Economist Farid A. Khavari, the scrappy independent candidate who hopes to become only the second person in Florida history to win the governorship outside the ingrained and increasingly polarized two-party establishment, sharply criticized a recent proposal by Republican gubernatorial candidate Rick Scott to make Citizens Property Insurance Corp. actuarially sound while turning the government-run entity into an “insurer of last resort.”
Created in 2002 as more and more private insurance companies were abandoning the Florida market, since its founding the not-for-profit government insurance agency has attracted hundreds of thousands of policyholders who faced huge premium increases or were simply dropped by their existing carriers.
For thousands of customers, Citizens has been the insurer of only resort — and it’s a trend that’s likely to continue as giant insurers such as Allstate and State Farm continue to flee the state and more and more Floridians reluctantly turn to small and largely untested insurers, including many questionably viable companies that barely satisfy the state’s $4 million minimum reserve requirements and couldn’t possibly hope to survive the state’s next major storm.
Earlier this year, State Farm, the state’s largest private homeowners insurer, dropped 125,000 of its most vulnerable policyholders in Florida, accounting for nearly one-fifth of its 714,000 customers. Most of the cancelled policies were in the state’s hurricane-prone coastal regions.
Scott’s homeowner’s insurance plan, unveiled last week, would allow the free market to set property insurance rates for the nearly 1.2 million homeowners who currently rely on Citizens to insure their properties.
Scott, who spent lavishly from his personal fortune to win a bruising and bloody battle against Attorney General Bill McCollum in last month’s GOP primary, believes that Citizens must raise rates and remove artificial caps that place private insurance companies at a competitive disadvantage.
“My belief is with competition and with certainty the insurance market rates will come down,” said Scott.
Critics have called Scott’s proposal a giveaway to the insurance industry that will inevitably lead to hefty increases in premiums, possibly tripling current rates for thousands of financially-strapped and struggling Florida homeowners. The Republican-controlled legislature capped premium increases for Citizens Property Insurance Corp. at ten percent annually in 2009, two years after state lawmakers initially froze the insurance company‘s rates.
In an unpublished letter to the Miami Herald, Dr. Khavari denounced his Republican rival’s plan as “a bad idea” and suggested that there is a much better way to fix the ailing state-run insurance agency.
Privatizing Citizens will only make a grim situation worse, resulting in higher insurance premiums that will almost surely lead to more foreclosures, claimed Khavari.
“The number of Floridians who have already lost their homes is staggering. It’s intolerable. We shouldn’t compound the problem by allowing insurance rates to skyrocket,” he said wistfully. “Floridians have already suffered enough.”
Khavari’s own solution could result in a thirty percent savings for every Florida homeowner while enabling the state treasury to earn billions of dollars per year. It would also minimize the insurance agency’s potentially huge exposure.
“Citizens is in trouble because it guarantees private insurers’ profits, and foists all of the risk onto Florida taxpayers,” explained Khavari. “This is an obvious recipe for disaster. Citizens covers the riskiest 22% of Florida homes, nicely protecting the private insurers at our expense.”
By adding the “safest” 78% of Florida homes to the risk pool — a risk borne by all of the state’s taxpayers — Khavari said that Citizens’ risk would be among the lowest in the nation. In such a scenario, the government insurance company could easily survive a major hurricane, he said.
Six million new customers, saving an average of $500 per year, would amount to $3 billion per year, generating at least $25 billion per year of economic activity in Florida while creating approximately 30,000 desperately-needed jobs, Khavari elaborated. The state, he continued, could earn $5 billion per year in profit, making Citizens the safest, most actuarially sound and profitable insurer in the country.
It could also help alleviate the state’s growing fiscal crisis, added Khavari, noting that Florida faces a potentially catastrophic $5-6 billion budget shortfall next year.
“You don’t need to be an economist to understand this,” said the white-haired entrepreneur and author. “It’s just common sense.”