Five-Part Series: Hurricane-proofing discounts attacked by insurance industry
Dec 3, 2009
Hurricane-proofing discounts attacked by insurance industry
News-Journal Online–December 3, 2009
By JIM SAUNDERS
Tallahassee Bureau Chief
State leaders and the insurance industry have sent the message time and again to Florida homeowners.
Add hurricane shutters, strengthen your roofs and make other home improvements.
And if you do, you’ll get a two-pronged reward: better protection against hurricanes and lower insurance bills.
But with hundreds of thousands of Floridians receiving insurance discounts, a debate is building about whether the system has gone amok.
Insurers complain they are being forced to give price breaks that are larger than justified and contend home inspections are riddled with fraud and errors. They say excessive discounts are causing financial losses in the industry — with the issue helping lead to State Farm Florida’s announcement this year that it would stop selling homeowners insurance.
State Farm spokesman Chris Neal said the company wants customers to upgrade their homes and supports giving discounts, known as “mitigation credits.” But he and other industry officials point, in part, to a 2007 state change that effectively doubled the size of credits.
“What we are challenged with is the amount of credit we’re supposed to give,” Neal said.
State and industry officials are setting the stage for a legislative debate in the coming months. But the discount issue is complex for technical, financial and political reasons.
If lawmakers or regulators revamp the credit system, the changes likely would lead to reducing discounts. That could be a difficult sell when many homeowners have spent thousands of dollars to upgrade their houses and enjoyed insurance discounts as a benefit.
“Now that we’ve been down this path for a few years, it’s hard to change course and tell people, ‘I know you spent $20,000 on shutters and reinforcing your roof. We’re going to reduce the amount of credit you get for that,’ ” Deputy Insurance Commissioner Belinda Miller told a commission studying the issue.
Sean Shaw, the state’s insurance consumer advocate, said he doesn’t want to fix problems in the system by placing burdens on homeowners. For example, he rejected a recent suggestion that home inspections should gradually become mandatory and that insurers should be able to pass on the costs to consumers.
“The mitigation-credit issue is not the consumer’s fault,” Shaw said.
But Lisa Miller, a former deputy insurance commissioner who is a consultant and lobbyist, said the program is causing a financial “drain” on insurers that ultimately will hit consumers.
Lisa Miller said policyholders have benefited from substantial discounts in the short term. But longer term, she said lost revenues will hurt the ability of insurers to pay claims and could affect the availability and cost of coverage.
“The insurance companies want to reward and incentivize their customers, but they don’t feel the current discounts are valid,” said the former regulator, whose clients include insurers.
HOW BIG SHOULD CREDITS BE?
The mitigation-credit system is based on 2002 studies that analyzed potential hurricane losses and the effectiveness of various construction techniques.
The state requires insurers to give discounts to customers whose homes have features that will limit damage, with the amounts based on a complicated matrix.
As an example, roofs are a key factor in how much damage a hurricane causes to a home. The credit system takes into account issues such as the shape of a roof and how it is attached to the building.
Insurers complain about the financial impact of the state doubling the discounts in 2007. But Belinda Miller said regulators initially held down the size of discounts in 2002 to help start the program and that those reduced amounts were not intended to be permanent.
Also, she said insurers could conduct their own studies to justify different mitigation discounts but have not. Neal said State Farm is doing such a study.
“It’s not just a simple thing,” he said. “You don’t just fill out a little worksheet and submit it.”
Ideally, credits would match up with reduced risks of hurricane damage. If a homeowner puts on a new-and-improved roof, for instance, the insurance company would give a premium discount that reflects the relative lower risk.
Insurance industry officials are careful to say they support giving discounts but contend the current system is out of balance. Also, some officials question whether homes really are being protected as much as the discounts would indicate.
Julie Rochman, president and CEO of the industry-backed Institute for Business & Home Safety, said the system offers credits for individual home improvements and building techniques. But simply adding hurricane shutters, for instance, might not save a home from being destroyed if it has a weak roof.
Rochman, whose institute studies the effects of natural disasters on buildings, said focusing only on single improvements is “sort of a lose-lose” situation. While insurers give discounts and homeowners think they are safer, the buildings might not be able to withstand hurricanes.
SYSTEM ‘OUT OF CONTROL’?
State lawmakers this year directed a panel known as the Florida Commission on Hurricane Loss Projection Methodology to study the mitigation-credit system and submit recommendations by Feb. 1.
Commission members have heard testimony during the past few months about the technical details of the system, its financial effects and fraud.
Jack Nicholson, a commission member and chief operating officer of the Florida Hurricane Catastrophe Fund, said the concept of home mitigation is like “mom and apple pie.”
But during an October meeting, Nicholson described the system as “out of control.
“Somebody needs to take responsibility to make sure it is done right,” he said.
Insurers argue, in part, they are being required to give larger-than-justified discounts at a time when companies are not able to charge high enough insurance rates.
Also, they say they are losing income while facing increased expenses for reinsurance, a crucial form of backup coverage that helps pay hurricane claims.
In the highest-profile example, State Farm last year sought a 47.1 percent rate increase and pointed to mitigation credits as a major reason.
After regulators rejected that increase, the company’s Florida subsidiary announced it would gradually stop selling homeowners insurance because it was losing money and facing eventual insolvency. State Farm has not started pulling out of the market because of long-running negotiations with regulators.
“That (mitigation credits) was probably the single biggest factor that led to our revenue problems,” Neal said.
The state-backed Citizens Property Insurance Corp. also has been heavily affected, providing an estimated $700 million in discounts as of June 30. The lost revenue has come as many industry and state officials worry that Citizens could face multibillion-dollar deficits if it has to pay claims after a major hurricane.
One issue drawing heavy scrutiny is the inspections that are required before homeowners can receive discounts.
Though inspectors were approved by the state, insurers say they suspect widespread fraud and errors, including blatant fraud such as submitting inaccurate inspection reports.
The Florida Association of Insurance Agents released a report that warned of fraud and discounts being given when they are not warranted. That report summed up one fraud scenario by saying everybody would be “happy until the wind blows.”
When that happens, the report said, “The carrier didn’t collect enough premium, and the homeowner is upset because his fully credited roof is in his neighbor’s front yard and his family is living at a Motel 6.”
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Fortify your home |
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Making your house safer and stronger in hurricanes earns insurance rate discounts, but now insurance companies want to limit those savings. It’s still a good idea. Here’s how: 1. ROOF: The stronger a roof is, the more protection it can offer. This involves improving connections, adding a secondary water barrier and choosing the right roof covering. If not replacing the roof, check shingles. If they aren’t well-adhered, place three 1-inch dabs of roofing cement under each tab. 2. SOFFITS: Vinyl and aluminum soffits – which cover the underside of the roof overhang – may be installed in tracks that are poorly connected to the supports; if they move or deform easily when you push up, they probably are not well-attached. If the overhang is more than 18 inches deep, install sharp stainless steel screws every 12 inches into wood supports. If there are no wood supports, install screws and apply polyurethane sealant to connect soffits. 3. WINDOWS AND ATTIC VENTS: Protective barriers reduce the chance glass will be broken by debris; keep wind pressure from building up inside if a window breaks; and limit the amount of wind-driven rain soaking the interior. Install permanent anchors appropriate for the chosen system and wall type. This will allow for quick installation when a storm threatens. Cover gable and/or attic vents and all roof vents to keep out wind-driven rain. 4. ENTRY DOORS: Can be forced open by pressure or impact. Wood frames rarely provide recommended protection. Wooden doors with raised panels split when hit. Double-entry doors, doors with glass or doors that open in are also at risk. Doors should have three hinges and a dead-bolt lock with at least a 1-inch bolt throw length. Add barrel bolts to the inactive door of double doors penetrating the header and floor. Or shutter with products that can be operated from the inside or outside. 5. GARAGE DOORS: Double-wide doors are more susceptible to wind damage than single doors. It may buckle, be forced off the roller track or the track could be vulnerable to pressure if it’s light or the fasteners don’t penetrate the wall deep enough. Install a hurricane-resistant garage door or shutter the opening with a pressure- and impact-rated system. Bracing kits also are an option. |
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SOURCE: Institute for Business & Home Safety |
New, smaller companies pose new risks
News-Journal Online–December 2, 2009
By JIM SAUNDERS
Tallahassee Bureau Chief
Before hurricanes started blowing through Florida in 2004, a few big names dominated the state’s property insurance market.
State Farm, Allstate, Nationwide, USAA. Add the state-backed Citizens Property Insurance Corp., and those players had about 3 million residential policies.
But all that changed after eight hurricanes hit the state in 2004 and 2005. Many big companies headed for the exits or refused to take on new customers, leaving the market to smaller, Florida-based companies that, in many cases, didn’t exist before 2004.
Now, when homeowners shop for coverage with insurance agents such as Mark Mullin, they typically have two choices: one of the newer firms or Citizens.
“There’s no big players left in the regular homeowners’ market,” said Mullin, president of the Ormond Beach agency Mullin & Co.
The transformation of Florida’s market affects the ability of homeowners to find coverage and the amounts they have to pay. Also, it has spurred repeated debates among state and industry officials about whether smaller companies can survive financially if a major hurricane hits.
Regardless of the debates, however, it is clear Florida has placed a big bet on homegrown companies.
OUT WITH THE BIG, IN WITH THE SMALL
Since Jan. 1, 2006, regulators have approved 27 new companies to sell homeowners or mobile-home policies in the state. Those companies are helping fill a vacuum created by old-line insurers that stopped writing new policies or systematically dropped hundreds of thousands of customers to reduce financial risks.
USAA, a company that specializes in insurance for military families, puts it succinctly when visitors to its Internet site express interest in buying homeowners policies in Florida.
“We offer homeowners and renters insurance on a very limited basis in Florida because of high exposure to weather-related catastrophes,” USAA says.
Contrast that with a company that started operating in 2005, Ormond Beach-based Security First Insurance Co., which has run television ads to draw business — and tries to put potential customers’ minds at ease about its financial strength.
“We’ll be here for you storm after storm, year after year,” company President Locke Burt, a former state senator, said in one of the commercials.
In some ways, it is difficult to compare companies that have come into the market in recent years with insurers that have done business in the state for decades.
Newer companies, for instance, can often be more selective in writing policies. Meanwhile, a company such as State Farm has a statewide customer base that is already established.
A state Internet site, shopandcomparerates.com, offers a crude way to look at how much companies charge for coverage. Using two examples on that site, it appears many smaller Florida companies charge less than national insurers in Volusia and Flagler counties.
But that Internet site doesn’t capture all of the dynamics of the market. For example, a company might have low rates in a particular county — but write few policies there.
Also, in setting criteria for writing policies, companies look at factors such as the location, age and even value of homes.
As an example, companies might want to be highly competitive in North Florida and inland areas but not expose themselves to the risks of doing business in South Florida and on barrier islands.
Similarly, as some newer companies have ramped up their businesses, they have sought to insure homes constructed after a statewide building code took effect in 2002. That code included more stringent requirements to help homes better withstand hurricanes.
“The newer the home, the better,” said Daytona Beach insurance agent Richard Brown, president of Hayward Brown Inc.
But even that thinking isn’t universal. Robert Ritchie, president of Tampa-based American Integrity Insurance, said his firm, which was approved to do business in 2006, has focused on older homes.
Mullin and Brown said some companies want to insure high-value homes, with Brown saying he has had luck finding coverage for homes valued at $600,000 or more. The agents said some national companies, such as Chubb and Fireman’s Fund, are willing to insure those types of homes.
Another exception to the trend toward smaller companies is that Allstate’s Castle Key subsidiaries expect to add 100,000 policies by November 2011, under an agreement reached last year with state regulators.
But those additions will only make up part of the hundreds of thousands of Allstate policies that have been dropped since 2004.
The state’s reliance on newer and smaller companies likely will grow in the coming years if State Farm carries through on a decision to stop writing homeowners’ coverage in Florida.
Regulators have been negotiating behind the scenes with State Farm, which announced early this year it would gradually pull out of the property market because financial losses threatened the solvency of its Florida subsidiary.
While details of the negotiations are unclear, speculation has centered on the possibility that State Farm would reduce its number of policies but continue to do business in Florida.
Even if that happens, many dropped customers likely will have to turn to newer companies or Citizens for coverage.
‘A BIG RED FLAG’
Since State Farm announced its plans, regulators have been trying to avoid a wholesale dumping of policies into Citizens, which already is the largest insurer in Florida with more than 1 million policies.
Sean Shaw, the state’s insurance consumer advocate, said Citizens often has to take policies that other insurers don’t want. He said Citizens is “left with the worst of the worst, and that’s not a sustainable system.”
Shaw said he wants to see a competitive market that includes a mix of large insurers, Florida-based companies and Citizens.
But with the state going more toward the smaller companies, a major question centers on whether some firms would have the financial strength to survive a hit from a major hurricane or multiple hurricanes.
Economist Robert Hartwig, president of the industry-backed Insurance Information Institute, said the increase in the number of smaller companies gives consumers more choices. But he said the companies have never been “battle tested” by having to pay claims after a hurricane.
Two small insurers licensed since 2004 — Coral Insurance Co. and American Keystone Insurance Co. — were placed into state receivership this year because of financial problems. Those problems occurred without hurricanes blowing into Florida since 2005.
Hartwig said the non-hurricane failures of Coral and American Keystone are signs that some smaller companies have problems.
“That raises some doubts,” he said. “That’s a big red flag.”
National insurers such as State Farm and Allstate have pumped hundreds of millions of dollars into their Florida operations after past hurricanes. But smaller, Florida-based companies wouldn’t enjoy such a backstop.
Many of the smaller companies also do not have large amounts of money built up, though they meet state regulatory standards.
“I’m worried to death over the finances of some of these companies,” Mullin said.
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Florida’s top insurer |
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The Florida property insurance market has changed dramatically during the past five years. The state-backed Citizens Property Insurance Corp. became a bigger player, while hundreds of thousands of customers shifted from national insurers to smaller carriers. Here is a comparison of the top 10 property insurance companies in March 2004 and March 2009, based on number of policies: 2004 1. State Farm Florida: 1,030,302 2. Citizens Property Insurance: 778,379 3. Allstate Floridian Insurance: 605,416 4. Nationwide Insurance: 276,360 5. United Services Automobile Association: 165,351 6. American Strategic Insurance: 126,984 7. Clarendon Select Insurance: 124,723 8. Liberty American Select: 118,145 9. Atlantic Preferred Insurance: 96,192 10. Allstate Floridian Indemnity: 96,182 2009 1. Citizens Property Insurance: 1,005,077 2. State Farm Florida: 853,867 3. Universal Property & Casualty: 498,139 4. St. Johns Insurance: 204,409 5. United Services Automobile Association: 162,435 6. Castle Key Insurance: 157,495 7. ASI Assurance: 132,113 8. Homewise Preferred Insurance: 131,059 9. Nationwide Insurance: 123,133 10. Royal Palm Insurance: 119,331 Note: Allstate Floridian Insurance changed its name this year to Castle Key Insurance, and Allstate Floridian Indemnity is now known as Castle Key Indemnity. |
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SOURCE: Florida Office of Insurance Regulation |
Why a company in Bermuda can raise your rates
News-Journal Online–December 1, 2009
By JIM SAUNDERS
Tallahassee Bureau Chief
Security First Insurance Co. is headquartered in a nondescript office building in Ormond Beach.
But when a Security First customer writes a check for property insurance, a big chunk of the money ends up in places like Bermuda and London instead of the offices on South Atlantic Avenue.
For insurance executives such as Security First President Locke Burt, sending millions of dollars to far-flung companies is simply part of doing business in Florida.
They are buying reinsurance — backup coverage to help pay hurricane claims — that keeps Florida’s property-insurance market functioning.
But for Florida homeowners, hidden costs of reinsurance are one of the biggest factors that drive up insurance rates in the hurricane-prone state.
Consider this: Despite no hurricanes hitting Florida since 2005, reinsurance costs increased about 15 percent this year. That forces property insurers to either try to pass on rate hikes to customers — or eat the reinsurance costs.
James Graganella, president of the Tallahassee-based Capitol Preferred Insurance Co. and Southern Fidelity Insurance Co., likened the situation for many insurers to “bleeding without a storm.”
And other than state government taking on huge financial risks, Florida can do little about it.
The reinsurance industry is based heavily in places such as Bermuda and England and does not face the rate regulations imposed on regular insurance companies. Most reinsurance firms are little-known to consumers, with a few exceptions, such as Lloyds of London.
But Florida property insurers need to buy large amounts of reinsurance because of the threat of devastating hurricanes. Insurance Commissioner Kevin McCarty said the state is subject to the “vagaries of the marketplace.”
“Reinsurance plays a larger role in Florida than any other state,” he said.
The details of reinsurance can get numbingly complicated and have spurred repeated controversies during rate cases — including a State Farm case in which a judge raised questions about “sham” transactions. But Security First offers an example of how it affects customers’ pocketbooks. For every $100 that Security First customers pay for insurance, Burt said about $40 of it goes to reinsurers.
And when no major catastrophes hit, reinsurance firms get to keep the money.
“All the guys in Bermuda are reporting great earnings,” Burt, a former state senator, said recently.
SPREADING THE RISK
Reinsurance is a global business that goes far beyond Florida’s hurricane risks. The Reinsurance Association of America, an industry group, says the roots of reinsurance date to the late 14th century and that an early focus was on marine and fire insurance.
But the pivotal role that reinsurance plays in Florida became apparent after eight hurricanes slammed the state in 2004 and 2005. Homeowners’ insurance rates soared in the aftermath, at least in part, because insurers passed on higher reinsurance costs.
In 2007, lawmakers and Gov. Charlie Crist stepped in and expanded the Florida Hurricane Catastrophe Fund, a state program that sells lower-cost reinsurance. That move led to insurers reducing homeowners’ rates — but also created billions of dollars in financial risks for the state.
The basic concept of reinsurance is that insurers want to get rid of part of their liability for paying catastrophe claims. At a simple level, insurance companies are buying insurance coverage.
Just like a homeowner who has to pay a deductible, insurers must pay a minimum amount of losses before reinsurance kicks in. But after that, through often-dizzying arrays of contracts, reinsurers pay large portions of damages.
Florida insurance companies — particularly smaller companies — would likely find it impossible to squirrel away enough money to pay all the claims resulting from a major hurricane.
Reinsurers, meanwhile, are willing to pick up certain amounts of that liability because they also are collecting money and covering different kinds of risks all over the globe.
“Literally, it’s risk spread around the world,” said economist Robert Hartwig, president of the Insurance Information Institute, an industry-backed organization.
As an illustration of the importance of reinsurance, Allstate’s Florida subsidiary did not buy private reinsurance in 2004 because it thought it had enough money to meet its obligations.
But four hurricanes in 2004 exhausted the money and forced Allstate’s parent company to inject more than $380 million into the subsidiary to maintain solvency, a company official testified last year before a Senate committee. Reinsurance could have helped offset at least some of the company’s losses.
SHAM TRANSACTIONS?
While state and insurance-industry officials agree on the importance of reinsurance, details of the issue have spurred debates and controversy during the past three years.
A key debate has centered on the Florida Hurricane Catastrophe Fund, the state program that sells low-cost reinsurance.
When Crist and lawmakers dramatically expanded the fund in 2007, the move saved money for insurers because they no longer had to buy as much reinsurance in the private market.
In exchange, insurers were required to pass along the savings to homeowners through rate reductions that ranged from the single digits to more than 20 percent.
The expansion added billions of dollars in potential risks for the fund, which was expected to be able to issue bonds to cover its obligations if a big hurricane hit. But, then, the nation’s credit markets collapsed, raising the possibility the fund would not be able to borrow enough money.
Worried about those risks, lawmakers this spring approved a plan to start scaling back the size of the fund. In doing so, they allowed insurers to seek rate increases to pay for replacing the catastrophe fund coverage.
Some insurers also have faced questions during the past three years about whether they are buying excessive amounts of reinsurance and trying to pass along the costs to homeowners.
The insurance industry uses complex computer models to estimate potential losses from hurricanes. A relatively minimum amount of reinsurance would cover losses from what is described as a 1-in-100-year event — a hurricane that has a 1 percent chance of happening in any year.
But some insurers have proposed rates that included buying far more reinsurance, up to a level as high as a 1-in-250-year event.
Regulators questioned such proposals during rate cases last year, including a high-profile case in which State Farm Florida unsuccessfully sought a 47.1 percent rate increase.
The state Office of Insurance Regulation accused State Farm of buying increased reinsurance rather than passing along savings to customers from the expansion of the Florida Hurricane Catastrophe Fund.
Adding to the dispute was that State Farm Florida bought part of its reinsurance from its Illinois-based parent company rather than from global reinsurers.
An administrative-law judge went so far as to raise the possibility that the reinsurance arrangements between State Farm Florida and its parent could be “sham transactions.”
But State Farm officials blasted the arguments of regulators and the administrative-law judge. They said, for example, that the Florida subsidiary saved money by purchasing reinsurance from its parent company instead of on the open market.
“There is no evidence that the parent/subsidiary relationship between State Farm Florida and State Farm Mutual is a ‘sham’ transaction,” the company said in a legal document.
Company official Dave Hill also pointed to hurricane losses in Florida as he defended the amount of reinsurance State Farm Florida bought.
“It’s incredible to me that people are suggesting companies are buying too much reinsurance,” Hill told lawmakers last year.
How Reinsurance Works
Reinsurance is a backbone of Florida’s property-insurance system. Essentially, it is backup coverage that insurers buy to help pay claims if a major hurricane hits.
A common measurement is for insurers to buy enough reinsurance to cover a “100-year” event. That translates into coverage for a hurricane that has only a 1 percent chance of occurring in a year.
Here is a step-by-step example of how reinsurance works, using information from Ormond Beach-based Security First Insurance:
1. A hurricane hits, damaging homes insured by Security First.
2. Security First must pay claims up to an amount of money known as a “retention.” For insurance companies, a retention is similar to a deductible that a homeowner would pay on damages.
3. Security First’s retention amount is $5 million. But because of a type of coverage it has purchased from reinsurers, Security First only has to pay 40 percent — or $2 million — of the retention amount, with reinsurers paying the rest.
4. If claims top $5 million, another type of reinsurance kicks in. This coverage will pay up to an additional $47 million in claims.
5. If storm damages grow, Security First can tap into the Florida Hurricane Catastrophe Fund, a state program that sells low-cost reinsurance coverage to insurers.
6. Security First can begin receiving money from the catastrophe fund after losses reach $43.3 million. The catastrophe fund, supplemented by relatively small amounts of private reinsurance, will cover up to $181.1 million in additional hurricane losses.
7. Additional private reinsurance would cover claims from a single hurricane that cost Security First more than $181.1 million.
8. In all, computer models approved by the Florida Commission on Hurricane Loss Projection Methodology estimate that Security First would face an estimated total of $225 million in claims from a 100-year event. The combination of reinsurance arrangements would allow it to cover those claims.
9. Just in case Florida gets hammered by repeated hurricanes, Security First also has reinsurance to cover up to four smaller storms in a year.
SOURCE: Security First Insurance
Costly political workings of high-risk state insurer
News-Journal Online–November 30, 2009
By JIM SAUNDERS
Tallahassee Bureau Chief
Citizens Property Insurance Corp. is a bane to some people, a necessity to others.
But don’t mistake Citizens — a state program that has more than 1 million customers — with other insurers.
Citizens is a political creature.
When lawmakers didn’t want Citizens to compete with private companies, they required it to charge high rates. When lawmakers wanted to give relief to hurricane-addled homeowners, they suppressed its rates.
But here’s something to think about the next time politicians or customers debate whether premiums are too high or too low: Citizens has never charged the proper rates to insure homes.
One result is that Citizens would likely run out of money paying claims after a major hurricane. That would force residents and businesses throughout the state — including non-Citizens policyholders — to chip in to cover the shortfall.
Another result is that the patchwork rate history has led to Citizens customers in some parts of Florida subsidizing customers in other areas.
“Some folks aren’t paying enough, and some folks are paying too much,” said Christine Turner Ashburn, director of legislative and external affairs for Citizens.
Citizens, which was formed in 2002 as the successor to two other government programs, is a favorite whipping boy in the state Capitol and in the insurance industry. Part of that criticism stems from the billions of dollars in financial risk that Citizens poses to Floridians if the Big One blows ashore.
“We all know that the financial position of Citizens is so corrupt that if it were a private company, they would be shut down a long time ago,” said Rep. Alan Hays, a Umatilla Republican who represents part of West Volusia and is one of the loudest critics of Citizens.
But Citizens isn’t a private company, and it was created to sell insurance to Floridians who couldn’t find coverage in the private market — at least not affordable coverage.
By holding down rates and making other legal changes in recent years, Gov. Charlie Crist and the Legislature have made Citizens more competitive with private insurers.
And the dirty truth is that Citizens still has to insure properties that other companies don’t want to touch.
Trying to find coverage along the coast in South Florida? Good luck. Looking for a policy in a sinkhole-riddled area north of Tampa? Better call Citizens.
As of Oct. 31, Citizens had 1.07 million policies, with 31,719 in Volusia County and 2,955 in Flagler County. It is the largest property insurer in Florida.
Richard Brown, president of the Daytona Beach insurance agency Hayward Brown Inc., said he tries to dissuade clients from buying Citizens policies, even if private insurance would cost more. But at times, Citizens might be the only option.
“If we’re quoting Citizens at all, it’s because we have no other choice,” Brown said.
UP AND DOWN RATES
Lawmakers this spring approved a bill that will lead to rate increases of up to 10 percent a year for many Citizens customers and gradually strengthen Citizens’ finances.
But Citizens’ plans for carrying out the increases have highlighted dysfunction in how rates have long been set. The plans indicate that some customers should see rates increase far more than 10 percent — while others should see rate decreases.
The state, in the past, did not want Citizens to compete with private insurers, so it required higher-than-market rates. That included looking at rates charged in each county by the 20 largest private insurers and requiring Citizens to top those rates.
But, after eight hurricanes crashed into Florida in 2004 and 2005, rates for private insurers and Citizens started to soar. That led Crist and lawmakers in January 2007 to freeze Citizens rates and overhaul the requirement that Citizens charge the highest rates in the market.
“Citizens has done a good job,” Crist said recently. “It has created more competition, frankly.”
The rate freeze has continued for nearly three years, but lawmakers decided this spring to allow Citizens to start increasing rates in 2010 by up to 10 percent annually for each policyholder.
The move came amid worries about Citizens not having enough money to pay hurricane claims, which would trigger extra charges — known as assessments — on insurance policies throughout the state.
Worries about assessments aren’t simply a mathematical exercise. Citizens had combined deficits of about $2.2 billion because of the 2004 and 2005 hurricanes, which required assessments and also led to the Legislature spending $715 million in tax dollars to help close the shortfall.
The prospect of paying assessments galls many people who are not Citizens customers.
With Citizens’ largest concentration of policies in South Florida, it is possible that privately insured homeowners in inland areas such as DeLand or Bunnell could be forced to pay assessments to cover Citizens losses in places like Fort Lauderdale or Miami Beach.
The bill passed this spring is aimed at, eventually, making Citizens’ rates “actuarially sound.” That term, which is used in setting private-insurer rates, broadly means that rates should reflect expected future costs.
MAJOR DISCREPANCIES IN RATES
Citizens officials have said rates would have to go up 35 percent or more statewide to become actuarially sound, depending on the type of policy.
But, when Citizens proposed actuarially sound rates this fall, the numbers showed that some customers had been paying too much and others had not been paying enough.
As an example, regulators in October approved rates for Citizens customers who buy full-coverage policies. A breakdown shows that homeowners in many areas of North Florida will receive reductions of 9 percent or more, while rates will go up by similar amounts in many coastal and South Florida areas.
Though lawmakers allowed 10 percent increases for individual policies, the statewide increase will average only 5.4 percent because of the rate reductions in many areas.
Susanne Murphy, executive vice president of Citizens, told lawmakers in November that the decreases stem from the old requirement that Citizens had to charge the highest rates in the market.
“That (the reduction in many rates) is surprising to a lot of people, but not if you remember again that we pegged our rates based on what other companies charged, not on what we might need for a particular geographical area or territory,” Murphy said.
A Florida State University study, released in September, pointed to major discrepancies in Citizens rates.
“The results show average policyholders in some territories are paying thousands of dollars a year in subsidies, and policyholders in other territories are receiving subsidies of a similar size,” the study said. “Furthermore, there are some territories where, given the current limitations on rate increases, it will take Citizens more than 20 years to achieve actuarially sound rates.”
While some policymakers are concerned about the impact of higher rates on Citizens customers, Hays and other critics say they think Citizens should impose 10 percent across-the-board increases until it is actuarially sound. Such a move would help bring in enough money to reduce the possibility of assessments, which are often likened to taxes.
Barney Bishop, president of the business lobbying group Associated Industries of Florida, said it’s “time to take our medicine and implement long-overdue rate increases on Citizens.”
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Cost of beach living |
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When it comes to property insurance, living at the beach carries a cost. Here are comparisons of Citizens Property Insurance rates for inland and coastal ZIP codes in Volusia and Flagler counties. The rates were quoted for a $200,000 masonry home, built in 1998 with a gable roof and no wind-mitigation credits. These rates do not reflect increases expected to take effect in 2010.
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SOURCE: Citizens Property Insurance Corp. |
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Citizens’ Growth |
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The state-backed Citizens Property Insurance Corp. is the largest residential insurer in Florida and one of the largest in the nation. Here is a by-the-numbers look at Citizens’ major role in the Florida market: Sept. 30, 2004: 855,948 policies Sept. 30, 2007: 1,379,847 policies Sept. 30, 2009: 1,064,287 policies 22 percent: 62 percent: $413 billion: Local Citizens Citizens Property Insurance Corp. sells far more policies in Volusia County than it did five years ago, while the number of policies in Flagler County has remained relatively flat. Volusia County Flagler County Note: These numbers include all types of policies sold by Citizens, not just homeowners’ policies. |
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SOURCE: Citizens Property Insurance Corp. |
Why your rates keep rising even without hurricanes
News-Journal Online–November 29, 2009
By JIM SAUNDERS
Tallahassee Bureau Chief
Wayne and Nancy Haller were in the “good hands” of Allstate for 42 years.
The Hallers insured a house, cars, a motorcycle and a boat. They were grateful to Allstate, too, after Hurricane Charley blew apart a pool screen and caused about $9,000 in damage to their New Smyrna Beach home.
So, Wayne Haller didn’t grumble much when his property insurance premiums went up, doubling from about $600 a year to $1,200 in 2006, even though the house near Interstate 95 is hardly a coastal property.
But Haller felt betrayed when he received a letter in 2007 saying Allstate was dropping coverage on the home where they’ve lived for 20 years.
“I remember getting a renewal notice for the car not long after that,” he said. “I said, ‘To heck with you.’ “
The Hallers were among countless Floridians who had to dig deeper into their checkbooks — or lost property-insurance policies altogether — after eight hurricanes hit the state in 2004 and 2005.
But now, five years after Hurricanes Charley, Frances and Jeanneplowed into Volusia County and four years after Florida saw its last major storm, all of that upheaval should be over. Right?
Don’t count on it.
In the coming months, hundreds of thousands of Florida homeowners will see insurance bills increase.
And many others will open their mailboxes and get the insurance industry’s version of the pink slip, forcing them to buy coverage from the state or turn to companies they might never have heard of.
Bottom line, as another peaceful hurricane season ends this week, property insurers still look at Florida’s beautiful beaches and see big, fat financial risks.
“There is no other place on the planet with such a high concentration of risk,” said economist Robert Hartwig, president of the industry-backed Insurance Information Institute.
The state’s Citizens Property Insurance Corp., the largest insurer in Florida, is moving forward with plans to start raising rates in January in areas including Volusia and Flagler counties.
Meanwhile, private insurers have been quietly filing proposals with state regulators to increase rates. In some cases, insurers say they are losing money, despite the lack of hurricanes.
Sean Shaw, the state’s insurance consumer advocate, said he looks at each company on a “case-by-case basis.” But he said policyholders have “zero appetite” for rate increases after four years without any major hurricanes.
“It’s just hard for people to imagine that we have not had a hurricane in years and for insurance companies to say, ‘We’re losing money; we need rate increases,’ ” Shaw said.
On a basic level, insurers are not supposed to increase rates to recoup losses from past storms. But they say they need to collect enough money in quiet years so they will be able to pay claims when hurricanes inevitably hit.
“We’re making money so we can pay our claims, which is a good thing,” said Lisa Miller, a former deputy insurance commissioner who lobbies for insurance companies.
But Florida’s insurance puzzle is far more complicated than insurers simply wanting to prepare for a rainy day — or beef up profits.
That puzzle has pieces ranging from global reinsurance firms in London and Bermuda to computer modelers who use mounds of data to create hurricane scenarios and estimate potential damages.
And never underestimate the part played by politics. It is a rite of spring in Tallahassee for legislators to change insurance laws, and often their decisions have a direct bearing on how much you’ll pay for coverage.
FRENZY OF RATE HIKES
Florida’s property-insurance market has been tumultuous for years, particularly since Hurricane Andrew mowed through parts of Miami-Dade County in 1992.
But the crisscrossing hurricanes of 2004 and 2005 caused roughly $36 billion in insured losses. That touched off a frenzy of rate hikes and dropped policies, as insurers tried to limit their future risks. Allstate reported a record $5 billion profit for 2006. State Farm saw profits climb 65 percent that year.
Gov. Charlie Crist and lawmakers gave relief to homeowners in 2007, freezing rates for Citizens Property Insurance and expanding another state program, known as the Florida Hurricane Catastrophe Fund, to help push down rates of private insurers.
The catastrophe fund sells low-cost reinsurance, a crucial form of backup coverage that insurers need so they can pay hurricane claims. In exchange for making more cheap reinsurance available, the state required insurers to reduce homeowners’ rates — with the reductions ranging from single digits to more than 20 percent, depending on the company.
But freezing Citizens rates and expanding the catastrophe fund also had a major downside. The state effectively took on billions of dollars in financial risks and, if a big hurricane hit, residents and businesses throughout the state would be forced to pay the tab.
So far, with the calm 2007, 2008 and 2009 hurricane seasons, Florida has been lucky.
But worried about the financial risks, lawmakers this spring agreed to allow Citizens to raise rates as much as 10 percent a year. At the same time, they started scaling back the size of the catastrophe fund and taking other steps to bolster its finances, which ultimately will lead to increased rates for many homeowners.
Citizens will begin charging higher rates for hundreds of thousands of customers in January. Meanwhile, numerous private insurers have sought rate increases, with regulators approving hikes of as much as 15 percent.
Insurance Commissioner Kevin McCarty said a number of factors are driving higher rates, including private reinsurance costs that increased about 15 percent this year.
Many reinsurers are based in Bermuda or Europe and are largely unregulated, which can lead to big swings in the amounts Florida insurers have to pay each year for the backup coverage.
COST OF DISCOUNTS TOO HIGH?
But another rapidly emerging issue in Florida centers on discounts that insurers are required to give homeowners who upgrade their houses to better withstand hurricanes.
Insurers argue many of the discounts — known as mitigation credits — are larger than justified and that the process of inspecting homes is filled with fraud and errors.
Locke Burt, president of Ormond Beach-based Security First Insurance Co., said discounts are costing his company about $22 million annually in lost premiums. Burt said he supports giving discounts to customers, but that other policyholders will be forced to pay more if some people get unjustified breaks.
“It’s not fair to the other customers to be giving discounts to people who don’t qualify,” said Burt, a former state senator.
But trying to limit discounts could be difficult, especially after years of insurance-industry and state officials urging homeowners to add storm shutters, upgrade roofs and make other improvements.
“God forbid they should give mitigation credits, right?” Robert Hunter, director of insurance for the Consumer Federation of America, replied sarcastically when asked about the issue.
Insurers say the large amounts of discounts add to the financial pressures of doing business in Florida, where name-brand carriers have stopped writing new policies and have dropped hundreds of thousands of others.
Most notably, State Farm Florida announced in January it would gradually stop selling homeowners insurance in the state because it was in danger of going insolvent — a problem it partly attributed to losses from the discounts.
State Farm’s wholesale withdrawal from the market has not started because of ongoing negotiations between the company and insurance regulators. If the withdrawal happens, however, it will mean hundreds of thousands of customers will have to find new coverage.
Other insurers, meanwhile, are choosy about where they will write policies and the types of homes they will cover. Though companies have different strategies, an example might be reducing risks in South Florida and coastal areas while competing for business in safer North Florida.
“You’ve got to really pick your spots very carefully,” said Robert Ritchie, president and chief executive officer of the Tampa-based American Integrity Insurance Group.
Like other large insurers, Allstate dropped hundreds of thousands of policies in recent years.
But its Florida subsidiaries — which changed their names this year to Castle Key Insurance Co. and Castle Key Indemnity Co. — are expected to add about 100,000 policies over three years under an agreement reached in 2008 after a dispute with regulators.
While that could give a boost to the state’s insurance market, many former customers of Allstate and other large insurers still have raw feelings about losing coverage after the 2004 and 2005 hurricane seasons.
Haller, the New Smyrna Beach resident, said he ignored Allstate’s suggestion to go with another company, Royal Palm Insurance, because an Allstate agent would have sold the policy.
Haller wound up paying a little more with a small company but felt good about doing it.
“I felt like they were dropping us for no reason,” he said. “It really showed me. They’re not out to help you. They’re out to make a profit.”
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Comparing rates Property-insurance rates can vary widely by company. Using information from a state Internet site, here are examples of average rates in Volusia and Flagler counties under two different scenarios. SCENARIO ONE: A masonry home built in 1990 with a replacement value of $150,000, a $500 deductible on non-hurricane damage, a 2 percent hurricane deductible, no claims in the past three years and no wind-mitigation features. Volusia County
Flagler County
SCENARIO TWO: A masonry home built in 2005 with a replacement value of $300,000, a $500 deductible on non-hurricane damage, a 2 percent hurricane deductible, no claims in the past three years, discounts for limited wind-mitigation features and a non-sloping roof. Volusia County
Flagler County
Note: While these are average rates approved by the state, companies might not be writing new policies in the counties. SOURCE: www.shopandcomparerates.com |