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Storm Watch
Nelson wasn't getting adjusters in place or checking on his agency's urban rescue teams, though.
No, even as the huge storm began lifting roofs and peeling siding, Nelson was doing the same thing he's been doing every day since he took office in January: begging for more property insurance for Florida. At this particular moment, Nelson was lobbying for a bill pending in Congress to create a federal disaster insurance program. But he could as easily have been pushing any of a dozen schemes that elected officials have come up with in recent months to revive the state's moribund insurance market.
Meanwhile, on a small television next to Nelson's desk, a message crawled across the screen over and over, like the chorus of a Weather Channel tragedy. "Dangerous Hurricane Opal continues to move toward the Florida Panhandle ... People in the warning area should have completed all preparations ..."
By now, of course, Florida should have completed all its preparations, too. But as Nelson's scrambling shows, it hasn't. In fact, the state's financial vulnerability to hurricanes appears to be growing. Three years after Hurricane Andrew caused a record $16 billion in insured losses, the state's shaky insurance market still hasn't recovered. It's held together only by a legislatively imposed moratorium on private carrier withdrawals. And that moratorium is set to expire next year, with a growing number of lawyers predicting that it can't be successfully renewed.
Exactly what happens if the moratorium ends is anyone's guess, but one thing is clear. Without major changes in underlying insurance market conditions, the already-bloated, state-run insurer of last resort - known as the Residential Property and Casualty Joint Underwriting Association (RPCJUA) - likely will begin growing faster than ever, as overexposed private insurers start canceling and non-renewing policies in earnest. That in turn could produce what one former state official terms a "China Syndrome," as private carriers - who are legally liable for the state-run carrier's losses - hasten to escape from Florida's market meltdown. The ultimate potential: paralysis of the state's entire real-estate-driven economy, as lenders are left exposed.
"I'm a Ph.D. economist, and I'm telling you this is the lifeblood of Florida's economy," says Tim Lynch, who directed a recent task force study for Insurance Commissioner Bill Nelson. "This is of the gravest concern."
As of August 31, the swollen RPCJUA already had about 800,000 policyholders, making it Florida's third-largest insurer behind State Farm and Allstate. And despite legislative efforts to control its size, it was still growing at a rate of 15,000 policyholders a month. That growth rate promises to push the RPCJUA near 1 million policyholders even before the moratorium expires in November 1996. Because the RPCJUA pays for its losses through assessments on private carriers, the carriers will have a powerful incentive to speed up withdrawals if the moratorium ends.
Hurricane Opal has only added to insurers' incentive to flee. In what was already one of the most tempestuous years on record, Opal caused an estimated $1.8 billion in windstorm damages in Florida, and as much as $2.8 billion across the Southeast, making it the third-costliest in American history.
What's so wrong with Florida's property insurance market, and what can be done to fix it?
One big concern continues to be rates. For years, fast-growing Florida was the scene of savage price competition between the industry giants. Before Hurricane Andrew, statewide rates for a $100,000 home stood well below other Gulf Coast states like Texas.
After Andrew struck, politicians exerted their own downward pressure on rates - none more so than then-insurance commissioner Tom Gallagher, who was running for governor. To be sure, average insurance rates increased by 63% in Miami between 1992 and 1995, and 68% in Fort Lauderdale. But in Hawaii, devastated by Hurricane Iniki, rates rose over the same period by 300%.
By most accounts, Nelson's record in granting increases has been better - although not much. The biggest test case so far was a request filed in May by Allstate, Florida's second-largest carrier, for a 59% rate increase. In September, Nelson allowed Allstate just 19.7%.
The industry is just as concerned about how long it's taking state officials to grant increases. Processing rate filings took an average 84 working days in 1994, and 68 working days through the first half of 1995. "The department has been more realistic about rates, but it's still not quick enough," says Rod Petrey, president of the Collins Center for Public Policy, which conducted the task force study.
Nelson's record in shoring up the RPCJUA also appears better than his predecessor's - but again, barely. In a significant move led by Nelson's appointees, the new RPCJUA board decided this spring to seek a rate increase of 41% to pay for a line of credit and reinsurance to cover claims in the event of a big storm. The credit and reinsurance were necessary to prevent the RPCJUA from delaying payments while it assessed private carriers - a scenario that terrified mortgage lenders because of the possibility of defaults.
But even that step wasn't as substantial as it seemed. By requesting a 41% increase, the RPCJUA effectively limited itself to relying primarily on credit rather than reinsurance. As the board eventually realized, relying on reinsurance would have required roughly doubling rates. Then the Department of Insurance reduced the request, and Nelson himself chopped it further, to 15.5%, saying too much of the request as filed was going to commissions.
With Hurricane Luis lurking offshore, the RPCJUA finally closed in early September on a $1.5 billion line of credit, enough to cover an Andrew-sized loss. In addition, the RPCJUA purchased $300 million of reinsurance that kicks in after two hurricane losses in a single season. At about the same time, the RPCJUA's industry-run counterpart, the Florida Windstorm Underwriters Association (FWUA), acquired a sizable line of credit to handle its own burgeoning potential for claims. Without much public notice, the FWUA has more than tripled in size since late 1992, to 205,000 policyholders.
Some legislative leaders criticize such heavy reliance on credit, particularly by the huge RPCJUA. "I've been very concerned about spending all this on a line of credit and not transferring risk" through reinsurance, says state Rep. John Cosgrove, D-Miami, chairman of the House Insurance Committee.
One problem with credit is that it could send the RPCJUA into a dangerous spiral of debt. Deficits have become a chronic problem of joint underwriting associations since they began to appear in significant numbers during the 1970s in response to compulsory insurance laws. New Jersey's auto JUA, perhaps the nation's most notorious until now, collapsed in the early 1990s with a deficit of $3.3 billion.
In addition, the RPCJUA's credit strategy is inequitable, Cosgrove argues, because although a credit drawdown would benefit RPCJUA policyholders, it would be repaid through assessments on all insurers. That wouldn't be true if the RPCJUA had raised its own rates high enough to pay for more reinsurance.
To add further to the questions surrounding the line of credit, there also are lingering doubts about the constitutionality of the assessments that would be needed to pay it off. RPCJUA officials insist those concerns are unfounded.
We'll likely find out soon enough. Because of the RPCJUA's persistently low rates, it already was running a technical deficit of $60 million by the end of 1994, even without a big hurricane loss. Then came two hurricane losses in 1995 - Hurricane Erin ($19.2 million in RPCJUA-insured damage) and Hurricane Opal. To cover its losses, the RPCJUA is likely to issue assessments at some point, says Chairman Bill Wilson, an Orlando attorney. The assessments probably will be challenged.
Rates aren't the only problem in Florida's insurance marketplace, however. An even bigger problem is overexposure. As Andrew showed, maximum potential hurricane losses in Florida are higher than anyone imagined, for a variety of reasons - shoddy construction, weak code enforcement, even fraud by homeowners. Because of density, the risks are highest in portions of Dade and Broward. Perhaps not surprisingly, the companies with the biggest overexposure include market giants State Farm (30% statewide market share) and Allstate (17%).
"Rate is a large problem, but it's not the problem," explains Gary Guzzo, a leading insurance lobbyist. "Some companies have a problem no matter what the rate."
It's that fact - overexposure - that really drives the debate. Unfortunately, it is proving extremely difficult to resolve, for the same reason that it came to exist in the first place: competitive pressures within the industry.
On the one hand, Allstate and State Farm, as well as some smaller companies, need to get rid of a sizable portion of their huge risk, especially in Dade and Broward. On the other hand, no one else in the private market appears eager to do the big companies any favors by taking the excess policies at current rates.
To solve the problem, the task force has suggested that the state develop plans along with State Farm and Allstate to transfer some of the companies' policies to other private carriers, in much the same way that the RPCJUA is transferring its own policies: through payment of bonuses to companies that take them. In mid-September, Nelson approved the first of the RPCJUA's sell-offs, the transfer of 100,000 RPCJUA policies to Bankers Security Insurance of St. Petersburg.
But private carriers like State Farm might prove reluctant to follow the RPCJUA's example, for a couple of reasons. For starters, money to pay bonuses ultimately could come from them, either directly or through RPCJUA assessments. The plan could also mean a loss of precious market share, as well as unhappiness among customers.
As an alternative, the two companies have suggested that the state take over hurricane risk. However, the idea of a state-run hurricane risk pool is about as popular with Florida legislators as an income tax. In fact, Florida leaders already are smarting from a series of embarrassing revelations about the way the state has handled its insurance responsibilities - specifically, the disclosure that former officers of a RPCJUA subsidiary spent lavishly on parties, office renovations, salaries and moving expenses.
To counter the idea for a state-run risk pool, the academic task force has floated a compromise solution. It would cap overall hurricane risk for all private carriers at $15 billion to $20 billion - roughly the Andrew range. Most companies regard the cap idea as a plus. But there's likely to be much wrangling over it between the big companies and smaller ones, because the cap might not benefit some companies as much as others.
In addition, it's becoming increasingly apparent that the cap by itself won't guarantee a return of a healthy market. In the face of further turmoil, Nelson recently suggested that he would support the extension of the moratorium past the November 1996 cutoff, despite the substantial doubts about its legality. Nelson says he also would consider a legislative option known as "linkage": specific authorization for Nelson to insist that companies keep writing windstorm coverage if they plan to keep writing auto and other profitable lines.
Insurance companies "will fight us tooth and toenail" on a moratorium extension, Nelson concedes. Understandably so. Courts have justified insurance moratoriums in the past on the existence of emergencies, and the emergency that justified Florida's moratorium in the first place was Hurricane Andrew. But that was three years ago - plenty of time, a judge might conclude, for the state to make preparations.
