Weathering the insurance storm
The 2010 hurricane season may be behind us, but the insurance storm is just starting, especially if your homeowner’s policy is with Citizens Property Insurance Corp.
Effective Jan. 1, the three year freeze on Citizen’s rates will be lifted and anyone who is currently covered by a Citizens policy can expect an increase in next year’s premium. Although there is an annual 10 percent cap on individual policies built in to any increases Citizens can levy, this percentage can vary based on a variety of criteria.
For example, the anticipated average rate increase is 5.4 percent; however, this does not apply to high risk coastal areas. It also doesn’t apply to condominium associations that can plan on at least 10.2 percent. These averages also do not include a special assessment to be included in all policies starting in 2011. In addition, rates for individual homeowners, as well as condominium associations could be adjusted up or down based on new code requirements or changes to the property. You can also expect increases from Citizens during the next several years in order for it to meet its actuarial requirements.
None of this should come as a surprise to anyone who lives in Florida, especially in coastal areas, but what may surprise you is what Florida Tax Watch, an independent, nonpartisan research institute, thinks. In April, just before this year’s hurricane season was due to kick off, Tax Watch called Citizens Insurance “a high stakes gamble that may be one major hurricane hit away from depending upon Federal relief or facing financial crisis.”
It went on to say that the state’s focus on rate affordability has meant that the state hasn’t collected enough money from consumers to responsibly fund claims from a major hurricane. Artificially low rates have the added problem of discouraging homeowners to invest in hurricane proofing their homes.
The Wall Street Journal called Florida’s insurance market a laboratory of experiments to keep insurance affordable. One of those experiments was to encourage private sector start-up insurance firms, known as takeout firms because they literally take policies from the state run pool. The program was attractive because these firms can get an immediate book of business with no marketing expenses, plus the possibility of low-cost loans from the state. Although some of these new firms have survived and are viewed as successful by the state, their ability to pay claims is still questionable should a big storm hit the state.
There is, however, an additional layer of protection since private insurers are required by Florida state insurance regulators to carry reinsurance to supplement their hurricane claims. Reinsurers are specialty insurers who take on some responsibility for paying the claims of the primary insurer.
If Florida is an insurance laboratory, then so are all the other coastal states in the country. The difference is that Florida has a very long and susceptible coastline. Not to mention that, according to the Wall Street Journal, Florida’s insured coastal exposure increased 27 percent between 2004 and 2007, exasperating the problem.
So while you may be done with the heavy lifting of storing the storm shutters away, starting in January your checkbook will be doing the heavy lifting. Living in paradise has its price.
