Rick Scott released his insurance plan last week, so we thought we’d provide some analysis. In just a couple words, Scott’s plan would be unlimited rate increases and tort reform. That’s the result of Scott’s “free market” approach and anti-lawyer ideology. Now, the details:
Scott starts off by saying that Citizens Property Insurance could not pay the damages resulting from a Category 2 storm. He does not say where he got this information. I checked Citizens site, and they say they can handle up to $14 billion. They’re doing well because there haven’t been any hurricanes. So I then looked at the NOAA site to find out how much in damages a hurricane might generate. Bear in mind that many insurance companies bear the cost of damage claims and some people don’t have insurance.
Ike Cat 2 $27 billion in 9 states
Gustav Cat 2 $4.3 billion in 4 states
Dolly Cat 2 $1.2 billion in 2 states
Wilma Cat 3 $17.1 billion in Florida
Rita Cat 3 $17.1 billion in 4 states
Looks like Citizens could handle any of these, no problem. Scott is apparently trying to scare people by suggesting something may happen that probably won’t happen. This is necessary to make sense of the second part of his plan – eliminating assessments.
Assessments are on your insurance bill, and people don’t like them. But people don’t understand them, and that’s fine with Scott. Assessments are what Citizens does in the event it doesn’t have enough reserves. It means that everyone bears some of the risk from hurricanes. Here’s why that’s good:
Insurance is founded on the idea of “spreading the risk.” If one person has a fire and has to pay, it’s a problem unless the person has enough savings, which most don’t. But if everyone pays into a fund and one person has a fire, its not such a disaster. The government could administer such a fund, but private companies say they can do it better, BUT they want to invest our funds and keep the profits they make in exchange to assuming any risks. Sadly, private companies reneged on this arrangement by no longer taking everyone. This makes their profits higher, but makes the system fail.
Assessments return the structure to health, once again spreading the risk to everyone, more or less equally. Those that choose the private companies can take advantage of possibly better service and help pay for expensive TV ads. If insurance companies would just take everyone, we wouldn’t have a problem. When they stopped doing that, we (you, the government) had to do something.
Our coastal areas generate a lot of economic activity that supports much of the rest of the state. Some states have studied this economic benefit and agreed to subsidize insurance costs in return. Not Florida. People like Scott have got people thinking they are losing something because they can’t see the benefit, but there is the cost right there on their insurance bill. But there is a benefit, and it is a big one.
Scott says Citizens is driving private insurers out of the state. It just isn’t true. We had a big game of poker when State Farm threatened to leave last year, but, as I predicted, State Farm didn’t leave after all. There’s just too much business in Florida to walk away. Even Allstate ended up staying, but they changed their name. What’s happening is that insurers are using computer models to avoid the riskiest customers, and forcing Citizens to accept them.
The insurance companies say they can’t charge high enough rates, yet they continue to make huge profits. Just a couple years ago they set new records, and so far this year they’ve made $10 billion dollars in the property and casualty market. That’s good money in a down economy. But they have been having trouble with their investments in this market, and they try to make that up by charging higher rates. If they can prove to the Insurance Commissioner that they deserve higher rates, in accordance with industry standards, they are allowed to charge them.
Why do we regulate insurance companies? First of all, almost nobody outside of the insurance business understand policies and how insurance works, so consumers are at a disadvantage. Most of us have no idea what’s in our insurance policy and we can’t effectively comparison shop. We just pick the TV ads we like. But there’s another special reason for regulation: insurance companies say they need to exchange data so they can set prices accurately. That way, a small new company without years of experience in the market, could compete against the big boys. In other businesses, that would be called collusion or price fixing, but in insurance its legal. So, we regulate them in exchange for this benefit and to protect consumers who cannot make price comparisons on this product. This worked for years and years, up until the insurers decided to stop insuring everybody.
Scott’s plan says “I want to open the property insurance market back up in Florida so that financially solvent private insurers can compete, allowing consumers to choose what they want from a free market.” This is code for deregulation. He means he wants to end price regulation, and leave consumers on their own to understand their policies. That would mean drastic rate increases which would shock the already damaged Florida economy. When he says “allow consumer to choose” that means the insurance companies can put whatever they want to into your policy and you have to compare that against another policy.
Regulation means that each company must offer a standard form, or policy that meets the same minimum standards. That way consumers can make price comparisons. The other benefit is that society is protected. If some consumers decided to save money by buying no fire insurance, but their home burns down, who is going to pay? You can say no one, but that is not how society works. We usually take care of people after a disaster, whether it is the Red Cross or a church or neighbors. Somebody pays. Maybe it is the Federal government if it is a big disaster. This is a problem because we are being forced to pay someone else’s bills. Sound familiar? That’s exactly what Scott is complaining about, except he is pandering to a group more likely to vote for him. That’s politics as usual.
One more thing is rather ironic about Scott’s proposals. He seems to be running against the Tallahassee establishment. But he is a Republican, embraced by the Republican establishment including the Chamber of Commerce and Associated Industries and, surprise, the insurance companies. Republicans have been in charge in Tallahassee for the last 16 years, so electing another Republican from a corporate background with corporate money isn’t going to make any difference. Instead, and more moderate voice that might temper our extreme legislature might be in order.
Finally, Scott rails at length for tort reform. That has to wait for another post. But just let me say I know he hates lawyer, like most corporate types, because lawyers are one of the few things big corporations fear. They certainly don’t fear the government, which they can buy and influence at will. But consumers still have rights in the legal system and insurance companies would love to see us lose our right to trial by jury.
I hope you see through Rick Scott’s rhetoric and analyze what he’s saying. Many people want to believe him, but that doesn’t make it true. People want simple solutions to complicated problems, but that often creates worse problems. Think this through, Florida. Make a wise decision.
