Florida Faces Crises in Auto, Property Insurance Markets

Florida Faces Crises in Auto, Property Insurance Markets
February 7, 2012

Despite bipartisan support for reform over the last three years, Florida’s legislature has not effectively addressed the state’s dysfunctional property insurance system. Add to that emerging concerns regarding the long-term sustainability of Florida’s vehicle insurance system, and the state now faces dual crises in its insurance markets.

“If the Florida legislature does not reform vehicle insurance, it will run the risk of seeing vehicle insurers leave the state. If it does not reform property insurance, it will run the risk of an all-out fiscal catastrophe,” says Eli Lehrer, vice president of The Heartland Institute.

In a newly released white paper, “Workable Solutions for Florida’s Challenging Insurance Problems,” James Madison Institute Adjunct Scholars Lehrer and R. J. Lehmann outline the cases for reform and propose a series of recommendations that can be immediately addressed.

Lehrer said, “While legislators cannot solve in one session all the insurance-related problems that face Florida, they do have an enormous opportunity to make a very real dent in some of them. This paper focuses on reforms that could reasonably be implemented in the 2012 Legislative Session and thus could begin to make a meaningful difference in Floridians’ lives very shortly thereafter.”

Property Insurance Reforms

Florida’s geographic vulnerability to hurricanes and tropical storms cannot be changed. Earlier legislative efforts to address rapidly rising property insurance rates resulted in the creation of a state-sponsored property insurer, Citizens Property Insurance Corp., and reinsurer, the Florida Hurricane Catastrophe Fund (Cat Fund). Both have ballooned beyond their ability to handle the risks they face.

The authors’ recommendations:

  • Retain the Cat Fund as a buffer for Katrina-sized events, but shrink it to remove the dangers it poses to the state. Although the Cat Fund offers value as a buffer, it is currently Florida’s largest reinsurer while lacking sufficient resources to meet the potentially massive payout in the event of a major storm. To reduce this risk, legislators should eliminate the Temporary Increase in Coverage Limits, start gradually reducing the size of mandatory Fund layers, start gradually increasing the insurance industry’s retention and copayments, and require the Fund to have cash or risk-transfer instruments recognized in the private sector as sufficient to repay debt.
  • Pursue more aggressive depopulation of Citizens by granting it greater freedom to raise rates and to deny or non-renew policyholders. Originally envisioned as an “insurer of last resort,” Citizens should be returned to that role by providing regulators and management with a toolbox of depopulation options (as opposed to legislative micromanaging and tinkering) and by applying stringent ethics and transparency standards.
  • Harden Florida’s built environment against hurricanes, and end subsidies for development in hurricane-prone areas. Accommodations for Florida’s geographic vulnerability should be made, such as prohibiting Citizens from covering structures in coastal areas, creating a hurricane mitigation sales tax holiday, promoting mitigation efforts, and seeking additional flexibility in the use of federal funds for mitigation.

Vehicle Insurance Reforms

Florida law mandates all registered motor vehicle owners carry Personal Injury Protection (PIP) Insurance to reduce litigation and facilitate quick medical care for vehicle crash-related injuries without regard to fault/liability.

Yet despite declining numbers of auto accidents, PIP claims in Florida continue to increase significantly. Much of the increase has been attributed to an escalation in fraud and abuse such as staged accidents, unnecessary or improper medical care, and illegal billing. These have resulted in higher insurance premiums, especially in certain geographic regions.

The authors recommend:

  • Retain and enhance the no-fault nature of Florida’s vehicle insurance system. No-fault vehicle insurance is a fundamentally just, effective, and pro-consumer way of dealing with less serious vehicle-related claims. Instead of outright abolition, legislators should pursue modest changes to stabilize the system and restore profitability while maintaining its benefits.
  • Make commonsense reforms to limit legal and medical costs. In order to contain costs and provide rate relief to consumers, legislators should reform the rules governing medical and legal providers, including ending contingency fee multipliers for legal cases and revising the current medical fee schedule.
  • Crack down on fraud in all contexts. Florida already has most of the laws needed to fight fraudulent activities, but investigators need to be provided with all the tools necessary to better enforce laws already on the books.

Legislative Update

Legislation designed to shrink the Florida Hurricane Catastrophe Fund has just started moving in the Legislature. It is drawing some scrutiny about possible ripple effects on Citizens’ premium disparities and policy depopulation efforts. Bills reconfiguring the assessment levels of Citizens Property Insurance Corp. have passed through Florida House and Senate committees with little notice or opposition.

“Policymakers realize that Citizens’ current assessment structure is a barrier to entry for private insurance capital interested in investing in Florida,” said James Madison Institute Public Affairs Director Thomas Perrin.

PIP reform legislation must resolve partisan divisions over several medical care and insurance industry provisions, including requirements that medical care/evaluation be provided through hospital emergency departments within 72 hours, limits on the range of treatment services, limits on class-action attorneys’ fees, and the allowable scope of “examinations under oath” (EUO).

James Madison Institute Capitol Reporter Will Patrick said, “This is complex legislation, and policymakers are challenged with finding the balance between combating fraud and abuses without favoring the insurance industry over consumers.”

Tanja Clendinen (tanja@jamesmadison.org) is communications director for the James Madison Institute in Tallahassee, Florida.