As the one-year anniversary of Hurricane Katrina approaches, the nation's attention will soon turn again to the Gulf Coast region. As the country reexamines the devastating institutional response to that tragedy, special attention must be paid to the disappointing performance of the insurance industry, which has left hundreds of thousands frustrated, angry and even destitute as they struggle to survive.
Insurance should be a policyholder's road to recovery at times of crisis. But as Floridians know better than anyone, the insurance industry's response to recent hurricanes has been poor, ranging from resistance to paying legitimate claims to massive cancellations to astronomical price hikes for future coverage.
This is shocking behavior by the insurers. In the mid 1990s, in the wake of Hurricane Andrew, the insurance industry acted similarly, imposing gigantic price hikes and sharply reducing policy coverage coupled with dropping many homeowners flat. They promised such actions would bring stability to the insurance markets in hurricane-prone states. But promises of stability, the test of the value of insurance to consumers, have been broken. Consider just the price of insurance. After Hurricane Andrew, insurers introduced the concept of using scientific ''models'' on which to base rates. The idea was to make pricing more stable for policyholders. But now, in an amazing broken promise, insurers are manipulating these models to raise rates, to the detriment of policyholders. This is beyond unfair, and many Floridians are suffering.
Homeowners are not the only ones hurt. As many businesses are now discovering, insurance coverage is extremely hard to find. Even when it's available, insurers are covering less and less for more and more money. This month, the Florida insurance department released figures showing that 42 percent of commercial policies have been canceled or not renewed in the past six months, and that among the 32 percent able to find new coverage, rate hikes were astronomical, with policies covering less.
With Florida's insurance situation in such crisis, state lawmakers should be expected to find real solutions that address this economic emergency. But as this past legislative session demonstrated, the majority of state lawmakers and the governor remain focused on measures that simply give insurers everything they want, including the tools to further increase prices and restrict coverage, rather than to really solve this crisis.
Now the governor has appointed a task force, headed by Lt. Governor Toni Jennings and filled with insurance and real-estate representatives. Reports indicate they are exploring traditional, temporary fixes, which will not work. Continuing to try to fix this problem the same way by placating the private market, giving in to its demands in a desperate effort to keep it in the state, is a road to continuing disaster. That much should be obvious, by now.
Eliminate profit motive
But there is an answer. The time has come for Florida to remove the private sector from the hurricane-insurance business -- for both homeowners and commercial insurance -- and establish a privately run state plan for the hurricane wind portion of insurance coverage.
A solution like this is different from current state plans, like the JUA and the Citizens Property Insurance Corp., into which policyholders in high-risk areas are dumped while private insurers keep the lower risks for themselves. That type of solution is obviously unfair to Florida taxpayers and does nothing to solve this problem. It is the equivalent of trying to solve the health-insurance crisis by having the state insure only terminally ill patients.
By eliminating the profit motive, cutting overhead significantly, eliminating the need to purchase reinsurance and allowing for tax-free reserve build-up, this plan would result in $3 billion more in the bank each year. Policyholders would benefit immediately, with huge drops in premiums. Similar positive benefits would accrue to business policyholders if they were included in the plan.
The insurance industry has been adept at exploiting Florida hurricanes by repeatedly threatening to pull the rug out from under the state economy -- dumping risk, raising rates and abandoning policyholders altogether. The time has come to remove the private sector from Florida's hurricane insurance business, and establish a privately run state plan for the hurricane wind portion of homeowner's and business insurance coverage.
J. Robert Hunter and Joanne Doroshow are co-founders of Americans for Insurance Reform.