Wednesday, November 13, 2013

Political Differences Between the Citizens PIC and NFIP

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When Florida Governor Rick Scott ran for office he promised to push Citizens Property Insurance Corporation's rates the an 'actuarially sound' level.   And in recent times, those rates are increasing (though, this has less to do with Scott and more to do with current market dynamics).  Yet, when it comes to federal flood insurance Scott sounds more like a struggling Florida homeowner than the private market insurance advocate he is known to be.  

Recently, Scott and the Attorney General Pam Bondi, together with the Alabama Governor and Attorney General,  filed a brief in support of a lawsuit filed by the Mississippi Insurance Department against FEMA for increasing the cost of flood insurance.  FEMA administers the National Flood Insurance Program (NFIP), the federal government residual market for flood risk. 

In their brief, the group argues that the increased cost of NFIP coverage is 
so high that many homes have become unaffordable leaving homeowners to choose between foreclosure and sale to escape the crushing financial burden imposed by the NFIP rate increases. In many instances, however, sale is not a viable option because the new exorbitant premiums render the properties unaffordable to potential buyers. This cycle has already begun to have a deleterious effect on the real estate markets and economy of the State of Florida. 
We are supporting Mississippi in their lawsuit against FEMA because the NFIP rate hike will not only hurt Florida families but will devastate our real estate market.
This all sounds remarkably similar to the accusations alleged at Florida's state run insurer, Citizens.  Consider, Sen. Mike Fasano
Homeowners can no longer afford these types of increases or even the premiums they're paying now...This is economic disaster for our state if they allow Citizens to continue to go in the direction they're going 
What can be drawn from this observation?  I make two conclusions.  The first addresses the function of residual markets in general.  The second addresses the political difference between Citizens and the NFIP.

First, residual markets, as public policies, have a ratemaking process that incorporates the views and concerns of the public.  Residual markets serve a supportive role in the state and national economy.  They provide "insurance" at a politically acceptable cost to support desired behavior such as, buying cars, buying houses, or going to the doctor.  As residual market rates change they create different sets of winners and losers.  This is where conflict over rates arise.      

Second, differences between the NFIP and Citizens has Florida Governor Scott looking to keep rates low on the former and raise rates on the latter.  Why?   Here are a few considerations:
  • The ability to spread risk by the NFIP over a population (ie. the nation) is greater than Florida's Citizens which can only spread risk as far as the state population.  Scott's constituency is the Florida public, many of which would rather not have the burden of other people's cat losses.  Higher rates for Citizens decreases the future burden on Floridians though doesn't really do much for those hurting today.  Yet, Scott has little if any accountability to those in other states.  
  • To my knowledge, no private companies or few private companies, offer residential flood insurance coverage in the United States.  So, to the extent that a homeowner cannot afford to purchase NFIP coverage or chooses not to buy NFIP coverage they have no other options. Windstorm in Florida is different.  There are many private market companies that offer wind coverage in the state of Florida.  So, lower rates by Citizens "competes" with the private market.  By demanding lower rates on the NFIP there are few constituent insurance interests that Scott risks upsetting.  But, by demanding lower rates on Citizens, Scott will upset all private market insurers in the state of Florida.   
  • This final point is more of a question regarding the science of estimating hurricane risk and the science of estimating flood risk.  Nearly every Tom, Dick, and Harry has an estimate for hurricane risk.  The measurement is highly malleable and changes routinely.  One estimate is scientifically, as good as the next.  But, I'm not sure to what extent this is the case for flood. How does the role of science differ in the ratemaking process of the NFIP in comparison to Citizens?    

1 comment:

  1. Excellent article. Contrasting these two agencies affords insight into the political interests that ultimately determine insurance rates. Thanks

    ReplyDelete