Center for Property Rights

Res⁠t⁠or⁠i⁠ng ⁠t⁠he Pr⁠i⁠va⁠t⁠e Proper⁠t⁠y-Insurance Marke⁠t⁠ ⁠t⁠o Reduce Flor⁠i⁠da’s R⁠i⁠sk of F⁠i⁠nanc⁠i⁠al Insolvency

By: The James Madison Institute / 2009

As Florida faces a worsening crisis involving property insurance—a crisis exacerbated by the recent withdrawal of State Farm, one of Florida’s largest private providers—there are lessons to be learned from problems in another line of insurance. Through the years Florida has frequently acted to shut down fly-by-night shops peddling “car insurance.” Regulators often discovered that these storefront offices, many clustered in minority neighborhoods in the state’s larger cities, weren’t actually selling insurance; rather, they were selling the illusion of insurance: pieces of paper that the buyers could present as “proof of insurance” when registering their vehicles and obtaining license plates.

In the more flagrant cases of this kind of fraud, there were no financial assets to back up the insurer’s paper promise to compensate the customer in the event of a claim. Often, the customers either did not know—or did not care. What they needed was that precious form attesting that they had the minimum amount of auto insurance coverage required by law— generally “Personal Injury Protection” (PIP). If their clunker of a car were totaled in a crash, so be it; they could always get another one – sometimes for monthly payments that were less than the cost of their pricey “car insurance.”

When one’s home is severely damaged, however, the problem of inadequate insurance coverage becomes much more serious—and a huge concern for the troubled mortgage business, too. Nonetheless, in the field of property insurance, the state of Florida arguably is engaging in practices akin to those practices it prohibited and prosecuted when car insurance was the issue: It is countenancing the sale of property insurance by start-up firms recently formed for the purpose of filling the void left when well-capitalized companies such as State Farm withdrew entirely while others, i.e. USAA, substantially reduced their exposure in Florida. Although some of these new firms appear to have a capacity sufficient to cover their risk unless a catastrophic storm or storms hit a densely populated area, others do not.

Meanwhile, the state government—through its Citizens Property Insurance—is essentially engaging in the same dubious practice. Although Citizens is not without assets, they are far from adequate to cover the potential claims should Florida suffer severe damage from a major storm or a series of storms. Moreover, the company’s backup plan – borrowing to make up for any shortfall—is no longer plausible, given the worldwide problems in the credit and reinsurance market. This leaves Florida’s taxpayers and insurance customers on the hook in a way that could threaten the state with financial ruin.

The next hurricane season begins on June 1. As Eli Lehrer’s study demonstrates, while there is still time to move toward restoring Florida’s private property insurance market, the clock is ticking, the risk is growing, and the need is urgent.

Read the Backgrounder here.