Florida Loosens the Noose on Insurers as Credit Tightens

Insurance firms can handle hurricane losses, but a hurricane of a different sort has been brewing in Florida. Insurers such as State Farm, the largest U.S. home insurer, have folded their tents and left, complaining that they can’t compete with the Sunshine State’s own cut-rate insurance program.

But there are signs that the tide is turning. A bill to allow insurers to set their own rates for some policies without getting approval from the state’s regulators is making its way through the legislature. And there’s a move to raise rates at Florida’s own insurer, Citizens, to market levels over the next five years, ending what many insurers regard as unfair competition.

But the tide didn’t turn because Florida politicos, or populist Gov. Charlie Crist, suddenly developed a warm spot for insurers. Instead Crist & Company got hit with the full force of the credit crunch, the same storm that’s been devastating the entire country.

After hurricanes Katrina and Wilma in 2005, Florida created a Catastrophe Fund of nearly $30 billion to provide reinsurance, which is insurance for insurers if they can’t meet their own obligations. The state planned to sell bonds to pay for the fund until it discovered that, because of the ongoing credit crisis, it couldn’t sell enough bonds, leaving it with an embarrassing $17 billion shortfall.

Rating agency Demotech told Florida insurers who had been propped up by the state that unless the Catastrophe Fund was proven to be solvent, their ratings could be pulled, thus starting a chain reaction. With no insurance, homeowners in the state couldn’t get mortgages from the bank, potentially putting the construction industry into a death spiral and creating more reasons for homeowners to allow their properties to fall into foreclosure.

Thrashing about for help, Florida reached out to the U.S. Treasury, the sugar daddy that’s already rescued many banks with TARP funds. Florida wants the Treasury to be the cosigner for up to $80 billion in loans for the kind of public insurance program that it and states like California and Texas run.

That strategy drew a rebuke even from USA Today, which said in an editorial that “the state’s undercapitalized hurricane fund threatens taxpayers everywhere.”

So now it appears that Florida, once the bully of U.S. property insurers, is trying to kiss and make up. And just in time, too. Hurricane season starts in June and if the big one ever hits, hurricane loss estimators say it could cost $100 billion, swallowing up that miniscule Catastrophe Fund and putting the state and perhaps the nation in debt for a very long time.