These prepared remarks were delivered by AIF’s CEO at the 22nd International Reinsurance Congress in Hamilton, Bermuda on October 16, 2008.
Fifteen years ago I was appointed by then-Florida State Treasurer & Insurance Commissioner Bill Nelson as a member of the Advisory Council of the Florida Catastrophic Hurricane Insurance Fund. The meetings were tedious and very technical in nature, and honestly it took me a long while to understand the fundamentals of the CAT Fund and how it would operate. Back then we had the annual challenge of just trying to keep the legislature from taking money from the fund, especially for beach renourishment. Of course, very soon it became apparent that we would need to seek tax exempt status which we successfully did. With the strong leadership of CAT Fund Executive Director Jack Nicholson the Fund balance slowly built up while we began exploring the idea of creating our own public model after hearing presentations from the major modeling firms about their work product. We later authorized the creation of the state’s model, and after serving two terms on the Advisory Council, I stepped down in late 2002 upon the election of a new Insurance Commissioner.
Speed forward and in January of 2005 I came full-time to Associated Industries of Florida, often simply referred to as “AIF.” It was a fortuitous opportunity for me to take the helm of what is today an 88 year old business association that has the laudable reputation to be the first in Florida to “draw a line in the sand” on any policy issue that we do not agree with. Known as “The Voice of the Florida Business Community since 1920,” we have a rich history of advocating for the free enterprise system in deference to any Florida Governor, Senate President or Speaker of the House. We can accomplish that because though we are a horse, we are a horse of a different color when it comes to us and other business groups. You see, membership in AIF is secret. Nowhere is there a list of our members. Even our board of directors is a secret. We do this because when, not if, AIF takes an adversarial position on a policy matter, the only one who takes the slings and arrows for that position is me as the president and CEO and chief spokesperson for the association.
A good example of that was our 33 year annual battle with Florida trial lawyers to repeal the onerous joint and several liability statute. We finally won in 2005 and 2006 when the Florida legislature under the leadership and foresight of then-Governor Jeb Bush pushed through nine tort reform bills including the demise of joint and several. Do you know how we won? We got two female, Democratic, African-American state Senators to switch their votes and give us the one vote margin of victory! And, of course, we will spend the rest of our existence trying to maintain that ground breaking victory.
On the insurance front, I don’t have to tell you that AIF’s success rate has been less than stellar and that Florida has violated about every free market principle with regard to property and casualty insurance. Let me put it for you in very stark terms: Florida’s CAT Fund is woefully under-financed with a looming $13-15 billion shortfall! To make matters worse, we have allowed Citizen’s Insurance Company to become the largest P & C carrier in the state. Yet is has become the insurer of “first” resort rather than last and it has even been allowed to grow into the commercial P&C business. At last year’s legislative session, we were able to help engineer testimony from executives of Citizen’s and they revealed that at that time last spring, they had over $485 billion worth of exposure on Florida’s coast with almost $3 billion in the bank. So, in essence they could not cover even 1% of their liability. Of course, those exec’s were quick to try and tell us that they also had about another $7 billion available, but in truth that is simply a line of credit that will have to be paid back once it is ever accessed. To sum it up, it looks like this: Citizen’s is over-exposed by 99%, it is the largest purchaser of reinsurance from the Florida CAT Fund, and the CAT Fund can only meet about half of its reinsurance obligation to Citizen’s and the other companies who have secured reinsurance coverage! This is well, catastrophic!!!
AIF and many editorial boards of the state’s newspapers and business journals recognize that Florida has put itself in a position to risk the bankruptcy of the state. Some elected officials will say “Yea, but it would take a Cat 5 storm to cause the unthinkable, and the odds are high that would never happen.” That kind of naiveté is quite evident when you realize that little old Hurricane Wilma was only a Cat 2 or 3 when it entered Florida and a Cat 1 or 2 when it left, and yet it pierced the threshold of the CAT Fund! As you all realize it’s not necessarily how high the winds are, as much as it is where the storm strikes the state. The unspoken truth is that certain Florida politicians expect the U.S. to come in and bail out our CAT Fund and they usually will cite as evidence the bailout of New Orleans. While I know that the federal government will bailout a city that was certainly unprepared, but would they be as willing to save a state that created a fund to protect itself, but then purposely increased dramatically its liability without properly funding it? Others will offer that the model for salvation is similar to the National Flood Insurance program, which ignores the recently ignoble history of that program but which also fails to comprehend that while every state has rivers, that fewer states have to take the blunt force of hurricanes and that the U. S. Senate is the real ultimate problem for any national CAT Fund because every state regardless of their population size has two votes.
Prior to the call of the 2007 special session of the Florida legislature by newly elected Governor Charlie Crist, AIF had already formed a broad coalition of diverse business associations called the Florida Hurricane Crisis Coalition which included insurance companies and agents, homebuilders, roofers, home inspectors, realtors, reinsurers, bankers, contractors, among many others. And we issued a comprehensive list of sound recommendations that even today will help to revitalize our anemic insurance marketplace. Rather than try and demagogue the issue and make insurance and reinsurance companies the culprits, we quickly recognized that unsustainable losses were the primary reason for rate increases and so our first recommendation was the most important: harden more homes. The state had previously appropriated $250 million to conduct free home inspections and then match consumer’s financial commitment with a like amount so that homes could be mitigated and our first recommendation was to double that amount. With less than 20% of all homes in Florida built under the toughest South Florida Building Code standard, we knew that we had to send a message that we understood the problem and how best to begin fixing it over time. Our political leaders failed us during that special session and it has therefore planted the seed for our current predicament.
In January of 2007, just 2 Republican House members sided with AIF and we unfortunately will lose their reasoned voices because they are now term limited out of office. During last year’s regular session though, we garnered 38 votes for the bill by Republican Representative Alan Hayes that was designed to begin the process of unwinding Citizen’s. And next year we hope to round up more votes to keep the process going in the right direction. The bill’s task force to help create the process for unraveling the Citizen’s mess was recently appointed, and Bruce Douglas, the former Citizen’s chairman was appointed to the task force and unbelievably he was just elected last Thursday as the task force chair! This engineered-election tells me that we still haven’t learned any lessons and that we should not expect anything helpful to come from this initially well-intended idea.
But, there is one bright new voice on the Florida Cabinet which belongs to Florida CFO Alex Sink, who has consistently been a reasoned and principled vote on all matters regarding the CAT Fund and Citizen’s. Her bill last session to lop off $3 billion from the CAT Fund liability, was a worthwhile attempt to at least begin the process of correcting the undue exposure of the Fund. AIF has once again signed on to help push this bill through the 2009 legislature and we believe we will continue to gain momentum as we try and reach the 61 votes needed for passage in the House. The Senate is a whole another story and it is replete with the political dynamics of the reelection race of Senate President-designate Jeff Atwater of southeast Florida and the continuing demand that rates be frozen for coastal residents despite the fact that the rates have already been actuarially unsound for some years. This, of course, will exacerbate our teetering current situation.
Over the past year, we have been working with Renaissance Re, FLASH, (the Federal Alliance for Safe Homes) and also My Safe Florida Home to position Florida in such a way that we can educate and inform consumers why it is important to undertake enhanced mitigation. Our challenge is that consumers will be interested only because of the premium breaks they may receive rather than an acknowledgement that the safety of one’s family should be their most significant concern. First and most importantly is the reality that come next July 1st, My Safe Florida Home will be relegated to the scrap heap unless we can extend its statutory authority and fund it. The CFO has recently sent a letter to legislators asking for a $25 million appropriation and while we wholeheartedly support this, the chance for its continued survival is threatened. That’s one reason that AIF has proposed the creation of a public-private partnership so that My Safe Florida Home can accept private corporate donations and allow it to continue the much-needed work of hardening homes. We hope that if we can “privatize” the program that home supply retailers and other like-minded companies will help to fund this joint enterprise as it will be good for their future business. Second, is to introduce into the residential marketplace the voluntary concept of a Home Hurricane Rating Scale, and so this past summer AIF created a second coalition, comprised of many of the same business groups as before, to implement the use of the grading scale – without government intervention. That means that bankers, homebuilders and realtors must agree to voluntarily put this 1-100 scale into practice and we believe that over a period of 3 – 5 years we could instill into home buyers and sellers the idea of not only asking the purchase price of a home but also asking for the home hurricane rating scale. In this way, home buyers will be able to ascertain for themselves the durability of a home from hurricane force winds and adjust their asking price accordingly.
Though Florida continues to make the wrong P&C moves, there are eight (8) ways to help improve Florida’s ability to weather this financial storm of tightening of lines of credit, the maelstrom on Wall Street and the tenuous bond market:
- Commit to an annual program of home mitigation starting on both coasts and then working inland, with a privatized-My Safe Florida Home entity;
- Recognize that all Floridians have to pay actuarially sound rates and short of that, we must establish a quick timeline for actuarially sound pricing for everyone;
- Begin the process of unwinding Citizen’s, first by establishing a timeline of say 3 -5 years to get wealthy coastal homeowners to harden their homes or they will be dumped out of the subsidization program; then continue state financial support in efforts to assist less wealthy consumers with a matching program that will allow for enhanced hardening of their home;
- Expand all continuing education efforts with home builders, realtors, architects, engineers, roofers, public inspectors, and private home inspectors, to insure knowledge and adherence to the building code, at a minimum;
- Commit that in future years, that a portion of any future sales tax receipts as a result of post-hurricane rebuilding, be committed to enhanced mitigation funding;
- Encourage insurance companies and agents to inspect the insured’s home to insure that consumers are getting all appropriate deductions and credits and encourage future mitigation efforts which may help to reduce premiums in the future, and also their taxes if a proposed Constitutional Amendment is approved;
- Florida’s CAT Fund needs to run their Public Model after every hurricane in order to assure that it’s projections are still valid with respect to losses; and
- Work to establish a fair process for improving coastal land-use decision-making but with a healthy respect for private property rights and the perhaps even the potential of a coastal buy-out program.
I would like to suggest that AIF could sure use your help to bring Florida into a position where we have a truly competitive marketplace. Participating in what happens in Florida is important because it is the insurance epicenter and you have the potential to make it better because Lord knows it can’t get much worse.
In our Hurricane Crisis Coalition back in early 2007, we adopted 11 Guiding Principles two of which were: truthfulness, and then secondly it is better to pay for hurricane risk with private sector capital than to finance it with public debt. The coalition unanimously also issued five recommendations, and copies of both of these two documents are available on our website at www.aif.com.
Though Floridians have already begun to pay the price literally for our bad choices it is only when they fully understand that we already have an 8% tax assessment against all of our personal and most all of our corporate P&C lines of insurance, that the true insurance revolution will occur. And we will continue to pay this indebtness for a number of years into the future until we realize that post-event funding is the least preferable way to do it. I will say that there is a glimmer of hope about our CAT Fund and about Citizen’s because it is attracting bi-partisan support for change, I think that is the operable word these days, isn’t it? Both Republican Representative Alan Hays and Democratic Senators Al Lawson and Jeremy Ring are prepared once again to support a state policy promoting a free marketplace where everyone can compete on a level plane and the Senators support could particularly help us in any future Senate debate.
In closing, Associated Industries of Florida is the strongest most consistent voice in Florida for sane, non-punitive insurance legislation. For us it is simple: 99% of the companies in Florida and, 99% of our citizens do not have the capacity to self-insure, and so for us, a robust marketplace is in our best interests over time. Interestingly, when we annually poll this question: “Do you support the idea that more insurance companies competing in Florida will help to bring down insurance rates over time?” 83% of likely voters in the poll this year understood that this elementary principle is the underpinning of our entire free-enterprise economy. So, once again as is the case with offshore exploration and drilling among Floridians, our elected leaders are not listening to all of their constituents, only those they want to hear.
Strange bedfellows are common in politics. And as strange as it may seem Insurance and Reinsurance companies are indeed welcome and encouraged to do business in Florida – it’s just you have to speak to business owners rather than politicians to feel the real love. As for me, I strangely forgot to properly acknowledge in the outset that I am indeed a lifelong Democrat running a Republican-oriented business association and I did work for the trial lawyers. We humans may not be as rational as we are always supposed to be, but we do seem to always be able to rationalize things. But, please never doubt AIF’s commitment under my tenure, because we will continue to lead the fight in Tallahassee for a regulatory environment that recognizes the need for a vibrant, fair and competitive marketplace. Thank you for inviting me here today.
Hurricane Crisis Coalition Brochure
