other southern states. Bigger cat fund, defused risk - sounds good to me. Democrats are in a good position for this, because it'd be Alex Sink who has to take the lead on that. Democrat legislators need to public ally push Sink to do it, not only so that it happens, but so that they can share credit. Solving (well, at least making positive steps) the insurance crisis while in the minority in both houses is a big victory, as it paints Democrats as competent and motivated, and will definitely help in the 2008 elections.

What else can be done? I have no idea. I'm not an expert, and I have the feeling that you'd have ot be to know how to get the insurance companies to voluntarily reduce rates. And yes, they'd have to voluntarily do it - mandates will cause them to pack up and leave Florida. They're already threatened to do it, and if they did - that leaves us with Citizens and not nearly enough money to pay for hurricane damages.

Anyway, the moral of this story is that our amateur legislature has gotten itself backed into a corner. And its not individual legislators who are to blame: its the structure of the place. Part time, term limited legislators are like lobbyists' wet dreams, and you can be sure that the insurance industry has more lobbyists than anyone else.