Call it the "All In"question.
What if the state of Florida assumed complete control of the property insurance market and threw all its weight behind Citizens Property Insurance?
As free-market economists and insurance agents run screaming from the room, consider this:
In three critical areas, the state is almost there.
Exposure. Between state-backed Citizens' 1.3-million policyholders and the recent expansion of the state's Hurricane Catastrophe Fund, more than half the property insurance liability in Florida is now covered by the state.
Affordability. In 55 of Florida's 67 counties, Citizens' rates are lower than those of State Farm Florida, the state's second-largest property insurer. In nearly all counties, Citizens is now a mid-priced product.
Availability. Nationwide dropped 40,000 policies last week, on top of the 35,000 it dropped two years ago. State Farm dropped 50,000 policies in July, and Allstate has dropped about 300,000 polices over the past three years. Many other companies, including Tower Hill, Liberty Mutual and USAA, are restricting their business.
No state has ever attempted to insure all of its property. But no state faces the risks that Florida does.
Is such an idea feasible?
"You bet it is," said Bob Correll, a Palm Harbor retiree and former insurance agent who pays State Farm about $2,000 a year to insure his modest two-bedroom home.
"I know it sounds like communism, and I'm not a Communist. But if these companies want to leave, let them. We'll do it ourselves. The state can set up controls and run it better than these companies."
The insurance industry argues just the opposite. In a recent Wall Street Journal editorial, Jay Fishman, chairman and CEO of The Travelers Cos., warned that if Hurricane Dean had hit South Florida, a massive taxpayer bailout would have followed.
"We should resist public policy measures that enact the sort of 'windstorm socialism,' " Fishman said, "forcing inland property owners or all federal taxpayers to pay for hurricane risks to which they are not subject."
Beyond that, an all-in solution may not be efficient, said Jonathan Hamilton, chairman of the economics department at the University of Florida. "It may underprice the most severe risk because Citizens is a government operation that's under a lot of pressure to distort rates from being actuarially fair."
The real problem, Hamilton said, is that Citizens is not diversifying the risk. "Just spreading it around the state," he said, "is woefully inadequate."
"What we should do is sell and repackage risk to those who want to take it. We ought to get outside capital into the market. Trying to get somebody else to bear the risk makes a lot of sense."
The somebody else is Wall Street.
If there is a Father of the All-In Theory, it is J. Robert Hunter, director of insurance for the Consumer Federation of America and a former insurance commissioner of Texas.
Hunter believes turning Citizens into the sole property insurer statewide might work, but like Hamilton, the key is shifting the risk to the financial, not insurance, markets.
"The equity market, big investors like hedge funds with a lot of capital, could sell catastrophe fund bonds on the stock market, tapping into trillions of dollars," Hunter said. "A Katrina-type event to them is nothing. They could price reinsurance to make a fair but not grossly excessive profit."
Hunter acknowledged that in the short term, a major hurricane could wipe out Miami "and you'd have to find the money somewhere. It's a timing risk."
It also goes against conventional wisdom.
"Some would say it undermines private enterprise, Hunter said, "Others say no, insurance is a social contract. A lot comes down to your political thoughts. But a system where insurance companies get to cherry pick the stuff they think will make money and leave rest to the state is a bad system. You have to spread the risk."
Citizens board chairman Bruce Douglas declined to speculate on an all-in proposal, saying that decision is in the hands of the governor, Legislature and Cabinet.
Florida has already pushed a huge stack of chips into the pot. Citizens has estimated that its probable maximum loss this year for a 1-in-100-year storm is $22.8-billion. That's the amount of money Citizens believes it will have to pay in claims if a 1-in-100-year storm hits.
Contrast that with the $2-billion in cash and $8-billion in borrowing power Citizens has.
Kevin McCarty, Florida's insurance commissioner, believes hedge funds could help, but they are mostly short-term investment vehicles and might not want to wait around to get paid by the state.
Instead, McCarty wants to let the legislative reforms passed in January play themselves out. Those reforms include requiring insurance companies to buy more of the state's CAT Fund reinsurance and pass the savings on to policyholders.
It's already working, McCarty said. Smaller companies, ones that write fewer than 100,000 policies, are slowly coming to the state and lightening some of Citizens' load.
"Citizens is not growing as fast as we first thought, and we have considerable more capital coming into Florida," McCarty said. "But no, it's not enough."
As for larger companies fleeing the state, McCarty said State Farm, Allstate and Nationwide had reduction plans in place for more than 10 years. "They were nonrenewing," McCarty said, "before (Hurricane) Charley made landfall. "But I don't think all the news is bad," he added. "I'm frustrated, but we have stemmed the tide."
An all-in solution?
"I'm not opposed to anything that brings stability to the market," McCarty said, "but I would not want to encourage imprudent economic behavior. An industry delivery system is already in place, and the CAT Fund is an efficient way to provide to capital capacity."
Meanwhile, companies continue to ask for higher rates and homeowners like Julie McNichol still wind up with Citizens.
McNichol, 48, works at Barnes & Noble and owns a 49-year-old, 1,660-square-foot home in Gulfport. Nationwide notified her it will drop her homeowners policy in December. With a large deductible, she was paying $1,660 a year, excluding flood insurance.
After checking more than 20 companies, she found one willing to take her: Citizens. But her rate would rise to $2,860.
"I'm going to see what happens in the next year, and then probably put the house up for sale and move out of state," she said.
It's not so much who insures her, she said. She just wants to pay her premium.
"I took a second job trying to sock away money for insurance," she said.
"And there's a lot of people out there in the same situation I am."
The case against
- If the state suffers major hurricane losses, and Citizens and the CAT Fund run huge deficits like they did in 2004 and 2005, the state's main recourse is an assessment on all policyholders. (Citizens had a $2.5-billion shortfall in 2004-05.) Federal disaster relief could be inadequate, late in coming, or both.
- Those who live inland would be forced to pay even more for losses likely concentrated along the coast.
- Citizens could endanger its tax-exempt status if it deliberately undercuts private companies.
- Smaller insurers could be driven out of the market and the well could be poisoned for companies considering a move here.
- Expanding Citizens ignores the basic premise that insurance rates need to go up, not down, based on Florida's increased risk. But if the rate increases are gradual and predictable, the hardship to homeowners can be reduced.
The case for
If no major storms hit the state in the next few years, Citizens and the CAT Fund would build sizable reserves. That would lessen the chances of a statewide bailout and lead to reduced rates.
- Since Citizens buys all of its backup coverage, or reinsurance, from the state, if that money is not used in a given year, it would remain in state coffers, not lost forever to a private reinsurer or the parent company of a major insurer. The state could also invite investment vehicles like hedge funds to back the CAT Fund.
- Unlike private insurers, anyone can open Citizens' books and see how much money is taken in and where it goes. And instead of having rates that are unpredictable and in some cases questionable, Citizens rates are set by the state.
- Citizens already has about 900 employees and has greatly improved its efficiency. Plus its rates are in the mid range already, lower on average than some of the big players like State Farm.