Insurance Welfare for the Rich
Government insurance programs are out of control. A new study finds that Florida’s biggest homeowner’s insurer — state-run Citizens Property Insurance Corporation — has been disproportionately subsidizing rich coastal homeowners, and that wealthier homeowners also disproportionately benefit from the National Flood Insurance Plan (NFIP). Essentially, these programs are operating like Robin Hood in reverse.
While the study is new, its findings are hardly so. Early in 2013, my organization, the American Consumer Institute, wrote a study called "Welfare for the Rich" that came to similar conclusions about Florida's program. In 2007, the Congressional Budget Office found that wealthier homeowners living in coastal states more frequently availed themselves of below-cost flood insurance supported by federal taxpayers. One homeowner received (over the course of many years) ten times more in payments from flood claims than the home was even worth.
The federal Biggert-Waters Act has made some changes to curtail this, and things are improving in Florida as well. But more work is still needed in states across the country.
After "Welfare for the Rich" was released, I collected data directly from Citizens, Florida's insurance company, and found that much of the money was benefiting people who owned more than one home and even some who lived out of state. In fact, Citizens was subsidizing some homeowners whose primary homes were in Russia, Saudi Arabia, Luxembourg, Monaco, and dozens of other countries. While Florida, a tourism hub, should welcome buyers and visitors from all over the world, having in-state policyholders pay more so that out-of-state policyholders can pay less is simply bad policy, and it is a sign of a runaway government program.
Further, the data showed that many of these subsidies were completely unnecessary. For example, I reported at the time that 20,000 Canadians owned homes with subsidized coastal insurance. Yet 90 percent of Canadians purchasing homes in Florida paid cash. As much as I like our great neighbors up north, if someone can afford to pay cash for their home, they should be able to pay the cost to insure their home, and shouldn’t depend on those living inland to foot the bill.
The program was in bad financial shape as well. Just a few years back, Citizens commanded 23 percent of the homeowners'-insurance market. At the same time, its financial backstop, the Catastrophe (Cat) Fund, had reserves that may have been insufficient to protect against a major hurricane or two.
But that was all then. Today, things are changing, thanks to smart political leadership that has been willing to question whether big government is the answer and whether subsidizing the rich is a good idea. As a result of some regulatory changes, Citizens has gone from 1.5 million policies in force in early 2012 to under 600,000 today.
Additionally, the State Board of Administration recently authorized the Cat Fund to transfer up to $1 billion of catastrophic risk to the private sector. This additional coverage better protects taxpayers from new taxes, and it provides a stronger line of defense for coastal residents in the face of a potential hurricane.
But while Florida is trying to work its way out of the subsidy business, other states are not learning from its experience. Consider North Carolina, where homeowners'-insurance premiums have just gone into effect that are dramatically different from the previous rates, with coastal areas seeing rate cuts and inland areas seeing increases. Many policymakers in Raleigh have homes and second homes along the coast, as do their donors. Allowing artificially low insurance prices along the coast puts self-interests over the public interest, and it represents regulatory malpractice on the part of the state’s insurance commissioner.
Texas too has heavily regulated insurance programs; state policies suppress rates 40 percent and then tax insurers to cover uninsured storm losses. The state further prohibits any visible surcharges on insurance bills, keeping costs out of public view and leaving people to wonder why rates are so high.
Going forward, policymakers need to align rates with risk and transfer these risks to the private market. If subsidies are kept, they should be modest, based on need, and focused only on primary residential homes.
All in all, the new study validates many previous observations. As we move into the hurricane season, there should be some peace of mind in knowing that Florida is beginning to put itself in a much better financial position to deal with a major storm — and other states should do the same.
Steve Pociask is president of the American Consumer Institute Center for Citizen Research, a nonprofit educational and research organization. Twitter: @consumerpal