Over the past two decades, Florida has built a fiendishly complex property insurance system that has turned the state’s government into one of the nation’s largest providers of homeowners’ coverage.
In recent weeks, many state officials have asked for loans or loan guarantees to preserve this system. The proposed guarantees – whose supporters include Democratic Rep. Ron Klein, Republican Gov. Charlie Crist, and Democratic Sen. Bill Nelson – would expose federal taxpayers to liabilities that could dwarf the largest Wall Street bailouts. They’re a bad idea.
Some background: For a generation, Floridians and their elected leaders have refused to acknowledge that wind-insurance rates should be high for residents of a hurricane-prone peninsula.
Rather than letting rates rise for people in hurricane-prone areas, the state government has capped them and created a state agency, the Florida Citizens Property Insurance Corporation, that competes with private insurers.
As a result, almost no large private companies write new wind insurance policies in Florida. In an unsuccessful effort to keep private companies, the state created the Florida Hurricane Catastrophe Fund.
This “Cat Fund” serves as a mandatory reinsurer for every company doing business in Florida. When claims reach certain thresholds, the Cat Fund pays a portion of insurers’ liabilities. And Florida Citizens is its largest client.
But the Cat Fund, which would end up with most of the loans, simply can’t work. Rather than actually saving the funds to pay its liabilities, Florida legislature plans to pay hurricane claims by issuing lots of bonds.
The Cat Fund has at least $28 billion in liabilities and only about $3 billion in assets. Thus, it may need to issue $25 billion in debt to cover a storm. (No state has ever issued more than $12.3 billion in debt at one time.) But a federal loan capability, once established, could cost even more. Florida’s total coastal liability tops $1 trillion and, with the floodgates open, the state may ask for even more.
Floridians should pay more for homeowners’ insurance. When Florida politicians ask for loans to support their broken system, Congress and the Treasury should respond with a polite, firm “no.”
Eli Lehrer is a senior fellow at the Competitive Enterprise Institute.
