Worried about Hurricane Irene? Here's the REAL disaster.

Hurricane Irene is spinning its way through the Atlantic and could impact the Central Florida area by Friday. The storm is currently a Category 2.

With the first major storm of the season heading our way, it's a painful reminder of how very vulnerable Florida's property insurance system is. The James Madison Institute published a comprehensive study on this topic, and suggested changes to the Florida Citizens Property Insurance Corporation ("Citizens") and the Florida Hurricane Catastrophe Fund (the "Cat Fund"):

James Madison Institute | Backgrounder February 2011 | Solutions to Restore Florida's Property Insurance Marketplace to Protect Taxpayers and the Insured

This study presents data demonstrating that Florida’s property insurance system is seriously broken and needs significant changes, some of which may be somewhat painful to — or unwelcomed by — those who benefit from the status quo. Yet those changes must be enacted if the Legislature hopes to protect the state against the risks inherent in crowding 18 million people onto a low-lying peninsula that juts out into one of the most hurricane-prone areas on Earth. For the past several years Florida has placed its public safety and fiscal health at risk, and the state has — against the odds — won each time. That winning streak cannot continue forever. Therefore, change must come because the risks are simply too great.

Some important facts and comments from the report:

• Florida has more than $2 trillion worth of property exposed along our coast, more than any other state.
• Citizens is Florida's largest writer of property insurance and among the country's 50 largest.
• Citizens is a government agency, and the statute that created it gives it the power to levy assessments on nearly every insurance policy issued in Florida, affecting every single resident, business, and organization in the state.
• Citizens was originally designed as an insurer of last resort.
• The 2007 insurance reforms championed by then-Governor Charlie Crist vastly expanded the number of Floridians insured by Citizens and required Citizens to lower and maintain their premiums at below market rates. 
• Crist's reforms "essentially transformed Citizens from a residual marketplace and made it an active competitor in the property insurance marketplace, a state-owned behemoth with an unfair advantage."

And here's the key section:

As a result of Citizens’ size, Floridians themselves — not private insurance companies, reinsurers, or capital market participants — are the ones principally on the hook for hundreds of billions of dollars in potential losses. Many of these losses would have to be paid for through special taxes (called assessments) that would be levied on the property insurance policies and vehicle insurance policies of homeowners with no serious hurricane exposure, on vehicle owners who do not even own homes, small businesses, charities, and houses of worship. This poses a serious threat to Florida taxpayers, and the threat is made worse by the fact that Citizens relies on another taxpayer-backed entity — the Florida Hurricane Catastrophe Fund—to pay most of its claims following a catastrophe.

...Unlike private reinsurers, however, the Cat Fund does not actually keep funds necessary to pay most of the claims. Instead, if it runs short on money, it has the authority to issue bonds, which it repays by imposing assessments intended to pay off any such bonds it decides to issue. All Floridians currently pay taxes that add about 1 percent to their insurance policies to pay off the Cat Fund’s debts from the 2004 and 2005 hurricane seasons.

...Furthermore, the Cat Fund writes business only in Florida; all sizeable private reinsurers have an international scope. While a private insurer can pool the risk of hurricanes in Florida with, for example, the risk of earthquakes in Japan, the Hurricane Catastrophe Fund cannot. In sum, the Cat Fund turns the principle of diversification on its head by concentrating Florida’s peak hurricane risk within the state rather than spreading it around the world. This means that, even assuming the Cat Fund has management talent and investing opportunities equal to those in the private sector, it must charge higher rates than the private sector would if it hopes to break even in the long run. Instead, it charges substantially lower rates than the private sector would for comparable coverage. Any shortfalls that rise out of this model would be made up by its aforementioned bonding and taxing authority.

Do you understand what is happening here? We have two levels of government run insurance covering hundreds of billions of dollars worth of property, both of them are charging below market rates, and both of them have the power to charge you taxes if they need more money. Every year this goes on drives more private insurers out of the state, increasing the number of properties insured by Citizens and therefore also increasing the risk we are all bearing.

And, oh, did you see the punchline? This report was published last February, before the beginning of this year's Legislative session. It should come as no surprise that our Legislature failed to adequately address the catastrophic weaknesses in Citizens and the Cat Fund. The 2011 session followed a similarly ineffective 2010 session, where the Legislature passed a "package of reforms with overwhelming bipartisan majorities and with the support of the state’s Office of Insurance Regulation and Office of the Insurance Consumer Advocate [that] would have reduced the size of Citizens, improved the stability of Florida’s struggling primary insurance market, and [brought] more private insurance capacity into the state," but Charlie Crist vetoed the legislation. Thanks, Charlie!

Think Florida has a housing bubble and a bad unemployment rate now?

Just. You. Wait.

Now that we have a hurricane knocking on our door again and the 2012 session won't start for half a year, better cross your fingers that Irene (and all the storms that follow her) aren't too severe. One hit from one bad storm and we'll all be paying higher taxes for decades.

Ticked off about what you've read here? Contact your State Representative and State Senator, send them the James Madison Institute report, and ask them to incorporate the recommendations into legislation for the 2012 session.

Don't wait until session starts. The legislators are deciding now what bills they want to sponsor, and are limited to only a few bills apiece. Let our elected representatives know that this is a priority for Floridians and they cannot continue to drag their feet on this vital issue.