McCarty: Citizens, of course, has grown to be our 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 this point is just too large and should be broken up into more manageable pieces, maybe stripping the wind pool out and the sinkhole out so you can focus time, talent and attention on those particular perils.

How likely is it for that to occur?

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

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

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

What accounts for the increasing appeal of Citizens policies to the private market?

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

Of course, not all of those 400,000 proposed takeouts in 2012 wound up entering into the private market.

That's right. Unfortunately, only about 60 percent of those actually found a private-sector home. That's driven in large part by the Citizens Opt-Out provision, which allows policyholders to choose to stay in Citizens. We need to look at how we can make moving policies to the private marketplace more appealing.

What are some of the initiatives that will achieve that goal 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 when there's volatility in the market? Or should it be a residual market, and by being a residual market reflect what's going on in the rest of the country, which means you charge rates that are higher than the rest and that you make the policy less appealing? There has been a re-emphasis in the legislative process this year about returning Citizens to a residual market and by doing that, we need to move back to what we had prior to 2006 where we set rates based on the Top 20 carriers. Rates would automatically go up based upon that. So we have had a model of having actuarially sound rates. But when you don't buy reinsurance, and you don't have the expenses that you would have to have as a private company, then your rates could possibly and often times are cheaper than they are in 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 of doing business. We also need to create some mechanisms to make it easier to identify those policyholders that currently do not really qualify for a Citizens' policy because they are within the 15-percent margin. And we need to get the insurance-agent community involved in brokering this business. That will help find more placements for these policies in the private marketplace—and with policyholders wanting to go there, as opposed to feeling they have to.

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

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

A PIP reform bill was signed into law by Governor Scott last May. Has there been any impact on rates yet?

There have been about 160 filings made by insurers to be in compliance with the law; for this go-round, there had to be a 10-percent rate decrease in those filings or a justification why that 10-percent standard was not in place. Historically, we've seen 85 percent of rates go up for PIP; this time around, we've seen 50 percent of the PIP rates going down and about 70 percent of the rates are either unchanged or going down. So that's a very positive sign: We're optimistic there will be more savings in the future.

What role, if any, is it appropriate for the federal government to play in regulation of the insurance market?

The NAIC supported [creation of] the Federal Insurance Office in Dodd-Frank. States cannot enter into treaties or agreements with foreign governments—so having a federal voice in that role is appropriate. Our concern is the federal government can't help itself and operates with the view that unless regulation is federal, then it's not right. We have a very different view, and we think that the financial crisis bears out that state regulation—as inefficient or clunky as it may seem at times—is enormously effective.

The federal government fell woefully short with regard to regulation of the financial sectors of which they were the watchdog. So our goal would be to work closely with FIO on international issues and work with them to identify and improve weaknesses in the state system—but always to keep in mind the benefits that are there with a state system that's well regulated.

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

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

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

Unfortunately, preventing a huge problem has never easily saleable in Washington; the problem has to be in their face and acute before they want to do anything about it. People you talk with in Washington are very candid about it and say, “When we have a storm or a seismic event, we'll do something about it because everybody will be there, it will be real, it will require political attention.”

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