Citrus County Chronicle
By Dr. William Dixon
September 18, 2011
The concept of home insurance is not difficult. Think of it as a game of chance.
An insured homeowner places a bet each year with the insurance company (your premium payment) that his house may be damaged or destroyed. The company determines appropriate odds for the bet.
Odds are derived using statistical probabilities of fires, storms and other risks. Despite the numbers being fuzzy, different insurers will come up with odds for the bet that will be very similar. Competition among insurers forces the profit component down.
Like the “house” in a game of chance, the insurer must make a profit in the long term. In the short term he could get crushed by unusually frequent storms or other hazards. To cover his bet, he buys expensive backup insurance from a reinsurance company with very deep pockets.
In a free competitive market, the cost of insuring one’s home is a fair reflection of the risks. Not so, once government gets involved. Florida is a prime example.
In the years prior to 1990, property insurers in Florida offered premiums that reflected favorable loss experience. From 1950 through 1990, only six storms made landfall in Florida. In 1992, Category 5 hurricane Andrew devastated South Florida, bankrupting some insurance companies and forcing the strong companies to transfer surpluses earned elsewhere to cover losses in Florida. After Andrew, the cost to insure a home increased substantially as insurers recalculated the odds on their bets.
Companies, at that point, made a decision that some homes were just uninsurable because Florida limited what they could charge. Many quit writing policies on high-risk homes. Some pulled out of the property insurance market in Florida.
Rather than permit insurance companies to charge rates consistent with risk, many Florida politicians demonized them as price-gougers. Lacking wisdom and common sense, the same politicians established state-owned Citizens Property Insurance as the insurer of “last resort” for homeowners who could not find insurance or found the rates unaffordable. In another stroke of economic genius, the politicians set premium rates below the private market and below rates needed to offset Citizens’ assumed risks.
Citizens has never had adequate cash reserves to cover major storm damage. Its reinsurance for excess losses comes from the Florida Hurricane Catastrophe Fund, an entity that is financially unable to back it up. Were a major storm to hit, Citizens and the Cat fund would have to sell bonds and place surcharges on every insurance policy, auto, home, whatever, held by Floridians to raise cash. The cost of insuring selected homeowners would be transferred to all Floridians.
No hurricane has touched Florida in the past six years. But a storm of a different sort — sinkhole fraud — threatens to bankrupt Citizens and smaller private companies unless rates are raised to cover the sinkhole risks. Senate Bill 408 helps combat new cases of sinkhole fraud, but does nothing for those already in the pipeline.
Affected homeowners (and the editorial board of this newspaper) are denouncing rate increases. Local politicians, concerned more about re-election, are ginning up anger against the proposed rates for sinkhole coverage. Would they prefer the costs for sinkhole coverage (and wind damage) be transferred onto the backs of Floridians who don’t live in sinkhole regions or along the coast? Do they really believe private insurance companies will write policies that will cause them to lose money?
The cost to insure against sinkholes will decrease once pending claims are settled. Not so the costs of wind damage. The only fair solution is for homeowners to pay premiums based on actual risks. Subsidizing select homeowners is but another form of wealth redistribution. In the long run, that always fails.
William Dixon is a graduate of Columbia University, New York Medical College and the USF College of Business Administration. He served in the Army as a surgeon and as a Special Forces Officer, achieving the rank of Lieutenant Colonel. He was an assistant professor of surgery at the University of Georgia before entering private practice. Dr. Dixon can be reached at Wdixon16@yahoo.com.
http://www.chronicleonline.com/content/capping-insurance-premiums-invites-disaster
