As the hurricane season in Florida approaches, state officials are in a quandary over whether to raise house insurance premiums and risk the ire of their constituents or maintain premiums on their current levels and risk the collapse of the state-run insurance firm, Citizens Property Insurance Corp., and the state reinsurance fund, Florida Hurricane Catastrophe Fund.
Both Citizens and the reinsurance fund are bound to collapse if a major hurricane ravages the state.
Florida Governor Charlie Crist, who promised to reduce house insurance rates during his election campaign, is now realizing the impact of what he promised and now moving away from it.
In 2007, Crist and legislators froze rate increases on Citizens Property Insurance, the state’s biggest insurer. But as officials ponder how the state-run insurers could cover huge claims in case stronger storms hit the state during the cyclone season, they now realize the need to shore up the reserves of the state-run insurance companies.
Representative Bill Proctor, who introduced legislation that allows private insurance firms to increase their house insurance premiums, argued that the two state-run insurers would be unable to pay insurance claims if a major hurricane devastates a major metro area.
Citizen has over one million policies and is liable to pay about $450 billion in claims in case of a major devastation. Although no major hurricanes hit Florida since 2005, Citizen has increased its surplus to only about $3 billion.
Citizen’s chairman James Malone said any major hurricane can wipe out the firm’s reserves in a matter of hours.
Last week, the state House Insurance Committee passed a proposal that would increase Citizen’s house insurance rates by 20 percent per year until the rates approximate the true risk level of living in an area frequented by devastating hurricanes.
The link of house insurance rates to area development is nowhere more illustrated significantly than in Florida. Florida hosts one-fourth of the nation’s insured coastal property, which was valued in 2007 at $2.5 trillion.
Robert Hartwig, chief economist and president of the Insurance Information Institute, supports the increase of house insurance rates so that the state can build up its resources. He cited the case of State Farm Insurance, the second-biggest insurer in Florida, which decided to stop issuing house insurance policies in January because Florida regulators blocked its plan to increase its house insurance rates by 47 percent.
The State Farm Insurance’s decision would further worsen the situation of state-run Citizens, which is expected to be overwhelmed with State Farm’s clients.
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