Sarasota Herald-Tribune Column: State’s insurer of last resort calls to mind a house of cards

The Sarasota Herald-Tribune published this article on March 5, 2010.

By STEVE POCIASK Guest Columnist

If an insurance company sold you a homeowners policy knowing that, if disaster was to strike, they probably couldn’t pay your claim, you would call that “consumer fraud” — plain and simple. If private insurance companies were to instigate such a scam, the insurance commissioner should be the first to step in and halt these insolvent business doings, even going so far as to trying to put these crooks behind bars.

At least, that is what the public expects.

But when Florida’s state-operated homeowners insurance company, Citizens, sells you a homeowners policy knowing it may not have the financial reserves to cover your claims should a major catastrophe occur, what would otherwise be considered a fraud is just business as usual.

So, I read with interest the Herald-Tribune’s article “Weak Insurers Put Florida at Risk” (Feb. 28), which detailed the financial peril of many home insurers in Florida. However, what was not emphasized in the article is that it’s largely a man-made crisis manifested by Florida’s insurance commissioner. The cited problem of small, undercapitalized insurers is just a symptom of a much bigger problem.

The fact is that Citizens, now the biggest homeowners insurer in the state, is selling policies to Floridians at predatorily low rates — rates so low that Citizen may not be able to pay claims should a major catastrophe occur.

Unlike private companies, however, when the government can’t cover its costs, it does not go out of business; it just finds ways to tax someone else for their mistakes.

So it is for Citizens. Unlike real businesses, Citizens will make up its financial shortfalls by charging “assessments” to all of the remaining homeowners, auto, boat, motorcycle and business insurance policies — including policies of competing private insurance companies.

The bottom line is that large, well-managed and financially solvent private companies cannot compete against state-sanctioned and subsidized operations, so they withdraw from the state.

It means a slow death of the private insurance market, but a painful and costly one for consumers. As Citizens grows and charges the customers of private insurers for its financial misdeeds, more customers leave for Citizens. This pushes well-funded private insurers out of the market, increases the market share of Citizens, and could leave many small insolvent insurers waiting for a bailout should that storm arrive.

It’s an endless cycle. It’s the public option. But, like a house of cards tumbling down, the scheme will soon leave Citizens fewer and fewer privately served citizens to level its assessments upon. It will also leave Citizens as the state’s high-cost monopoly, with no competition and with all of its risks put into one basket.

The scheme also means that premiums will eventually have nowhere to go but up, since the subsidy is not sustainable. That is the fraud being perpetrated upon Florida’s consumers. It’s a bait-and-switch — a promise for low (industry-subsidized) coastal rates today, but tomorrow everyone will pay much more.

For years, state policy has allowed Citizens to set premiums below expected losses. Those irresponsible policies have and will continue to have detrimental effects on insurance prices for years to come.

For instance, setting predatory rates has encouraged overdevelopment of coastal properties, which (over time) has put more lives and property at risk, reduced natural storm barriers and led to even much higher average insurance premiums for consumers.

For consumers, this means the end of competition and the beginning of the public option, and the result will be only higher premiums for consumers for years to come.

Selling property insurance without adequate financial backing to pay claims is just consumer fraud, but, with Citizens, the only difference is that those entrusted to protect Florida’s citizens are behind the scheme.

Steve Pociask is president of the American Consumer Institute Center for Citizen Research, a nonprofit educational and research institute based in Washington (theamericanconsumer.org).