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Hernando Today

The Answer – My Friend – Is Blowing in the Wind

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By JOHN REINIERS

In My Own Words

Published: August 1, 2008

Hernando Today published columns in 2006 and 2007 in which I suggested that our "hurricane" insurance crisis is beyond the ability of the private market. We needed a government solution. And this was a tough decision for a conservative. Well, we're in the hurricane season again, and still, no silver bullet.
Hurricanes made me think of Bobby Dylan's "The answer, my friend, is blowing in the wind." One could argue that this lyric is very ambiguous since wind is very amorphous or – now think about it – very obvious, because the wind is right in your face. My vote is for the latter explanation.
Let me explain.
In one of my youthful incarnations, before I settled in as a lawyer, I was a manager for a major insurance company in Florida with a territory so large that when a major hurricane hit in the '60s, it was so catastrophic for my people that I probably created the first hurricane "catastrophe unit" in the United States. It was quite by accident. We were flying in "cat" claims adjusters from all over; and our office was overwhelmed by new claims. We had to house the adjusters and feed them in places where the motels and restaurants were destroyed or without utilities. (We had people running food to them wherever they were. It finally became obvious that we had to set up a parallel operation with a dedicated staff, a separate file system, etc. And this was the '60s, long before Hurricane Andrew and before our coastline was overbuilt.
Why tell you all this? It's because of what The Florida Reinsurance Corporation is telling us. Don Crane, Bill Ballard and Dan Montgomery realized that insurers had been getting increasingly uneasy about writing insurance for a risk as unpredictable and expensive as hurricanes. I remember the '60s decade of hurricanes well. The simple world we knew back then – auto accidents, kitchen fires, dog bites, litigation etc., exploded into another universe. We were grossly unprepared for these catastrophes – and that was then.
This is my point. Insurers knew with actuarial certainty what normal claims counts would be. But not this. Put it this way: If insurance losses are so bad that the National Guard has to be called out, maybe it is a problem that requires a government solution – which is not unlike the reasoning behind the "war, or warlike acts" exclusion in all policies, which was examined after the 9/11 property claims.
When President George Bush was told about the insurance ramifications in describing the terrorist attacks as an "act of war," he insisted on calling it what it was. Nevertheless, the industry paid the claims, but testified at hearings that the private marketplace was unable to manage such a risk because it is too unpredictable and catastrophic. Hurricanes are somewhat analogous. The Southeastern coastal states are well aware of this – particularly since Hurricane Katrina.
John Tibbetts wrote: "In one of the greatest human migrations of modern times, people are flocking to coastlines around the world." Well, Florida is about out of coastline to abuse. About three quarters of the population lives in its 35 coastal counties. Insurance is but one more reason why we can no longer afford ourselves. (Government programs being another.)
This was not the case in the good old days when the insurers sold an extended coverage endorsement to cover the "additional" peril of windstorm, which was given equal dignity with two other heavenly perils: hail and aircraft damage. Miami Beach wasn't built then. "Homeowners" insurance wasn't even a gleam in the industry's eye. The entire Southeast was mostly a huge pristine beach, so it couldn't suffer catastrophic damage. (Nowadays, if they were to build another hotel on Miami Beach, it would sink into the Atlantic.)
The FRC paper offering a solution to the collapse of the private property insurance market is to remove hurricane coverage both from the private market, and Citizens, or as FRC says, a "transformation of the existing Florida Hurricane Catastrophe Fund into the exclusive insurer of hurricane risk for every property insurance policy... All other primary insurers would cede 100 percent of their hurricane risk to the reconstituted FHCF... called the Florida Reinsurance Corporation (FRC) ... The FRC, as a single peril insurer with no sales force, no federal tax expenses, and no required investor returns ... 'should provide' Floridians immediate rate relief."
FRC would set the premium rates, but the premium dollars would go to them and not private insurers, yet permit "that market to do what it does well – insure non-catastrophic, regularly occurring, risk."
It is beyond the scope of this article to explain the financial scheme, other than to say that within 10 years, the FRC could have a surplus of $82 billion – which should be more than enough to cover the worst catastrophe – and a very real possibility of a 25 percent reduction in premiums.
While my original idea was the creation of a federal regional agency similar to the Tennessee Valley Authority (TVA), this is a step in the right direction, and may influence other Southeastern states. The fly in the ointment is that, similar to federal flood insurance, private insurers would handle claims on a fee basis. If an insurer is ever going to throw money at claims without loss cost control or audits, a catastrophe is the time to do it.
Believe it or not, insurers try to avoid (always unsuccessfully) media bashing and political blowback. Just recall all the money FEMA threw at exaggerated or fraudulent claims, and they aren't even an insurer exposed to all of the above, plus public adjusters, bad faith lawsuits or exaggerated appraisals resulting from a failed appraisal system. (The only concerns of FEMA are the media and politics.)
Somebody should talk to the claims people and legal staff at Citizens. (Where is the Legislature and media when we need them?) If FRC gets off the ground, and is going to succeed, legislators would need to demand prudent control of loss payments, which would require insurer protection from all the cottage industries feeding off the insurance industry – at least to the extent these insurers would be handling FRC claims.
So influential was economist John Maynard Keynes that an entire school of economic thought bears his name. Keynes was "sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas." The insurance industry has a vested interest in making a profit on all lines of insurance, so on a subliminal level, they really want out of the "wind" business. We have simply overbuilt in all the wrong areas and do not want to pay for it.
The answer, my friend – this creative idea – is blowing in the wind.

John Reiniers, a regular columnist for Hernando Today, lives in Spring Hill.

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