State CFO Tom Gallagher and state insurance regulators have to be careful how they react to this season's storms. They must send signals to consumers that they won't let insurance companies use the storms as an excuse to raise rates precipitously. But they must also encourage the private market enough that companies will continue to write policies here.

"That's going to be an interesting tightrope walk for whoever has to do that," says Rade Musulin, vice chair of the public affairs committee of the Florida insurance news Council and vice president of operations for the Florida Farm Bureau. "One sign the market's not going to like," he says, would be an order to freeze rates in the storms' aftermath.

Shrinking Citizens

Both state and private insurance experts agree: State-run Citizens Property Insurance Co. is too big.

More than a decade after Andrew, Citizens Property still carries some 815,000 policies. That's fewer than the 1.4 million the state carried at its peak, but recent trends have seen Citizens growing again after shrinking steadily up through 2000. The majority of Citizens' policies are windstorm-only policies written for homes in locations that private insurers generally won't touch: The Florida Keys and east of I-95 in southeast Florida.

In recent years, a "takeout" program provided financial incentives for private insurers willing to take on Citizens' policies. But Robin Prunty, director of Standard & Poor's public finance department, says the incentives haven't been enough to make private insurers eager to insure high-priced dwellings in high-risk areas. "Those are the high-value properties that stand to lose where the exposure is the greatest," Prunty says. "There hasn't been a rush by the private market to pick up those policies."

It's important to shrink Citizens, say the experts, because unchecked growth in the number of Citizens' policies will mean no limits on Citizens' liability. Whereas private insurers pay losses without assessing the rest of us, Citizens would have to meet truly catastrophic losses by assessing every homeowner in the state to pay, whether they're insured by Citizens or not. In addition, Citizens' rules mean it sometimes insures homes in high-risk areas that are worth more than $1 million -- raising the specter of the small homeowner in Palatka paying higher insurance premiums to rebuild a pricey Key Biscayne home.

In addition, "an uncontrolled Citizens leads the government to far more liability than the CAT fund does," says insurance expert Rade Musulin. The CAT fund has defined limits on what it pays. With a swelling Citizens, he says, "we end up with every hurricane being 100% a state liability. We chase the private capital out of the market. It's really not in our interest to have complete state takeover of all the risk."

One bit of hope: Florida CFO Tom Gallagher says he has been in discussion with two insurers who "are talking to us about depopulation." One would write 50,000 policies now covered by Citizens and the other would write 20,000. "We'd prefer the number of (Citizens') policies to go down," he says.

Citizens Property Insurance Co.

In its high-risk account, Citizens provides wind-only policies. Here's Citizens' exposure in the Keys and counties affected by Hurricane Frances:

Broward, Miami-Dade, Monroe and Palm Beach counties account for 62% of Citizens' high-risk policies.The hurricanes of 2004 highlight Citizens' size because if private insurers re-evaluate their risk tolerance and drop more policies, Citizens could grow even more.

The Future of Building Standards and Codes
In 1994, two years after Hurricane Andrew mowed down 99% of south Florida's mobile homes, the U.S. Department of Housing and Urban Development upped building standards for manufactured homes. The manufactured housing industry fought the higher standards, saying that the better-built houses would be too expensive. "We fought that effort and lost," says Bill Turney, assistant executive director of the Florida Manufactured Housing Association. "It's the best loss we ever had," he concedes.

Today, manufactured homes cost about $4,000 more to build than homes built before 1994. In Charlotte County, Charley destroyed most of the 12,000 mobile homes there. All were built before 1994. Turney says the 550 mobile homes in the county that were built after 1994 were damaged but not destroyed. Unfortunately, just 16% of some 900,000 mobile homes in the state were built after 1994.

The home building industry also fought stricter building standards after Andrew, spending a decade and millions of dollars arguing against beefed-up codes. Ultimately, the state adopted standards on new construction in 2002 that called for homes on the coast to be able to withstand 130-mph winds (Miami-Dade, Monroe and Broward counties adopted even tougher standards for new construction). But builders convinced state legislators to allow less-stringent standards in inland counties. (HUD standards for manufactured homes also are less-stringent inland.) In De Soto County, for instance, the standard is just 120 mph; in Orange County, it's 110 mph.

Charley destroyed more than 12,000 homes and left another 19,000 homes "uninhabitable"; most were built before 2002. But Charley showed that a storm could maintain its wind force even after moving inland, making the industry's claims that stronger standards aren't needed inland look shortsighted.

"Anyplace in Florida can be hit by a bad hurricane. We need to revisit where that building code is applicable. It may be OK ... but we maybe need to look at stronger building codes" in inland areas, says insurance expert Rade Musulin.

Building On the Beaches
Orrin Pilkey, an emeritus Duke University geology professor and director of the school's Program for the Study of Developed Shorelines, offers some very tough advice for Florida policy-makers:

He expects the hurricanes to produce a "major loss" of renourished beaches and believes that Florida should rethink its beach renourishment program. The Clinton and Bush administrations, he says, tried to get the federal government out of beach renourishment. Eventually, Pilkey says, most of the costs will fall to the state. "We're dealing with a very wealthy group of people living along the shoreline," says Pilkey. "Why should we pay for their stupid act of building along a receding shoreline?"

Pilkey also criticizes the federal flood insurance program, which has been blamed for promoting high-risk coastal development by providing low-cost insurance. In the wake of Charley, U.S. Rep. Porter Goss was the subject of a story in the Naples Daily News reporting how Goss had secured federally subsidized flood insurance for North Captiva, leading to more development on the barrier island and leaving taxpayers on the hook to bail out its wealthy property owners after the storm.

The law was designed to prevent future development in high-risk areas from being supported by taxpayer-subsidized insurance, but Goss obtained an exception for the island. "This politician did a most irresponsible thing," says Pilkey.

The Big One: The Role of the Feds
If Florida gets hit by a storm causing more than $21.4 billion in losses, the CAT fund would be tapped out. (Though it starts each season afresh with the ability to pay $15 billion in claims.) Primary insurers would have to fall back on their reinsurance to pay claims. The state guaranty association would take over for any that fall insolvent. That sounds as if everything's fine, but it's not.

In the aftermath of such a huge storm, depending on where it hits and how it affects individual insurers, some companies could fail, the private reinsurance market could see prices increase dramatically, and policyholders in Florida would see either huge rate increases or non-renewals.

"The Florida system as it's designed can handle an Andrew or Andrew plus a Charley. We don't have an answer for the Armageddon storm," says Rade Musulin, vice chair of the public affairs committee of the Florida Insurance Council and vice president of operations for the Florida Farm Bureau. "There will be companies that go insolvent, that exhaust their capital reserves."

At that point, he says, "we're in uncharted territory. That to me is where the federal government has largely been playing ostrich. We all know that a $50-billion to $80-billion storm is out there. We don't have a great answer for when that storm hits -- notice I didn't say 'if.' "

The issue, Musulin says, is not whether the federal government will get involved. It would have to after such a storm. The issue is whether it prepares in advance or whether it does something in a haphazard way after the storm. What the nation -- think the San Francisco or New Madrid earthquakes happening today -- needs is a federal disaster preparation fund, Musulin says. Former U.S. Rep. Bill McCollum proposed legislation while in Congress to create a federal backstop but couldn't get it passed.

Long-Term Stability
This summer's storms served as a reminder that the whole insurance infrastructure -- including big players like Allstate as well as smaller, weaker insurers -- isn't windproof. Charley knocked third-quarter earnings down for some affected insurers before Frances and Ivan even arrived, serving as a reminder that the potential of post-Andrew insurance company failures haven't been legislated out of existence.

After Andrew, insurers such as Allstate and State Farm, the leading private insurer with 23.7% of the property insurance market in Florida, set up separate legal entities to do business in Florida -- to insulate the parent firms from collapsing because of Florida. Multiple hurricanes call into question whether parent companies will remain committed to those separate entities, says Damien Magarelli, an associate director with Standard & Poor's. A.M. Best downgraded one smaller insurer after Charley and as Frances approached placed Allstate's and State Farm's Florida units and a third insurer under review for possible downgrades.

That same doubt about how committed parent insurance companies are to their Florida-specific offspring holds true for commercial insurance. Unlike homeowners' insurance, commercial coverage isn't propped up by Citizens or the CAT fund. When you see any figure for insured loss after a storm, assume 30% of it is from commercial coverage -- a big number in a combined $11-billion-plus insured damage-season.