Press Releases

Reforms ⁠t⁠o El⁠i⁠m⁠i⁠na⁠t⁠e Cos⁠t⁠ Dr⁠i⁠vers, Ensure F⁠i⁠scal S⁠t⁠ab⁠i⁠l⁠i⁠⁠t⁠y of Proper⁠t⁠y Insurance Marke⁠t⁠ Ou⁠t⁠l⁠i⁠ned ⁠i⁠n Flor⁠i⁠da Repor⁠t⁠

By: The James Madison Institute / 2015

TALLAHASSEE– Although the most powerful hurricane ever recorded in the Western Hemisphere made landfall in Mexico, Florida continues to experience unprecedented hurricane landfall inactivity. Once again, this presents an opportunity for policymakers to help shield the state’s economy from inevitable storm-related threats, says a new report from The James Madison Institute (JMI) and R Street Institute. In the policy brief, “Shoring Up Florida’s Property Insurance Market,” JMI adjunct scholar and R Street co-founder, R.J. Lehmann discussed reforms that should be considered during the 2016 legislative session to help eliminate cost drivers and ensure fiscal stability in an active storm season.

Florida’s total coastal exposure now stands at $2.9 trillion, with more property at risk than all of the other “hurricane alley” states combined. The report states that this concentration of population and property in high-risk coastal areas, in addition to the costs associated with the 2004 and 2005 storm seasons, all contributed to property insurance premium increases in the years following Hurricane Wilma in 2005. As of 2012, the average Florida homeowner’s property insurance policy premium was $2,084, more than double the national average of $1,034.

“No meteorological explanation exists as to why Florida has experienced this streak of good luck. Facts are, the state’s geography and risk profile haven’t changed, but its built environment and the number of lives and amount of property at risk of hurricane damage have grown dramatically,” said Lehmann. “Despite our remarkable lull in activity, the average property-insurance premiums are still on the rise in some parts of Florida.”

The report explains that the financial sector discovered years ago that gains or losses in the catastrophe and reinsurance markets were not tied to global economic cycles and as a result capital flooded into the catastrophe markets. Florida has benefited handsomely from this “buyers’ market” through Citizens Property Insurance Corp., the Florida Hurricane Catastrophe Fund (Cat Fund) and the state’s private insurance sector. Currently, all in ideal financial positions to absorb reforms without undue adverse impacts on taxpayers, ratepayers or the state’s economy.

However, human behavior and cost drivers disconnected from the state’s most obvious risk factors continue to drive some insurance rate increases. For instance, the report highlights the spike in non-catastrophe claims that has been exacerbated by exploitation of laws and court decisions governing “assignment of benefits,” when a third party – such as a contractor or water-extraction company – assumes a policyholder’s benefits and collects payments directly from the insurer for “covered work.”

Additionally, the report notes that while it currently has the resources to cover a significant hurricane event, the Cat Fund would be left bare and potentially unable to meet its $17 billion obligation in the subsequent active hurricane season. Cat Fund surplus protection for subsequent seasons should remain a priority for the Legislature.

Recommendations in the report include:

Assignment-of-Benefits Abuse

-Address the explosion in the number and cost of non-catastrophe claims that, if left undressed, could undermine the state’s fragile insurance market recovery.

-Any third party to whom benefits are assigned should be bound by the original policy requirements for recovery and for allowing the insurer to conduct its investigation.

-An opt-out period should be made available to consumers who may have felt compelled into signing over their insurance benefits.

-Rules for attorney fees in assigned-benefit disputes should be revisited since existing law appears to be a catalyst for unnecessary litigation, providing ample incentives to file suit even in cases where a claim in unwarranted.

Cat Fund Reform

-Give insurers greater flexibility by creating a 25 percent coverage level option, as well as the option to eschew Cat Fund coverage.

-Consider dedicating part or all of the unused capacity resulting from insurers selecting the proposed 25 percent and 0 percent coverage options to the subsequent season.

-Authorize Cat Fund managers to negotiated the purchase of private risk transfer.

“Florida has leveraged the past 10 years to get our insurance industry back on track toward actuarial sanity. We have been aided by an unprecedented streak of good fortune. However, there are still reforms that need to be made to continue our course,” said Sal Nuzzo, vice president of policy at The James Madison Institute. “Fraud and abuse in the system has led to more rate increases for Floridians. Policymakers need to realize this and understand that the sensible policy solutions proposed in this report will help to protect the economy Florida has worked so hard to improve. Currently, the threat of an active storm season stands to erase much of what we’ve accomplished since the Great Recession. Fortunately, this legislative session we have an opportunity to stop this from happening and we should take it.”

For further information about The James Madison Institute or R Street Institute, please

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