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Florida's Insurance Crisis: Is There a Solution?

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It’s abundantly clear—there are no easy answers, there is no one fix and change will not happen overnight. However Florida’s Realtors® are offering solutions. Here’s where we’re headed into the state legislature’s special session this month and the 2007 regular session.

Throughout Florida, obtaining affordable property insurance is almost impossible. After suffering higher-than-expected losses from eight hurricanes in two years—and facing unfavorable weather predictions for the future—private insurers are fleeing the state or dramatically raising their premiums.

“This is the most formidable problem in the state’s history,” says Lee E. Arnold Jr., chairman and CEO of Colliers Arnold in Tampa and a member of the state’s advisory Property and Casualty Insurance Reform Committee. “On the properties we operate, insurance is having a dramatic impact on our pricing structure.”

For the state’s real estate professionals, the pricing and availability of windstorm insurance for homeowners can make or break a transaction. Citizens Property Insurance Corp., the state-run insurer of last resort, has become the largest company in the state, with more than 1.2 million policies written in much of the state.

According to the Property and Casualty Insurance Reform Committee, a coalition of insurance agents, Realtors® and homebuilders, “As common-sense market reforms for catastrophe funding are implemented, Citizens will no longer be needed in its current form. Therefore, it must be restructured to avoid unnecessary growth in the future and to eliminate expensive and unnecessary bureaucracy. It should provide provisional coverage only to those who need it and only for the time and extent of that need. And, it should never enable a financially capable individual to avoid the responsibility of hardening their home or business against hurricanes.”

“Without Citizens, all of us in the real estate business would be on long vacations,” says Gregory D. Rokeh, broker-associate of Watson Realty Corp. in Longwood. He serves on the Citizens Market Accountability Advisory Committee, a panel created by the Legislature after the costly 2004 hurricane season.

Since Hurricane Andrew in 1992, the number of standard insurance companies writing property and casualty policies in Florida has fallen by two-thirds, says Rokeh. “Insurers feel the risk is higher and the regulatory environment in Florida is not that pleasant.”

Today, the insurance issue is a high priority for the state Legislature and the U.S. Congress. And there are a variety of suggestions that might provide some long-term relief. “What needs to be done is for the Realtor® world to come together and talk as much as possible as a single voice,” says Arnold. “The more ideas we bring to the table, the better and the faster the results.”

“Reforms that I think are needed immediately relate to increasing the state’s capacity to offer reinsurance,” says John Sebree, vice president of public policy for the Florida Association of Realtors.® “Insurance companies need greater access to reinsurance, and we’ll find them staying in our market [if it’s more readily available]. The special session could deal with that by lowering the threshold for the insurance companies to be eligible for state reinsurance. I also think they need to expand the mitigation program to show the world that we’re serious about hardening our homes.”

And, in the meantime, there are a few practical steps property owners and real estate professionals can take to improve their coverage situation. With the special session scheduled for this month, here are some proposals being put on the table:

A Closer Look at the Problem
In Florida, private insurers are willing to write policies to cover automobile accidents, theft and fire. After all, they still make money in those markets. But when it comes to windstorm-related losses, the story is vastly different.

“All you have to do is understand the math,” says Frank Kowalski, broker-owner of Metro Dade Realty Inc. in Miami and a member of the state’s Property and Casualty Insurance Reform Committee. “When eight storms slam though your state in 24 months causing $36 billion in damage—and the insurers have only collected $15 billion in premiums—you know there’s a problem.”

And the numbers get even worse, from an insurance company perspective. A major hurricane hitting Tampa Bay could cause $60 billion in losses, and a direct hit on Miami Beach could cause $125 billion or more, says Arnold.

With meteorologists predicting higher-than-normal hurricane activity for the next decade, there’s little to entice private insurers to offer coverage at competitive rates. “Simply shouting ‘Lower my rates!’ won’t do any good,” Arnold says. “For insurers, the rates need to be sound on an actuarial basis. And right now, that just isn’t the case.”

On a technical level, one of the problems for insurers is the difficulty of developing accurate loss-forecasting models. “The 2004 storms ended up being much more expensive than the models had predicted,” Rokeh says. “However, there is a constant push to create more accurate models.”

Arnold notes that modeling is particularly difficult in the commercial sector because there is so much variability between properties. The risks can be very different for a modern office tower, a small neighborhood shopping center and a hurricane-strengthened hotel on the ocean.

“We need to have a better understanding of the maximum loss on a property through better engineering and analysis,” says Arnold. “We need to work with the catastrophic loss-modeling agencies as an industry to help them understand the risk in Florida better than they do now.”

The Reinsurance Issue
Florida insurance companies rely on the reinsurance market to reduce their potential losses in the event of a hurricane. However, after the losses of 2004 and 2005, reinsurance companies are also reluctant to take on risks from Florida.

“Reinsurance is a worldwide issue,” says Joseph S. Ballarino, broker/owner of Amerivest Realty-Winfield & Associates Inc. in Naples and 2006 chair of FAR’s insurance subcommittee.  “Our representatives have traveled to London to talk to reinsurance syndicators, and they’ve said they don’t want any more Florida exposure right now. It’s not a good thing when the whole world is feeling like that.”

Closer to home, the state-sponsored Florida Hurricane Catastrophe Fund has helped to stabilize the insurance market in recent years by covering private losses over a certain amount—in essence, a form of reinsurance.

Property and casualty insurers doing business in the state are assessed for contributions to support the “cat” fund—before and after a hurricane. In 2005, the state spread its post-hurricane assessment out over 10 years, says Rokeh. But if another major hurricane came through before then, insurers could be assessed again—adding to the uncertainty of doing business in Florida.

Ballarino says Florida real estate professionals should support an expansion of the catastrophe fund. “This is a form of reinsurance that would help make our state more attractive to the private sector,” he says.

While the state’s catastrophe fund helps keep premiums down and companies in Florida, it’s no longer adequately funded and capable of handling the level of exposure we face going forward. Ways must be found to expand catastrophic funding and to enhance the ability of the state to partner with private insurers.

It’s also important that Florida stop funding its wind exposure with post-event assessments levied only on policyholders. We must find a fair and equitable way to build surplus, applying minimum impact on all those who benefit from available, affordable property insurance.

But it may take time to find the right level of state involvement and funding support. Arnold points out that the state’s bond rating—and the cost of doing business—is affected by its exposure to hurricane risk. “We have to keep our economy, our bond rating and our debt in relative balance,” he says. “A dramatic jump in our exposure could create problems across the board.”

The Federal Government’s Role
By law, U.S. insurance companies have to set rates on a state-by-state basis. That means the risks—and premiums—paid by a homeowner in Iowa or New Mexico are very different from those in Florida, Louisiana or California.

But after Hurricane Katrina in 2005, there has been a strong push in Congress to create a national catastrophe fund to bail out private insurers faced with heavy losses —essentially a form of reinsurance.

Not surprisingly, Florida’s senators and representatives have been active advocates of measures like the Homeowner’s Insurance Protection Act of 2005, which would provide lower-cost reinsurance to primary insurers, thus reducing the costs of insurance to homeowners around the country.

“This is one of FAR’s priorities for the next year,” says Ballarino. “There is an ongoing debate in Congress, and it’s vital for Florida real estate professionals to be heard.”

Arnold agrees that the federal government’s help is needed on the commercial side as well as for residential properties. “No one state can handle a major catastrophe,” he adds, “and that means putting a federal fund in place.”

In a recent talk to the National Association of Realtors,® Florida Insurance Commissioner Kevin McCarty called for a national layer of reinsurance that could be purchased by eligible state programs. “If we can accomplish this goal, it will likely lure additional private capital to the insurance market,” he says. “More capital means more competition, lower premiums for insurers, and ensures availability of property insurance.”

Another way the federal government could help would be to authorize creation of Hurricane or Catastrophe Savings Accounts (HSAs) that would allow individuals to set aside money that would accumulate tax free to cover deductible losses or mitigation steps.

 “This would help you pay for the damage an insurance company doesn’t cover,” says Ballarino.

“Hardening” Florida Homes
There is one big step every Florida property owner can take today—without waiting for the state Legislature or U.S. Congress: “hardening” the home or commercial building in advance of the next storm.

Spending $5,000 for a new roof or storm shutters now may reduce insurance premiums to some extent in the years ahead. And the state may even help pay for some of the costs through its My Safe Florida Home program (see “Florida’s My Safe Home Program” on page 52).

“FAR is calling for expansion of this program,” says Ballarino. “Safer homes make people feel safer, and if strong homes get through a storm without damage, the claims will be less and the rates can go down.”

A greater statewide focus on hurricane-resistant homes could lead to the development of a new rating scale that would address how well homes hold up in storms. If incentive programs are established and disincentives to mitigation are eliminated, existing homes can be fortified to withstand hurricane-strength winds, more lives will be saved, and the financial impact from property damage will be minimized. By taking steps to reduce and manage total exposure to hurricanes, Florida can help moderate damage claims and reduce insurance costs.

 “Perhaps the next thing would be developing a scale of 1 to 10—based on an engineer’s report—[measuring] how well that home [is likely to] withstand a hurricane,” says Kowalski. “It would provide an incentive for the [sellers] to upgrade property and put their homes at a competitive advantage over the competition.”

However, there would be a need to balance the needs for “harder” homes and affordability. “It may cost $20,000 to $30,000 to make a home safer,” says Kowalski. “If we go that route, we want to be sure there are long-term benefits for everyone.”

Ultimately, solving the insurance problem will require a multifaceted approach, say Florida real estate professionals. “There is no easy answer,” says Rokeh. “All the choices are painful.” But the silver lining, says Sebree, is that, “the legislature is looking for answers, and they will be very open to our comments and recommendations. Having a special session after the election will really take the politics out of it, and the right reforms will be made.”

For more information on FAR’s legislative priorities, go to http://media.living.net/Legislative2006.

Richard Westlund is a Miami-based freelance writer. Tracey Velt is Florida Realtor magazine’s contributing editor.