Why Citizens Insurance is a Mess
To understand the problems facing Citizens Insurance, it’s important to first understand how insurance is supposed to work. Insurance is simply the transfer of the risk of loss from one entity to another in exchange for a payment. The entity accepting the risk is the insurance company. The entities making the payments (premiums) are people (the insured) looking to protect an asset (jewelry, cars, boats, homes, etc.). The insurance company must maintain sufficient capital to pay a large number of insured persons in the event of an exceptional level of loss, otherwise known as “catastrophic loss”. If the insurance company is unable to maintain that level of capital, it must either increase the premiums for new and existing policy holders or eliminate coverage for a large group of insured.
Citizens currently does not have an adequate level of capital for the amount of risk they’ve taken on. They are unable to charge significantly more for insurance being issued because the Florida Legislature has set limits on how much premiums are allowed to be raised. And they can’t stop issuing new policies or reduce the number they already have because, as a state sponsored company, they must provide insurance when private companies decline to. Unfortunately, private insurance companies have been avoiding Florida like the plague because the premiums are too low to cover the risk and Citizens has been forced to fill the void.
Therein lies the messy part: state sponsorship has a cost and we haven’t had to pay it yet. Almost seven years have gone by without a major hurricane making landfall in Florida. When one eventually does, who will pay for the damage? On one side of the argument are people with homes in high risk zones, i.e. coastal communities, who don’t want or can’t afford to pay more for their homeowners insurance. On the other side are taxpayers who want off the hook for the former’s potential losses. Because those taxpayers haven’t been made to feel financial pain yet through higher taxes, they go about their daily lives with little interest in the matter. Homeowners insured under Citizens’ policies, however, have a keen interest in not seeing their monthly insurance premiums raised. And their legislative representatives act accordingly, which is to say they maintain the status quo.
So the silent majority (tax payers on the hook for tremendous risk) is being usurped by an extremely active and vocal minority (people with homes in hurricane zones). In the not so distant future, catastrophic losses will occur in Florida that exceed the capital reserves Citizens maintains. Only when taxpayers are forcibly made to cover claims for which they received no payments will this situation be resolved.
UPDATE: For a breakdown of how a catastrophic loss would be covered, check out this piece from Florida Realtors.