Government-supported insurance lowers
Hurricane Andrew's devastation in 1992 forced Floridians to take a
hard look at building codes, a process credited with making the
state an early national leader in hurricane protection. Fifteen
years after Andrew, an outcry among Sunshine State residents over
spiraling premiums has pushed lawmakers toward more sweeping
reforms — this time in insurance.
A year after Hurricane Ivan swept through Pensacola Beach,
Fla., debris still lined the roads. Lucky for Florida, the next big
one struck Louisiana. Would the state be able to afford
But as a similar outcry builds in other coastal states, it remains
to be seen whether Florida's insurance reforms will prove as
visionary or durable as its building code reforms.
In a two-week special session in January, newly elected GOP
Governor Charlie Crist seemed to surprise members of his party and
the state's insurance industry with the way he lived up to campaign
promises of dramatic change. As Crist repeatedly reminded
lawmakers, he had the overwhelming support of Florida residents,
many of whom had experienced triple-digit increases to premiums in
the aftermath of the 2004 and 2005 hurricanes.
The self-styled "people's governor" convinced lawmakers to remake
state-run Citizens Property Insurance Corporation, which has more
than 1.2 million policies and ranks as the state's largest home
insurer. Under his leadership, Citizens went from the most
expensive insurer-of-last-resort to one permitted not only to offer
lower prices than private insurers but also to compete with the
privates in offering standard, less risky fire and theft
The reform that makes the most immediate difference to Floridians,
however, is one that doubles the amount of low-cost reinsurance
made available by the state. Reinsurance is essentially insurance
for insurance companies. It assumes all or part of the insurance
company risk of a disaster.
Under the new law, private insurers and Citizens can buy
reinsurance from Florida at below-market rates — but they are
required to pass along the savings to consumers. That was the main
reason for anticipated premium cuts of between 5% and 40%.
Only two Florida House members voted against the new insurance
bill. Rep. Dennis Ross, R-Lakeland, was one. In an op-ed piece in
the Tampa Tribune, Ross noted that allowing the state to sell more
reinsurance opened it to risk from a major storm or repeated
"Insurance companies will receive the benefit of low-cost
insurance, but when it comes time to pay that reinsurance, and the
exposure is $30 billion, the state does not have the money to cover
the loss," Ross wrote. "The question then becomes, what happens
when there are multiple storms and successive bad storm
Supporters countered that the assessment was shortsighted. J.
Robert Hunter, director of insurance for the Consumer Federation of
America, noted that while it is true Florida could suffer in one
bad storm year, actuarial projections show the state will come out
ahead over a longer period by selling more reinsurance.
"There's danger in the short run, but not in the long run," says
Hunter, who was hired by Citizens this past winter as a consulting
actuary on the rate reductions. "If you trust your calculations,
using the best models over a 30-year period, the state would be
The Florida reforms are important because other states face similar
pressures as more and more residents flock to state-run pools
— a migration resulting from private insurers up and down the
coast either dropping policies or refusing to write new ones.
Although no company has totally dropped policies, residential
policies in government Fair Access to Insurance Requirements (FAIR)
plans soared from about 1 million in 1996 to 1.9 million in 2005,
according to the Insurance Information Institute. Exposure climbed
from $122.5 billion to $387.8 billion.
The year 2005 is the latest for which national figures are
available, but the number has likely ballooned since that year.
Policies and exposure at the South Carolina Wind and Hail
Underwriting Association (SCWHUA), for example, shot from 20,519 to
28,600 and $6.5 billion to $11.1 billion, respectively, between
2005 and 2006, according to association figures.
"I think some of the first things you saw were companies raising
deductibles, unwilling to write new business, and starting to get
off of risks such as large frame condos," explains Smitty Harrison,
executive director of the SCWHUA.
Some have cited the instability in the coastal insurance market as
an argument for a national catastrophe policy. Hunter, for his
part, does not support the idea. He calls it a nonstarter: no one
from Iowa will ever vote to contribute to a fund to bail out
coastal residents, and few major insurers have come out in support
of a national policy, he says.
Instead, Hunter maintains, the Florida model should be expanded to
create regional pools.
"I would do a multi-state cat [catastrophe] fund from Texas to
Maine," he suggests. "And I would use the Florida approach on
reinsurance because [private reinsurance] is way overpriced. That
way, you get an even better spread than in Florida." — Aaron
The End of an Era
Florida says good-bye to the internal-pressure
Florida builders are the first to face new hurricane protection
codes likely to be in force soon in other coastal states. Sunshine
State lawmakers this winter began requiring coastal builders to use
impact-resistant glass or shutters on all windows and sliding glass
doors. Before the change, builders also had the option of
structurally reinforcing homes and condominiums but leaving
The industry had anticipated the elimination of the so-called
"internal pressure design option" for 2008. That's when it will be
phased out of the International Building Code. Heavily advocated by
insurers, the phaseout follows repeated occurrences of homes
sustaining massive wind- and rain-caused internal and contents
damage yet remaining intact following hurricanes. The goal is to
reduce this damage.
Florida's early action, which applies on both the east and west
coasts, has builders fuming about altering permit applications and
contracts — in some cases raising prices unexpectedly for
Are impact-resistant windows worth an estimated $5,000 more to
the cost of the average 2,200-square-foot home? Viewed from this
perspective, the answer is decidedly yes.
"You've basically taken that whole program and shoved it 18 months
forward," notes John Wiseman, president of the Florida Home
Builders Association, which has asked lawmakers to push the
effective date from January to July of this year. "The industry can
deal with that, but when it comes to individual contract and
business decisions already made and you're changing that, it
creates more uncertainty."
Whether or not the industry succeeds in delaying the law, west
coast builders will likely feel the most dramatic effects, suggests
Dave Olmstead, a member of the Florida Building Commission's
Hurricane Research Advisory Committee and a senior officer at
window- and door-maker PGT Industries.
Olmstead says about 85% of current homes on Florida's west coast
and 35% of the homes on the east coast are built using the internal
pressurization option. One reason for the difference: until the
2004 hurricanes, the west coast had traditionally been viewed as
less prone to hurricanes, Olmstead notes. There are currently about
300 housing starts monthly on Florida's west coast, according to
Once the building is breached, the internal wind pressures can
be severe enough to rip the roof off, as shown in this classic
example: once Hurricane Andrew beat down the garage door, the truss
roof didn't stand a chance.
Wiseman estimates the new law will add about $5,000 to the cost of
the average 2,200-square-foot home, based on the $300 to $400 cost
of 10 impact-resistant windows and one $1,000 to $1,500
tant sliding glass door.
That amount could be considerably lower if homeowners opt for basic
plywood shutters, but higher-end electric roll-down shutters in
some cases are even more expensive than impact-resistant
For policymakers, the hope is that any added up-front cost will
reduce the considerable cost of paying for post-storm interior
damage — damage often made that much worse by the absence of
workers to clean up and rebuild. Too, the massive housing shortage
following Katrina made it clear that policy-makers need to do what
they can not only to save homes but to keep them livable as well,
"The idea of this law is to protect the homes against all that wind
and rain so people still have a place to live," he explains.
Florida lawmakers also bulked up other hurricane protections. They
removed a provision that allowed homeowners to replace up to 25% of
their windows annually without using shutters or impact-resistant
glass. For the first time, they required opening protection for
sunrooms, stripping a provision that mandated it only for entryways
to and from the rooms. And they expanded some high-wind zones to
include more homes.
Olmstead predicts most Gulf and East Coast states are likely to
follow Florida's lead in coming years.
"A lot of this was insurance driven, but it's being driven in a lot
more states than Florida," he notes. "The Florida insurance
industry puts the Florida Building Code into platinum standards,
and everyone else has to catch up." — A.H.