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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