Commentary on Wall Street Journal Editorial "Waiting for Hurricane Charlie (Crist)"

The Wall Street Journal gets it absolutely right in its February 23, 2011 editorial titled “Waiting for Hurricane Charlie (Crist).”

Before discussing some of the points made in the editorial, it is necessary to present a background.

In 2007, newly-elected governor Charlie Crist embarked on a crusade against the free market when he decided to foist a socialist experiment on Florida that included a property insurance version of the “public option.”

Many critics of the “public option” portion of President Obama’s health care reform package insisted that enacting such a proposal would drive private health insurance companies unable to compete with the government out of the market or out of business altogether. Little did they know that their hypothesis was being tested and proven down in Florida with Governor Charlie Crist’s property insurance experiment.

This is how it worked: Charlie Crist converted Citizens Property Insurance Corporation, the state-run “insurer of last resort” into an active competitor in the market. Before this ill-conceived change, only consumers legitimately unable to obtain coverage in the private market were eligible for coverage through Citizens. Crist made it so anyone who received a single quote 15% above Citizens’ rates was now eligible for coverage through Citizens—AND he arbitrarily and artificially reduced Citizens’ rates through legislation and against all tenets of actuarial science. This essentially translated into a price control.

The result: private insurance companies could no longer compete. Several reduced policies or left Florida altogether, and in a matter of a few years, Citizens became the largest property insurer in the state controlling 25% of the Florida market, and one of the largest insurers in the country.

If the unfair competitive advantage of a government-owned company over private companies and the resultant lack of choice for consumers was not enough cause for outrage, then the enormous risk forced upon taxpayers should be.

As the Wall Street Journal editorial points out,

Citizens assured the state legislature last month that it is in "its best financial position ever," with "pre-event liquidity" of over $14.6 billion. That may sound hefty. But some of that money is borrowed, and the insurer itself estimates a once-in-a-100-year storm could cost upward of $22 billion. Its total liabilities are $451 billion. No storm would hit every insured house, but the possibility of a more than $22 billion event is there.

So how would Citizens pay its claims? It has three sources of primary income: premiums from policy holders, coverage from its reinsurer (more on that later) and the ability to levy "assessments," or taxes, on policy holders and every other Floridian. It's the latter ability that Citizens counts on to top up its coffers, and that's what makes it different from a private insurer, which lives and dies by its actuarial estimates before the storm hits.

Assessments. That’s bureaucratspeak for taxes. To make up any deficit that it may incur following a hurricane or series of hurricanes, Citizens has the legal authority to impose a tax not just on its own policyholders, but on just about every insurance policy issued in Florida—including homeowners policies, renters policies, auto policies, and boaters policies. Those taxes could dramatically increase the cost of those policies for many years. Everyone from millionaires to your neighbor’s 16 year-old kid who drives a clunker to school will be impacted. A typical middle-class family that owns a home and two cars may wind up paying several extra thousand dollars a year for up to 30 years for the very same coverage they receive today.

And it doesn’t end there. Florida also has a state-run reinsurer (reinsurance, essentially, is insurance for insurance companies. An insurance company will pay for a house that burns down; reinsurance kicks in if, say, a wildfire destroys an entire neighborhood). Florida’s reinsurance company, the Florida Hurricane Catastrophe Fund (or Cat Fund for short) covers only catastrophic wind damage, and it also has the ability to levy taxes to pay off the bonds it would have to issue to raise the money it needs to pay claims after a hurricane. The editorial accurately states:

Last October, the Cat Fund said there's still "significant uncertainty" about how much money it can raise after a hurricane. The fund has about $6 billion of cash on hand. Anything above that would have to be raised in the bond markets. Imagine if the Cat Fund had to go cap in hand for $20 billion or $30 billion, all at once. Citizens, by the way, counts on the Cat Fund for $6.4 billion worth of coverage.

Mr. Crist's unstated answer to all this was that when the big one does hit again, Washington will ride to the rescue. In other words, the real insurers of last resort for Florida beachfront property are taxpayers in Waterloo and Denver.

So that, in a nutshell, was Crist’s entire hurricane catastrophe policy: reliance on Washington to bail Florida out of the bind he got the state in.

Now that the adults have regained control of the state’s affairs, tough decisions lie ahead. Unfortunately, the clock is ticking, and every hurricane season that goes by without the right reforms in place is another blank fired in the game of Russian Roulette that Florida was thrown into.

[The] politics will not be easy to navigate because any reform will have to reinsert price signals into the market—meaning higher premiums for Floridians, at least in the short term, given that Florida is so often hit by hurricanes. Some Republicans may resist spending political capital to fix a problem they may not get credit for tackling if a hurricane doesn't hit on their watch. Many Democrats will oppose any changes. Then again, Republicans will surely get blamed for premium and tax increases when a big hurricane hits.

Florida voters did the country a favor when they refused to send Mr. Crist to the Senate. Now Republicans have an obligation to clean up the looming fiscal catastrophe his policies have left behind.

Luckily, Governor Scott and the new Legislature are showing signs of willingness to tackle this difficult issue, but Floridians should insist that changes to the system be made sooner rather than later. Free-market reforms that level the playing field and shift hurricane risk away from taxpayers onto private companies may produce a short-term, methodical increase in property insurance rates. But that is a heck of a lot better than the alternative, which assures massive, disproportionate rate hikes for every Floridian for decades.

Hurricane season begins June 1. The clock is ticking.

(Full text of WSJ editorial may be found here)