If you live in Florida, there’s a good chance that you have your home insurance through Citizens Property Insurance, which is an insurance company created through legislation to act as the “insurer of last resort.” After significant hurricane activity, many, if not most, insurance companies withdrew from the Florida home insurance market, leaving homeowners without any coverage options. The state decided to step in and help create a resource so that homeowners could continue to buy insurance. The winds have now shifted and the legislature is concerned that too many people are being insured by Citizens instead of private insurers so they have been working on legislation to force people back into the private market!
The situation in Florida is not unique so it can serve as a good example of how insurance regulation and legislation works together to provide the best insurance options for consumers. In many sectors of insurance, if losses are overwhelming, private insurance companies will start to withdraw as they don’t believe they can make money, regardless of how much premium they charge. When this happens, it creates a huge void and crisis for the consumers in that market. With certain types of insurance, it’s less of an issue as those policies may be ones that are purchased by only a small percentage of companies and individuals.
However, when it comes to more common coverages that are very necessary for individual consumers and businesses, the state will step in to create solutions. Common coverages that generate this type of response are homeowners, automobile, and workers compensation. In most states, there’s an automobile assigned risk pool for individuals that have difficulty purchasing insurance. Usually it’s because they have a poor driving record. Regardless, as licensed drivers and vehicle owners, they must carry liability insurance. Therefore, the state creates a system whereby these otherwise uninsurable drivers are allotted to the insurance companies in each state that write automobile coverage. As a condition of their licensing to conduct business, they must also agree to take on a portion of the assigned risk pool of drivers.
In many states, a similar pool of risk exists for homeowners insurance, known as the Fair Access to Insurance Requirements (FAIR) plan. We previously wrote an article about this plan and how it works. You might wonder why Florida’s situation is different, if the FAIR plan should be helping the difficult to insure. Unfortunately, because nearly the entire state of Florida is exposed to the same risk (windstorm), the FAIR plan would be overwhelmed. That is why Citizens Property Insurance was created. In California, a similar situation is the threat of earthquakes, which affects nearly the entire state, and the California Earthquake Authority (CEA) was created.
Unfortunately, sometimes the population of the state becomes too dependent on these types of solutions. In Florida, it appears that the legislature is attempting to ease homeowners back into the private insurance marketplace by passing a bill to limit the exposure Citizens can take on, according to Reuters. The state-mandated solutions are often designed only to be a stopgap measure to help protect the population while the private market corrects itself. However, if the private market is somehow shut out of the state’s insurance business, it’ll simply retreat, leaving everything in the hands of the government-created solutions.
As you can see, if you find yourself in one of these plans, you should be prepared for the day that you’ll be forced back into the traditional insurance marketplace.