FAIA: State Creating Own Financial Disaster

The Tampa Tribune--October 18, 2008

By JEFF GRADY Special To The Tampa Tribune

The similarity of our national economic meltdown to the property insurance crisis poised to occur within Florida’s economy should serve as a wake-up call to us all. Our state stands among the leaders of a motley pack suffering the ill effects of an overheated real estate market. But we stand alone in our potential to add to this economic misery due to the collapse of an artificial property insurance market crafted by the hand of government.

The root cause of our country’s economic woes stems from the government-sponsored illusion that home ownership should be available and affordable to all. Political pandering led many of our government officials to unleash the shackles of the American dream by directing their lending arms, Fannie Mae and Freddie Mac, to loosen proven underwriting standards for loans purchased from retail banks. This manipulation induced banks to make loans to borrowers that otherwise would not have qualified. More buyers created more demand, absurdly inflating real estate values and leading to even more speculative, risky behavior. The result of this fairy tale is now a systemic plague that offers daily headlines of government bailouts.

Compare this situation to Florida’s illusion of available and affordable property insurance. After the 2004-05 storm seasons, there was significant disruption in both the availability and affordability of property insurance due primarily to our massive exposure to catastrophic hurricanes and dire meteorological forecasts of increased landfalls. Lawmakers reacted by instituting two major price-cutting measures to the property insurance market. First, they added $12 billion of capacity to the Florida Hurricane Catastrophe Fund (the Cat Fund) to cover a total of $28 billion of insurer losses. Second, they rolled back and implemented a freeze in Citizens Property Insurance Corporation’s rates until 2010. In effect, they mortgaged the state’s risk, while turning their backs on current market realities.

In Florida’s fairytale, Citizens has effectively become our state’s Fannie Mae. “Quasi-governmental” is a term often used to describe Citizens, which unlike state agencies, has a board of directors, private sector employee compensation and benefits and unique statutory/regulatory guidance that confuses whether the company is a public or private entity. Most importantly, Citizens has been given the authority to reach into the wallets of millions of Floridians it does not insure to subsidize those it does. Sound familiar?

State officials have intentionally manipulated Citizens’ pricing so that it no longer reflects a credible valuation of the risk. Evidence of this troubling act can be found in the words of Citizens’ own actuaries. Just last April, they offered sworn testimony to the Legislature indicating their rates are actuarially unsound and that a 1-in-100 year storm would result in over $10 billion of assessments on Floridians. This presumes that Citizens could issue the bonds to be repaid by assessments, a more challenging proposition given the current credit squeeze.

Adding fuel to this fire is the fact that Florida’s Cat Fund is now on the hook to reinsure liabilities that exceed its cash reserves by as much as $17 billion. One major storm would also send the Cat Fund in search of billions from troubled credit markets to reimburse hurricane losses for both Citizens and every private property insurance company in Florida.

We are witnessing a historic national economic collapse due to a housing market recklessly manipulated by the hand of our federal government. Striking similarities to this crisis abound within Florida’s property insurance market with one glaring exception: The big one hasn’t hit, and our crisis has yet to unfold. Let’s hope the lessons being learned from mistakes by federal lawmakers will compel Florida’s government to act before yet another crisis appears at our doorstep.

Jeff Grady is president and CEO of the Florida Association of Insurance Agents.