In any contest to pick the state with the mostunique and challenging insurance landscape, Florida would almostcertainly prevail. From hurricanes to sinkholes, Citizens Propertyto PIP reform, the Sunshine State is a headline-generatingmachine.

And no one has better insight into—or oversight of—the state'sinsurance market than Kevin McCarty, commissioner of the FloridaOffice of Insurance Regulation, a post he has held now for morethan a decade.

PC360-NU Editor-in-Chief Bryant Rousseau recently satdown with McCarty in his Tallahassee office to discuss recentinitiatives in the state—and to find out what the Immediate PastPresident of the National Association of Insurance Commissioners(NAIC) thinks is the appropriate role of the federal government ininsurance regulation.

PC360-NU: Let's start by talking aboutCitizens Property, the state's insurer of last resort—which manystudies have stated will be unable, by at least a billion dollars,to pay all claims in the wake of a major storm.

McCarty: Citizens, of course, has grown to beour largest market in Florida, and it was never intended to be so.It's time for us to take a look at whether or not Citizens at thispoint is just too large and should be broken up into moremanageable pieces, maybe stripping the wind pool out and thesinkhole out so you can focus time, talent and attention on thoseparticular perils.

How likely is it for that to occur?

I am tasked with coming up with the insurance practical, not thepolitically practical—and there doesn't seem to be a lot ofappetite in the legislature to do that this year. The focus isgoing to be on Citizens returning to a market of last resort by wayof rates. Already we have already demonstrated there are a numberof polices suitable for being taken out and are just not going intothe private market.

So how would you characterize the recent depopulationefforts at Citizens? A success?

In the last several years, we had seen a slowing ofdepopulations, but 2012 was really a banner year—one of the bestyears we've had in history with regard to the number of proposedtakeouts: over 400,000 polices.

What accounts for the increasing appeal of Citizenspolicies to the private market?

There's a lot more capital available today. 2011 was one of theworst reinsurance years for payouts in history, and yet we havemore capital in the reinsurance markets in 2012 than we had in2011. That's due in large part to the gravitation of capital tosome portfolio diversification. So we're very optimistic in thelong run about having a private-sector solution if we wantto—because that capital is there for the long haul.

Of course, not all of those 400,000 proposed takeouts in2012 wound up entering into the private market.

That's right. Unfortunately, only about 60 percent of thoseactually found a private-sector home. That's driven in large partby the Citizens Opt-Out provision, which allows policyholders tochoose to stay in Citizens. We need to look at how we can makemoving policies to the private marketplace moreappealing.

What are some of the initiatives that will achieve thatgoal of pushing policyholders into the private market?

From a public-policy perspective, Citizens has a mixed mission.Should it be an alternative market for taking off pressure whenthere's volatility in the market? Or should it be a residualmarket, and by being a residual market reflect what's going on inthe rest of the country, which means you charge rates that arehigher than the rest and that you make the policy less appealing?There has been a re-emphasis in the legislative process this yearabout returning Citizens to a residual market and by doing that, weneed to move back to what we had prior to 2006 where we set ratesbased on the Top 20 carriers. Rates would automatically go up basedupon that. So we have had a model of having actuarially soundrates. But when you don't buy reinsurance, and you don't have theexpenses that you would have to have as a private company, thenyour rates could possibly and often times are cheaper than they arein the voluntary market.

But if Citizens' rates are higher than the private market,people will make an economic decision to go with a lower cost ofdoing business. We also need to create some mechanisms to make iteasier to identify those policyholders that currently do not reallyqualify for a Citizens' policy because they are within the15-percent margin. And we need to get the insurance-agent communityinvolved in brokering this business. That will help find moreplacements for these policies in the private marketplace—and withpolicyholders wanting to go there, as opposed to feeling they haveto.

How well does the average Florida citizen understand theimperative of these depopulation efforts—do they get why it'simportant?

We need to do a better job of explaining to people the potentialassessment liability out there. The first line of assessment goesto Citizens policyholders and that could be up to 15 percent peraccount, so as much as a 45 percent assessment. Now that[45-percent assessment] is not likely to occur, but it is likelyfor there to be some assessment in the future; we've been blessedthe last several years with not having a catastrophic event, but weknow that's not going to continue. We know it's not a matter of ifbut when Citizens policyholders will have to pay.

A PIP reform bill was signed into law by Governor Scottlast May. Has there been any impact on ratesyet?

There have been about 160 filings made by insurers to be incompliance with the law; for this go-round, there had to be a10-percent rate decrease in those filings or a justification whythat 10-percent standard was not in place. Historically, we've seen85 percent of rates go up for PIP; this time around, we've seen 50percent of the PIP rates going down and about 70 percent of therates are either unchanged or going down. So that's a very positivesign: We're optimistic there will be more savings in the future.

What role, if any, is it appropriate for the federalgovernment to play in regulation of the insurancemarket?

The NAIC supported [creation of] the Federal Insurance Office inDodd-Frank. States cannot enter into treaties or agreements withforeign governments—so having a federal voice in that role isappropriate. Our concern is the federal government can't helpitself and operates with the view that unless regulation isfederal, then it's not right. We have a very different view, and wethink that the financial crisis bears out that state regulation—asinefficient or clunky as it may seem at times—is enormouslyeffective.

The federal government fell woefully short with regard toregulation of the financial sectors of which they were thewatchdog. So our goal would be to work closely with FIO oninternational issues and work with them to identify and improveweaknesses in the state system—but always to keep in mind thebenefits that are there with a state system that's wellregulated.

You've been at the forefront of calling for a NationalCatastrophe Fund. What are the chances we'll see such a fund? HasSuperstorm Sandy given this concept added impetus?

For over a decade, I have been going to Washington and pleadingthe case that we have a very poor national-catastrophe plan today.People say, “We don't have a catastrophe plan.” Well, we do, it'sjust a very bad one. It consists of no pre-planning and allpost-event funding. We call it the “Air Force One” strategy, whereyou just fly over a disaster area and open up the back of Air ForceOne with bags of money. That might make for good PR and politics,but it isn't a very good strategy for encouraging mitigation in thefuture.

We had good success in Congress in late 2008 with the passage bythe House of a national catastrophe piece of legislation, which ofcourse never really got any traction in the Senate. I don't reallythink there's any realistic hope of that happening this year. Thereare too many competing factors going on in Washington with thesequester and a number of other issues.

Unfortunately, preventing a huge problem has never easilysaleable in Washington; the problem has to be in their face andacute before they want to do anything about it. People you talkwith in Washington are very candid about it and say, “When we havea storm or a seismic event, we'll do something about it becauseeverybody will be there, it will be real, it will require politicalattention.”

But I do think we will have a national-catastrophe plan—but itmay take a Cat 4 storm going up the Connecticut River Valley or a$400 billion seismic event in California before we realize the planwe have now is a failed one and that what we need is acomprehensive, thoughtful plan that includes land-use managementand personal responsibility and maximizes the private sector—andthen uses the federal government as a mechanism of distributing therisk over time, which is the greatest problem with a catastrophicloss.