Citizens Property Insurance Privatization: Crony Capitalism or Good Policy?

On Wednesday Citizens Property Insurance, Florida’s state-run windstorm and general insurance provider, will decide on whether or not to transfer a small portion of its existing policies into the hands of the private sector.

The deal would have Citizens Property Insurance paying private insurer Heritage Property and Casualty Insurance $52 million to “handpick” some 60,000 of the state-run insurer’s 1.3 million policies. The deal comes just two months after Heritage Insurance donated $110,000 to Florida Governor Rick Scott’s reelection campaign—money a Gov. Scott spokeswoman says won’t be returned.

It’s not the first time Citizens has come under scrutiny. In February, Citizens’ board approved a deal with Weston Insurance, which paid the company $63 million to take on 30,000 policies. The deal came after the firm spent more than $250,000 on lobbying this year alone. So is this crony capitalism or a step in the right direction for Florida’s state-run insurance program? The answer: maybe a little of both.

As John K. Ross explains in a recent Reason Hit & Run piece, this may be crony capitalism and a sweetheart deal, but the fact that a portion of government held insurance policies in a high risk state are being shifted over into the private sector is not the end of the world, as some journalists have suggested.

The bad side of the deal is obvious: the state is subsidizing a private insurer who may or may not have received an unfair advantage to take over insurance policies at the rate of $866 per policy. But the bright side is that the deal offloads millions of dollars worth of risk from the backs of Florida taxpayer’s right as the 2013 hurricane season starts up.

Critics of the deal can point to the fact that Citizens has been a profitable company the last few years, as it currently holds a $6.4 billion dollar surplus, and there is no need for the shift. The reality is that Florida and Citizens Insurance has just been lucky the last few years. The last time Florida was impacted by a major hurricane (a category three or higher on the Sapphire-Simpson Scale) was in 2005 when the state was hit by Hurricane Wilma, along with two other major storms.

One can hope that if Heritage Insurance proves as fortunate and profitable as Citizens has been over the last few years, it will spur more insurance providers to come into the state rather than flee it—a trend since the 2004 and 2005 hurricane seasons.

Shifting more policies into the hands of the private sector is a laudable goal—it’s just a shame the deal looks dirty. Someone has to bear the burden of insuring homes in the most hurricane prone state in the union, and it’s better for that burden to be shouldered by the private sector than taxpayers.

Of course, the biggest problem here is the state-subsidized insurance is encouraging people to build and live in dangerous areas. As John K. Ross notes, the fragility of Florida’s insurance market is likely to continue until residents realize an inconvenient truth:

If you cannot purchase insurance from a private provider that is the free market screaming, pleading, tearing its hair out, and repeatedly punching itself in the face all in an earnest attempt to get you not to build where you’re building.”