A major cause is the role and size of Florida's "public option," of Citizens Property Insurance Corp.
Citizens, not actually a corporation but an arm of government, offers Florida property insurance to nearly anyone who asks ? residents, business owners, snowbirds with vacation homes, and even coastal developers. It insures more than $400 billion worth of Florida property, largely in a "wind pool" area along the coastline. Common sense and hard science say that insuring that kind of risk is expensive. On average, Florida gets a hurricane about every other year, and a major hurricane about every fifth year. Sometimes, as in 2004 and 2005, we get several in a single season. Citizens says it would suffer around $23 billion in losses in the proverbial "100-year storm."
But Citizens' premium rates are not set by its professional staff but by legislators and regulators, in many cases at levels not "actuarially sound" or sufficient to fund its level of exposure. It does not have the "surplus" or funds to pay its claims after major hurricanes. Worse, it does not even ensure it has access to those needed funds (via "reinsurance" or backup coverage) in advance of hurricane season, and its staff and Florida regulators publicly acknowledge this.
How can Citizens survive ignoring these three basic principles of insurance ? underwrite to separate good risks from poor ones, charge a price that covers expected future costs of transferring risk, and ensure access to claims-paying capital after disasters? The unpleasant answer: through the power of government to tax current and future Florida property and business owners.
Citizens first pays claims from its coffers, but after exhausting its surplus (right now a mere $4 billion) it turns to the Florida Hurricane Catastrophe Fund ? a government reinsurer with less than $6 billion in surplus of its own to cover up to $24 billion in promises. Next, it would turn to the bond market, where the state would have to borrow potentially massive sums. It's plausible that Citizens and the CAT Fund could have to collectively beg Wall Street for $25 billion or more ? more than the entire current debt of Florida ? during the chaotic recovery from a major storm. Analysts believe such unprecedented borrowing would be difficult.
