On The Costs Of Climate Change, Or, Florida Bets The State

It is always a surprise when you begin to write one story and end up writing another, and that is the situation we have today.

Originally this was to be a story set in the future, but it turns out the future is now.

Here’s the deal: while watching the Super Bowl (love the mouse commercial!), I was considering the economic consequences of a flooded Miami, seeing as the ocean level is projected to rise over the next century, and Florida isn’t.

Specifically, I was thinking about what will happen to the economy of the state when you can no longer transfer real estate because the property is uninsurable.

In my mind, there would be a sort of tipping point where the State would have to look for outside assistance for their collapsing insurance situation, perhaps even seeking some sort of Federal bailout.

As it turns out, this is a story set right in the here and now. Since 2005, Florida home and business owners have had a major problem either finding or keeping property/casualty insurance.

The problem has become so serious that the State has initiated a major expansion of “last-resort insurer” programs that have existed since 1971.

By “expansion”, I mean the State has voluntarily made itself liable, through the Citizens Property Insurance Corp., the Florida Hurricane Catastrophe Fund, and other provisions of Florida law, for $36 billion of damages in the event of a single major storm.

How much of the State’s money might potentially be at risk?

The Florida Department of revenue reports that 2005’s assessed value for the entire State’s real estate is about $1.6 trillion, and in fact the State’s Chief Financial Officer, Alex Sink, had to talk the Legislature out of accepting unlimited liability for the entire amount.

There are provisions of Florida law that will seem unusual to many of you.

Here’s just one example:

If the State’s Citizens Property Insurance Corp. has a bad year policyholders of other companies (and other types of insurance-including auto insurance) can be billed by the State to make up the difference. In fact this is occurring right now, and will for at least the next ten years; under a deal included in the most recent insurance reforms.

The Citizens Property Insurance Corp. intends to build up the $36 billion they need to cover this liability in a reserve fund, but at the moment that fund only contains $2 billion, which means $34 billion of premium surplus must be collected from Florida ratepayers before a major storm hits if this is to work.

If a storm hits first, the State intends to issue bonds to cover the difference; and of course, if there is a major storm every 2 or 3 years, the hit to the taxpayers will be potentially quite severe.

But as I mentioned before, this was not the story I set out to tell.

This was supposed to be a story of rising sea levels, 1200 miles of shoreline, a Super Bowl city that pretty much sits less than 15 feet above sea level, dikes that might cost $25 million a mile, and the inevitability of an eventual tipping point.

Instead, we find a story of policyholders drowning now in a flood of premium increases, tax hikes, a slowdown in property value appreciation that may have much larger effects on the state’s economy than we yet recognize, and a State willing to bet it all that they can find a way out of the path of disaster.

Good luck to you Florida, but remember-you’re betting against Nature, and in the end, the house always wins.