State commissioner stands up to insurance catastrophes

Kevin McCarty laughed last Monday when he said he has the ``worst job in state government.'' His job assessment may be slightly off the mark, but McCarty's timing is certainly questionable. McCarty came to work at the state's insurance department just a month before Hurricane Andrew wrecked South Miami-Dade. He took the top job at the Office of Insurance Regulation in early 2004, just in time to cope with four hurricanes that crisscrossed the state.

The insurance commissioner faced a repeat performance last year when four more hurricanes hit Florida, including the final blow, Wilma. The eight storms left insurers with $38 billion in losses and little desire to write policies in this state. The storms swamped a major insurer, Poe Financial Group, and left Florida with the messy task of mopping up after the largest insolvency it has ever faced.

Now, McCarty and his crew are facing a brewing crisis in Florida's insurance market. Home and commercial insurers are canceling policies by the thousands. Skyrocketing insurance rates have consumers and businesses spooked, some already are considering quitting the Sunshine State.

Trying to find a workable, speedy solution for this crisis is part of McCarty's task as the state's chief insurance regulator. He said some proposals could be ready for review by mid-July. He spoke with The Miami Herald last week during an appearance in Key West.

Q: Many businesses are facing hurricane season and haven't been able to buy windstorm coverage. Premiums are exorbitant and coverages are thin. Is this just a pricing crisis?

A: This goes beyond the control of the legislators, beyond the control of the regulators. [This crisis] is being driven by the cost of the global reinsurance market.

We could require companies to have billions of dollars in capital. But [that's] not enough to cover all the losses from a major storm. We rely very heavily on reinsurance.

And quite frankly, I think the reinsurers are taking advantage of the situation because where prices are is what the market will bear.

We're being punished by the pricing mechanisms in the private marketplace. That's just the reality. That's why we've been spearheading for years the establishment of a national catastrophe plan.

The same thing happened after Hurricane Andrew [in 1992] - we had a contraction in the market. One of the factors that helped us recover and create capacity in the market was the creation of the Florida Hurricane Catastrophe Fund. It has been the anchor in terms of the revitalization of the Florida insurance market.

Q: Are there any possible near-term solutions, especially for the commercial insurance market?

A: Clearly, there's not much of an appetite for creating a primary market. So, the governor has asked me to look at the available strategies that we can utilize under the current law to see what we can do to provide capacity in the marketplace. It's not a matter of pricing.

Many people in the reinsurance market would say if we eliminated the approval process in Florida, quite frankly that wouldn't do it.

The surplus lines market, which charges whatever it wants to charge, has taken as much [exposure] as they can in certain parts of Florida. That's particularly hard in Southeast Florida. At any prices, they're not writing.

People are taking deductibles that are potentially ruinous to them, especially small businesses.

We need to be creative if we're going to activate a commercial property/casualty JUA (joint underwriting association), so we're not creating more administrative problems and some of the other issues we have experienced with [state-run insurance pools] in Florida.

We're deeply concerned and will be coming forward with an array of solutions that we can present to the governor and the Financial Services Commission with the hopes of addressing these problems in the short-term.

What we really need is a break from back-to-back ruinous seasons.

Q: What about the National Flood Insurance Program, which provides flood insurance nationwide - is that a model the state might pursue?

A: The flood program is a disaster. It doesn't have risk-based premiums; it's subsidized. It's $23 billion in debt. (The NFIP faced 225,000 claims last year, primarily from Hurricane Katrina.)

It doesn't promote mitigation. It doesn't promote retrofitting. It doesn't promote appropriate land use. Because of its subsidized rates, it actually increases the density of buildings in harm's way. I don't think that is a model we would pursue.

(There is legislation pending in Congress to improve and modernize the flood program, including updating flood zone maps and employing better risk assessment tools.)

Q: What other solutions are out there that could help stabilize Florida's insurance market?

A: There are three pieces of legislation pending that could help.

The Brown-Waite bill provides for the creation of a federal reinsurance program for state catastrophe funds like Florida's.

There's a bill providing for the creation of personal savings accounts, so consumers can save money for insurance, mitigation and repairs, if needed, tax-free.

The third piece of legislation pending would allow insurers to accumulate reserves tax-free over a 20-year period.

Q: Federal programs are good, but you must convince lawmakers from Missouri and Idaho to create a catastrophe program that seems centered on Florida and possibly the Gulf states. How do you get around the argument that hurricanes are a Florida problem?

A: In Florida, we get it. We have a strong building code. We have a mitigation program. We have updated our evacuation plans.

We're trying to say to the rest of the nation: It's not a matter of if, but when.

I would submit that 49 out of 50 states have a moderate to severe risk of a major catastrophic event. North Dakota is the exception. If you add flooding, then every state is at risk.

We can make a fairly persuasive argument that we're likely to see more catastrophic events in the future. We're already seeing scientific evidence of greater seismic activity globally.

This is an economic recovery plan as well as a catastrophic recovery plan.


* Position: Commissioner of the state of Florida's Office of Insurance Regulation.

* Duties: Regulation and oversight of more than 3,700 insurance entities operating in Florida.

* Education: Law degree and undergraduate degree from the University of Florida.

* Public service career: Previous positions in the Department of Labor and Employment Security and the Department of Insurance. While in the Department of Insurance: director of the Division of Insurer Services, the Division of Insurance Fraud and the Division of Information Systems. Appointed commissioner of OIR by the Financial Services Commission on Jan. 9, 2003.