Evaluating the Public Financing for Florida's Wind Risk

• Author: Jack E. Nicholson,Lorilee A. Medders
• Published date: 01 March 2018
• DOI: http://doi.org/10.1111/rmir.12092
• Date: 01 March 2018

Risk Management and Insurance Review

C

Risk Management and Insurance Review, 2018, Vol.21, No. 1, 117-139

DOI: 10.1111/rmir.12092

PERSPECTIVE

EVAL UA TI NG T HE PUBLIC FINANCING FOR FLORIDA’S

WIND RISK

Lorilee A. Medders

Jack E. Nicholson

ABSTRACT

To increase residential property insurance options for wind-related disaster

events, the State of Florida created the Citizens Property Insurance Corporation

(Citizens) and the Florida Hurricane Catastrophe Fund. These entities play a

major role in financing disaster losses for Florida. In this policy article, the

authors assert that the State of Florida has emphasized the political objective of

insurance affordability rather than managing and controllingrisk for the benefit

of the citizens of the state. The burden for financing catastrophichurricane losses

has been transferred to the public as most property and casualty insurance

policies in Florida are assessable. Florida plays an inherent leadership role in

the disaster risk arena, given its high exposure as well as its deep insurance

penetration. The authors assert that while Florida has taken a leadership role

in disaster risk control, the state’s disaster risk financing strategy has failed to

employ a long-term focus that recognizes the interconnectedness of all parts of

the system. The opportunity for the state going forward is to change its public

policy focus to one that emphasizes availability over affordability. Florida’s

private markets could operate more competitively, and thusnot unnecessarily

place Florida’s citizens and their economy at risk.

INTRODUCTION

Florida can be viewed as an experimental laboratory for policymakers around the globe

who struggle with the task of making financial preparations for disasters. Due to its

substantial disaster exposure from the hurricane risk, Florida presents the extreme case

that makes for a fascinating research study. Indeed, much research has been done on

Lorilee A. Medders is a Joseph F Freeman Distinguished Professor of Insurance at Ap-

palachian State University; e-mail:meddersla@appstate.edu. Jack E. Nicholson is the Florida

State University Director at Florida Catastrophic Storm Risk Management Center; e-mail: jnichol

son@business.fsu.edu. This article was prepared for the “Improving Disaster Financing: Evalu-

ating Policy Interventions in Disaster Insurance Markets” workshop held at Resources for the

Future on November 29–30, 2016. The author would like to thank the sponsors of this project:

the American Academy of Actuaries, the American Risk and Insurance Association, Risk Man-

agement Solutions, the Society of Actuaries, and XL Catlin.

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118 RISK MANAGEMENT AND INSURANCE REVIEW

this marketplace and its problems.1The purpose of this policy article is to examine two

of the state’s public risk financing programs designed to address the economic problems

of insurance availability and affordability of residential property insurance—Citizens

Property Insurance Corporation (Citizens) and the Florida Hurricane Catastrophe Fund

(FHCF).

Of the 18 Atlantic and Gulf Coast States, all2but Maine have residual market types of

facilities insuring wind and/or other perils.3Citizens and the FHCF, in tandem with the

private market for residential property insurance, comprise an interrelated system in

Florida for the financing of disaster losses. This is a fragile ecosystem wherein the public

entities are large and not true markets of last resort. Together, these two public entities

collect multimillions of premium dollars and are exposed to multibillions of potential

loss dollars, more than in any other U.S. state. Their size and the state’s dependence on

them for financing disasters position them inherently to involve a high level of political

risk. Economic and political pressures can quickly alter the use of the entities in a single

legislative session, and then switch to a different direction in the next. Even without the

consideration and dominance of various political objectives, the challenge of creating

and maintaining a well-orchestrated strategy for managing disaster financing in Florida

is substantial and is an ever-evolving task.

Although Florida is ahead of other U.S. states in some of its disaster preparedness and

insurance market efforts,4legislative and regulatory interventions in its insurance and

reinsurance markets have resulted in suppressed property insurance prices and cost

shifting from one policyholder to another (via non-risk-based pricing) and from current

to future policyholders (via a system of assessments used to finance debt).5

While the authors recognize the state’s recent efforts to stabilize the residential property

insurance market, economic problems remain within the system, posing risks to the

public and the private sector. This policy article examines the state of the public risk

financing sector for residential property exposure in Florida and considers implications

for potential future costs and risks to Florida’s policyholders and its citizens. The authors

submit that Florida’s property risk financing system serves to illustrate how short-term

political economies can easily override the long-term interests of the market economy,

creating substantial negative externalities that are difficult to correct.The authors further

assert that Florida’s current path is unsustainable, and that greater preparation and focus

1Medders et al. (2014) provide a detailed analysis as well as a lengthy bibliography of prior work

on the subject.

2See the American Insurance Association’s link at http://www.aiadc.org/File%20Library/

Resources/Industry%20Resources/PROPERTY—National—-Residual-MarketDescriptions-

White-Paper-295953.pdf

3The Property Insurance Plans Service Office(PIPSO) has links on its website to all FAIR plans and

wind pools in the United States covering auto, property,etc. See http://www.pipso.com/links/

4The strong Florida Residential Building Code and the requirement that residential property

insurers use catastrophe loss models to price their risks are two examples of forward-looking

state policies.

5The issuance of revenue bonds is at the foundation of both organizations’ ability to pay claims.

At times, both have become highly leveraged, and thus a failure of the financial markets could

have had catastrophic consequences for the state.