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You Asked For This Job, Bill

As I write this, no fewer than four hurricanes, tropical depressions or storms are playing a threatening game of tag out in the Atlantic. We are rapidly running through the alphabet of names, and each new tropical wave that develops off the African coast increases the odds in Florida's dangerous game of meteorological Russian roulette.

Will this be the one?

It's a question that is never far from the thinking of Insurance Commissioner Bill Nelson, who recently told a TV interviewer that he spends most of his work days ?on my knees.? Nelson can't do much but pray about the weather. But the state's scandalous hurricane insurance program is another matter.

As just about every property owner knows, the state, in the aftermath of Hurricane Andrew's devastation, created an insurance pool to provide property and casualty (p&c) coverage when private insurers bailed out of the market after suffering tremendous losses. That was three years ago. The state is still on the hook, and the odds of Florida getting whacked by a devastating storm increase by the day.

Right now, for instance, the potential liability of the insurance pool is about $70 billion against which it has collected premiums of only about $400 million. (At that rate, it would take some 40 years to pay off the $15.5 billion in insurance claims from Hurricane Andrew.) A consortium of banks in late summer was considering lending the state pool $1.5 billion to help pay any future claims. But this would be another short-term fix that only delays harsh reality.

So, as we batten down the hatches, maybe it's a good time to think about how we got here and what we might learn from the experience. There is a strong parallel to be drawn between the pending financial disaster in Florida brought about by the insurance crisis and the budgetary crisis in Washington stemming from the massive, unfunded entitlements. In both cases, the politicians have shifted costs and responsibilities in order to avoid telling the voting public unpleasant truths.

In Florida, this political shell game is why the state, for the fourth year in a row, is threatened with financial ruin by those rumblers out in the Atlantic. Look back at what happened before Andrew cut a swath through South Florida. At that time, the big insurance companies were in a discounting war, each trying to write as much insurance as possible in Florida to gain market share. As Senior Editor Phillip Longman noted in ?The Politics of Wind,? his award-winning September 1994 cover story, ?In many instances, (p&c) rates were below what the insurance company's own actuaries indicated were necessary.?

Competing with each other for market share in reckless disregard of the annual hurricane threat to Florida, insurance companies slashed rates and policy holders began to think they were entitled to cheap coverage. But wait a minute!

The state had an insurance commissioner whose job was to oversee the companies to make sure they put away adequate reserves. Where was he?

Well, just as the politicians in Washington have put off facing the day when the bill for unfunded entitlements comes due so as not to upset middle class voters, so too the Florida insurance commissioner, an elected official, gained political advantage by ignoring the implications of the rate war: He gained political support from Florida property owners and from the battling insurance companies. ?It was their surplus at risk and they had plenty of surplus,? then Insurance Commissioner Tom Gallagher told Longman, adding, ?and it was good for the consumer.? In fact, the companies' surpluses were woefully inadequate to cover claims from even a minor hurricane.

After the losses from Andrew, 23 surviving insurance companies threatened to abandon Florida. So the state created the insurance pool. It was meant to be a temporary solution, but Gallagher, who was running for the Republican gubernatorial nomination in 1994, welcomed any and all into the pool. Offering cheap rates that private insurers couldn't match, the pool became the underwriter of choice, instead of last resort, covering properties inland as well as those on hurricane-vulnerable coastlines.

Now we learn that a federal grand jury is probing companies tied to the state's vast, loosely overseen insurance pool, which was run by Gallagher's closest political adviser, Jim Bax. Among the allegations is that a claims company, operated by politically connected individuals, was paid $300,000 a month for doing little or no work.

While the grand jury looks into alleged misdeeds of the recent past, Commissioner Nelson has made only modest progress toward straightening out the mess. He did propose that the state pool not underwrite property in areas that are less vulnerable to hurricanes, but only after State Farm announced in August that it would no longer write homeowner policies. And he did appoint an Academic Task Force on Hurricane Catastrophe Insurance, but its final report has not been made public at this point.

There certainly isn't enough capital in the state insurance pool to spread the risk adequately; there's not enough in the domestic insurance market at the current premium levels charged here. To attract the capital it needs to cover its hurricane exposure, Florida must offer underwriters a fair return for the risks they are taking. Would you risk your own savings on a bet that Florida will experience no major hurricanes for the next decade or so?

Unfortunately for him, Nelson doesn't have the wiggle room that the politicians in Washington have with federal entitlements, which won't bankrupt the country until the next century. Clearly, Nelson would enjoy having the same freedom to temporize. But there's a big, ugly problem on his desk that won't go away.

You asked for this job, Bill. Go for it!