Florida's Hurricane Tax
by Gerald Wester

In the guise of protecting Florida consumers from insurance companies, the state’s political leaders have shifted the cost for a future disaster onto the back of every resident who pays taxes and insurance premiums.

With more than 2,000 miles of coastline, Florida is the country’s most hurricane-prone state. Approximately 80 percent of all the insured property in Florida, worth over $1.9 trillion, is vulnerable to hurricanes, and that figure is growing with continued development in the state’s highest risk areas.

Florida encourages risky development by subsidizing coastal property insurance premiums through post-event tax hikes on insurance premiums that are levied on almost everyone in the state. In 2007, Florida increased the probability and magnitude of a potential tax by taking the following actions

• expanding the Cat Fund
• expanding Citizens’ tax base to include most business insurance premiums
• rolling back Citizens’ rates
• converting Citizens from an insurer of last resort to a market competitor
• investing Citizens’ cash in securities backed by subprime mortgages

Both the Florida Hurricane Catastrophe Fund (Cat Fund) and Citizens Property Insurance Corporation are heavily reliant on debt to pay claims and associated “hurricane taxes” (aka assessments) to repay debt.

The Cat Fund is a state-sponsored property reinsurance program in which all property insurers providing residential property
insurance must participate. The Cat Fund’s rates are substantially lower than those of the global reinsurance market. The mandatory layer of Cat Fund coverage is approximately $16 billion. To achieve rate relief for residential policyholders, the 2007 Legislature provided an additional $12 billion in optional Cat Fund reinsurance coverage, which means that Floridians
now face $28 billion in risk exposure through the Cat Fund.

By rolling back and freezing Citizens’ rates, lawmakers set its costs well below actuarially sound private market rates. Prior to 2007, homeowners could purchase insurance from Citizens only if they could not find coverage in the private market. Last session, lawmakers opened Citizens to homeowners who were eligible for private insurance if the premiums charged were 15 percent higher than the rates offered by Citizen. In other words, lawmakers set Citizens’ rates artificially low and then allowed
it to compete with private insurers who lack the power to force taxpayers to reimburse them if they have to pay out more in losses than they collect in premium.

The 2007 Legislature also authorized Citizens to offer a multi-peril policy for all commercial property under its commercial lines
account. Previously, the commercial lines account contained commercial residential properties only.

Lawmakers justified these moves by shifting Citizens’ risk to the Cat Fund, but doing so did not decrease the state’s exposure to hurricane losses. Reducing Citizens’ rates simply reduced the overall monies the state has on hand to pay losses and increases the likelihood of assessments. Citizens and the Cat Fund have almost the same assessment base, which means shifting the risk from one to the other is nothing more than a shell game.

Exposure to loss in Citizens more than doubled in 2007, to $434.3 billion, relative to year end 2005. In the long run the expansionof these programs is not sustainable and has placed the State of Florida in great financial peril. A state bond issue in excess of $20 billion to fund recovery from a Katrina-size hurricane is not feasible and the state will not be able to meet its obligation to property insurance companies and consumers under these programs.

Commercial-insurance premiums account for approximately 41 percent of the total premiums subject to the hurricane tax. Florida’s residential and commercial policyholders will become responsible for paying off the state’s enormous debt in the event a bad storm or series of storms hits our state. In a worst-case scenario, an employer could be subject to post-hurricane
assessments totaling as much as 84 percent in additional taxes on its insurance policy.

The 2007 legislation replaced the system of financing hurricane losses through premiums based on property risks with a scheme to cover losses with post-storm policyholder assessments and state taxes.

Florida has bet its financial future that a major hurricane will not make landfall on its shores — a bad bet for Florida taxpayers.
Instead of the risk of hurricane losses being spread throughout the world’s insurance and financial markets, the 2007 legislation further concentrates the risk within the considerably smaller financial resources of the state, primarily on the backs of employers.

Gerald Wester is managing partner with Capital City Consulting, LLC, a Tallahasseebased lobbying firm and consultant for AIF
(e-mail: gwester@capcityconsult.com)