On the eve of hurricane season, we ponder what would happen if an irresistible force met an immovable object. To make this concrete, we consider the effect of a Hurricane Katrina-like storm impacting Florida's property insurance program, the centerpiece of which is the actuarially unsound, tax-exempt, non-profit corporation, and insurer of last resort, Citizens' Property Insurance Corporation.
The Atlantic hurricane season begins tomorrow. The forecasters at the University of Colorado Hurricane Center predict 16 named storms. Historically, that is an above average crop. Their methodology is not controversial. After gathering oceanic and atmospheric data - such as sea surface temperature, atmospheric pressure, and wind shear - in February and March, they then compared those conditions to the historical record and identified the previous seasons that had similar conditions. All but one (2006) had an above average hurricane season. The distinguishing feature for the exception was that it did not have neutral or La Niña conditions in the Pacific (i.e., El Niño dominated). The effect of that is to minimize the wind shear in the upper atmosphere, which permits hurricanes to build.
How does an increased hurricane incidence translate to landfalls in the United States? The forecasters predict an increased probability of landfall. Of particular note is the ominous comment: “Except for the very destructive hurricane seasons of 2004-2005, United States coastal residents have experienced no other major landfalling hurricanes since 1999. This recent 9 of 11-year period without any major landfall events should not be expected to continue.”
And what would happen should that probability become reality?
One place with a particularly bad outcome may be Florida. The largest property insurer in the state is Citizens' with over 1.3 million policies insuring $462 billion worth of property. That is approximately 18 percent of the residential market. Citizens' estimates that its exposure for a once-a-century storm is $23.4 billion. It has reserves and potential reinsurance of $11.75 billion. That leaves a gap of $11.65 billion. (For reference, a NOAA report based on inflation-adjusted dollars puts Hurricane Andrew's cost at over $43 billion; the 2004 quartet of Charley, Frances, Ivan and Jeanne cost over $45 billion.)
How can this be? An analysis done in support of HB 1243 in the Florida House of Representatives gives some insight:
Citizens' premiums are less than those charged by private insurers - If the premium in the private market for comparable coverage is 15% or more than Citizens' would charge, Citizens' coverage is available to a homeowner.
Citizens' portfolio of risks are not low-budget - If the value of the property is less than $1 million, or $2 million in designated windstorm areas, Citizens' coverage is available to a homeowner.
Citizens' insureds can (and do) shop their other coverages in the private market - In designated windstorm areas, property owners can buy non-wind coverage from private insurers and windstorm coverage from Citizens'.
Citizens' rates are not actuarially sound - Citizens rates are required to be actuarially sound but were frozen at 2005 levels for all of 2007, 2008 and 2009. Rate increases are capped.
Citizens is not required to be solvent - Citizens does not have to meet the solvency requirements of traditional insurers.
If this sounds like a recipe for disaster, many in Florida recognize it as such. Companion bills to reform Citizens' were introduced in the Florida Legislature this spring. HB 1243 and SB 1714 had the support of an "unlikely coalition" of industry, environmental groups, tax watchdogs and free market advocates. Notwithstanding this diverse support, and the documented flaws in the current program, both bills died at the end of the legislative session. Citizens' form and operatoins may be immovable given political realities.
Florida will lurch into tomorrow's hurricane season keeping its fingers crossed and hoping that this year's cyclonic trajectories all steer clear of the Sunshine State. If that hope is not borne out, then the irresistible force of 150 m.p.h. winds may demonstrate that immovable political realities are not.