Be Careful What You Ask For

While returning from a meeting in California with the Property and Casualty Insurers of America, Gov. Blanco made a rather provocative statement in a telephone interview with a reporter. Here is her statement: “I told (the insurers) that we want them to come in and fill the voids, or else (our) state government is going to do something like Florida has done.”

To understand the magnitude and potential consequences of Gov. Blanco’s comment, one first has to understand exactly what Florida “has done” in its recent special session on insurance.

First, Florida took its insurer of last resort — the state-created Citizens Property and Casualty Insurance Company — and made it a direct competitor with the private insurance industry. The Legislature removed a 56 percent rate increase for Citizens that was scheduled to go into effect, and retroactively removed a 12 percent increase that went into effect Jan. 1 of this year.

They gave Citizens permission and encouragement to expand its policy limits and write policies in lines of insurance from which it had previously been barred.

Additionally, if Citizens gets hit with losses (a strong possibility for an undercapitalized carrier), every property and casualty, general liability, automobile, and workers comp policy in Florida will be assessed a fee until Citizens’ losses are paid. State officials in Florida profess the belief that a surge in underwritings by a greatly under-capitalized, state-backed competitor will force the private insurance industry to reduce its rates in order to compete with Citizens for a market that is rife with open-ended risks.

Second, the Florida Legislature greatly expanded the role of its Catastrophe (Cat) Fund without putting any cash into its coffers. The fund — originally created a decade ago — slowly accumulated a reserve of $6 billion in its first 10 years of existence.

The hurricanes that struck Florida in 2004-2005 bankrupted the fund and forced the state to put $715 million into it, as well as floating a bond issue backed by policy assessments to make it solvent.

In the recent special session, the Legislature added another $16 billion layer to the fund, putting the state/citizenry on the hook for approximately $35 billion if more catastrophic storms come Florida’s way — which they certainly will at some point.

Basically, Florida’s governmental leaders walked into the weather “casino” and bet $40 billion or more on red.†

If the hurricane winds blow, they will be incapable of paying off the losses without massive assessments on almost every insurance policy in Florida and perhaps significant tax increases on top of that. If that happens, almost all forms of insurance in Florida will increase drastically in cost, and the fiscal stability of the state will be called into question.

When Gov. Blanco — or members of our Legislature — proclaim that they harbor intentions to “do what Florida has done,” everyone should understand clearly what they are talking about. It means that they plan to take our “insurer of last resort” — Louisiana’s Citizens Insurance Company that was copied from Florida — and allow it to take on a huge book of business and compete directly with the private insurance industry.

If that happens, every insurance policyholder in the state will be at risk for paying huge increases in many lines of insurance if Citizens again encounters significant losses. As Citizens’ book of business swells, its ability to get critical reinsurance will degrade, putting taxpayers and policyholders even more on the hook.

If Gov. Blanco wants to join Florida at the tables in the weather “casino,” she does so at your peril and mine.