Florida's Insurance Fiasco

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Homeowners
require affordable property insurance to obtain mortgages and to
protect their investments. Yet in many hurricane-affected states,
especially Florida, property insurance rates have skyrocketed making
coverage all but unaffordable. In addition, some important private
insurance carriers have dropped coverage entirely. And ironically,
most of the recent government attempts to remedy the situation have
been counter-productive.

In January
2007, the Florida legislature, with the full approval of Governor
Charlie Crist, required that Citizens Insurance, the state-owned
company that now insures more than 20% of all property in Florida,
reduce its prices to be more “competitive” with private insurance
rates. Second, the state legislated a “rollback” of private insurance
rates for 2007 on the order of 25% from then current levels. Finally,
the Florida Hurricane Catastrophe Fund (FHCF) was expanded to provide
lower reinsurance rates for private insurance companies that would
allow them to lower premiums for policy holders.

But will these
changes produce the desired results, i.e., more insurance availability
at reasonable prices? Unfortunately, the history of the state regulated
property insurance industry makes this very doubtful.

The U.S. property/casualty
insurance industry is technically “private” but it has been regulated
by various insurance commissions at the state level for almost 100
years. (The McCarran-Ferguson Act of 1945 exempts the industry from
federal regulation including antitrust. Several prominent politicians,
including Governor Crist, want to remove this exemption). Yet to
say that the states “regulate” insurance rates has always been ambiguous.
What actually happens in most states (including Florida) is that
the insurance industry “rate bureaus” collect “loss” experience
information (say on fires) and then suggest “advisory” rates for
member companies. These companies then FILE these advisory rates
(prices) and policy requirements with the various state insurance
commissions under the so-called “file and use” approach. Normally
these industry-determined prices and price changes automatically
go into effect unless directly challenged by the state insurance
regulators. Recently these challenges have become more frequent
and direct price regulation over the companies has expanded.

The problem
with direct government setting of insurance prices (or any prices)
has been known by economists for decades. Setting prices too low
by law will simply lead insurance carriers to withdraw from the
market and exacerbate the availability problem: price controls cause
shortages. It has happened with automobile insurance (e.g., Massachusetts)
and it is currently happening now with homeowner coverage in several
of the hurricane-affected states. Rolling back prices by law is
no long-run solution.

The legislative
changes enacted in Florida are unlikely to achieve their objectives.
First, the price rollbacks and increasing government and judicial
control over the insurance business will create incentives for private
firms to leave the Florida property insurance market. Second, Citizens
Insurance, initially designed as an “insurer of last resort,” will
increasingly become the insurer of “first” resort and do even more
business at the state mandated lower rates. Third, Citizens, which
lost a ton of money charging “high” prices, will lose even more
money charging lower rates; thus the risks for property losses will
be shifted increasingly to homeowners without losses through increasing
surcharges on their policies. Finally, the reinsurance changes are
unlikely to have any major effect on private insurance firms already
bent on leaving the market.

Central planning
and socialism in insurance is simply not working. My recommendation?
DEREGULATE the entire property/casualty insurance market. Remove
all legal barriers to entry including those against so-called “foreign”
companies. End all insurance commission and legislative price fixing
of insurance products. Phase out all governmental regulation of
the insurance policy contracts and require that the courts enforce,
not amend, legitimate contracts between insurance companies and
policy holders. And reject any and all calls to apply federal or
state antitrust law to insurance. In short, move to create a free,
open, competitive, and legally secure market for selling property
insurance.

May
14, 2007

Dom
Armentano [send him mail]
is Professor Emeritus at the University of Hartford (CT) and the
author of Antitrust
and Monopoly

(Independent Institute, 1998) and Antitrust:
The Case for Repeal

(Mises Institute, 1999). He has published articles, op/eds and reviews
in The New
York Times, Wall Street Journal, London Financial Times, Financial
Post, Hartford Courant, National Review, Antitrust Bulletin
and many other journals.

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