It's easy for the math-impaired to chalk it up to greed when publicly traded insurance companies like Allstate (NYSE: ALL ) , AIG (NYSE: AIG ) , Chubb (NYSE: CB ) , or White Mountains (NYSE: WTM ) complain that Florida's new legislation has suppressed rates, making it impossible for insurers to adequately price their risk.
Homeowner insurance rates in Florida have skyrocketed in the aftermath of several catastrophic hurricanes in recent years, capped by Katrina. The 2005 season's disastrous results highlighted insurers' risks, should a megastorm strike Florida and its estimated $2 trillion of coastal property value.
Florida's answer to rising rates was to expand a state-run pool, essentially pushing reinsurance companies like Motley Fool Hidden Gems recommendation Montpelier Re (NYSE: MRH ) and Renaissance Re (NYSE: RNR ) out of the market. It's a daft decision, the idiocy of which will become clear once the next major storm hits the state. Or maybe not -- Florida's governor recently asked the U.S. Senate Banking Committee to look into forming a national catastrophe fund to backstop insurers in case of disaster.
All of this hubbub ignores a simple truth: Wealth has concentrated on America's coasts, Florida in particular. Insurance companies (which lose money from their underwriting, on average) cannot adequately cover their own risks; it makes no sense for them to write coverage. No happy-pill talk about denying people the right to live where they want can overcome this math.
If you want to live in a high-risk environment, you have two choices: You may pay up to cover the risk you're taking, or demand that someone else pay for that risk on your behalf. No amount of mumbo-jumbo from the weathervanes in Tallahassee, Baton Rouge, Raleigh, or Washington, D.C. can change this simple equation.
Don't believe me? Below, I'm printing in full the letter that USAA CEO Robert Davis sent out to that company's members describing the situation in Florida. USAA is an interesting, admirable company; it's a member-owned firm, it's not publicly traded, and it only admits members under limited circumstances, usually related to military service. USAA does not lightly deny members coverage as a class, and it doesn't tend to make profitability and the bottom line its highest priorities. It's a company with a mission, and as this letter shows, Florida's recent insurance legislation puts that mission at risk. As a result, USAA is limiting coverage in the state. Whom does that help?
The text of USAA's letter:
Dear Florida Members,
I am writing to let you know that recent legislative and regulatory actions in Florida have created an untenable property insurance market in your state. Florida politics have severely restricted USAA's ability to charge adequate property insurance rates for the risk the association bears on behalf of its Florida members. These actions jeopardize our ability to protect the long-term viability of the association, as well as the assets of our members. Please consider the following facts:
1. Over the past 10 years, USAA has paid approximately $220 million more in Florida homeowner insurance losses and expenses than it has collected in Florida homeowner premiums.
2. Florida residents account for 49 percent of USAA's exposure to natural disaster risk, yet make up only 9 percent of USAA policyholders and pay 12 percent of USAA's property insurance premiums.
3. With more than $2 trillion in coastal property exposed to the risk of catastrophic hurricanes - and a history of frequent, strong storms across the state - Florida has the most challenging property insurance market in the country.
Therefore, the State of Florida has left us no choice but to take the following actions in order to limit potential future losses, and to protect the association and its members.
1. USAA will only provide new homeowner or renter insurance policies for the primary residences of active military members required to move to the state pursuant to military orders.
2. If your primary residence is in Florida and insured by USAA, USAA will continue to underwrite your existing homeowner or renter policy.
3. If your primary residence is located outside of Florida and insured by USAA, USAA will continue to underwrite one existing homeowner, fire, or renter policy in Florida.
4. Property insurance policies in Florida in excess of those cited above will be non-renewed upon written notice from USAA and in accordance with Florida's laws and regulations. We expect this change to affect about 10 percent of our 270,000 Florida members.
You can find more details in our Q&A.
We regret that Florida policymakers have forced us into this position, but without the ability to price insurance appropriately, it would be irresponsible to continue to place the entire association and its membership at risk. You may view a comparison of Florida homeowner insurance rates at FloridaToday.com. Additionally, you may wish to contact your state's lawmakers and regulators.
We value your membership in USAA, and will continue to serve your auto and life insurance, banking, and investment needs, as long as the State of Florida permits us to do so. If the Florida insurance market becomes more rational in the future, we will most certainly reconsider our position.
Robert G. Davis
The point? Whether you like it or not, there's no free lunch. As USAA shows, if you force companies to risk catastrophic insurance losses, they'll get out of the business one way or another.
Bill Mann is the co-advisor of the Motley Fool's small-cap investing service, Motley Fool Hidden Gems, which you can try free for 30 days. Montpelier Re is a Hidden Gems recommendation. The Fool has a disclosure policy.