Florida’s officials have always advanced politically by promising to halt or even lower insurance rates. Problem is, those artificially low rates will likely end up hurting residents in the future. Citizens, the state-run insurer, provides a perfect example of the perils of ill-considered insurance policy.

Citizens has had a mandatory rate freeze since 2007. While this has made customers happy, the freeze has starved the insurer of the surplus it needs if a storm should hit. Right now, Citizens has $450 billion in exposure yet only $3 billion in surplus.

“Any kind of significant storm event would, or could, wipe that out in a few short hours,” James Malone, chairman of Citizens, said in February 2009.

So, essentially, we have an insurer that doesn’t have a rainy day fund, which makes for a pretty lousy insurer.

Florida’s elected officials have slowly begun to realize they can’t keep demagoging on insurance rates—they’ve got allow insurers to raise them or else leave their constituents vulnerable to storms, which will likely continue to grow in intensity and frequency as ocean temps rise due to climate change.

Unfortunately, this realization has come at the worst possible time—during an economic downturn. This, sadly, is the price ignoring a problem.

It gets worse. State Farm, one of the largest property insurers in the state, is pulling up stakes because insurance regulators told them they couldn’t raise rates by 45 percent. Many of their customers will likely look to insure their homes with Citizens, which is, as we’ve established, woefully undercapitalized.

And the question remains—will other insurers follow State Farm’s lead?
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