Home insurer for rich reaps $17 million in help from state

Palm Beach Post–May 18, 2008

By RANDY DIAMOND

Palm Beach Post Staff Writer

A property insurance company devoted solely to insuring the houses of Florida’s richest residents received a $17 million low-interest state loan that enabled multimillionaires to save an average of $4,700 a year on their premiums.

The money came from a $250 million state capital loan program that was designed to increase the availability of property insurance for Florida homeowners. The 2-year-old program is up for renewal at the same funding level, but this time, the $250 million would come from a surplus held by Citizens Property Insurance Corp., the state’s insurer of last resort.

Citizens Chairman Bruce Douglas said he will ask Gov. Charlie Crist to veto an insurance bill line item that would move the surplus, created through a surcharge for Citizens imposed in 2004 and 2005 on all state policyholders, to the loan program.

"We need the money to pay claims," Douglas said.

Other observers are unhappy with the idea that any sort of state money should be going to an insurance company that only handles million-dollar homes.

”The state subsidies should be helping provide affordable insurance for people who can’t afford their mortgage payments and are having problems with their automobile gas bill,” said Robert Hunter, insurance director of the Consumer Federation of America and a former Texas state insurance commissioner. "They should not be going to help rich people who can afford to buy insurance elsewhere and own a Learjet.”

The Privilege Underwriters Reciprocal Exchange advertises itself as an insurance company catering exclusively to high-net-worth individuals. It insures homes worth at least $1 million and says the average house it covers is worth $3 million, state filings show. Twenty-five percent of the houses it insures are on the beach, its brochure says.

As of Dec. 31, the company was insuring 1,550 homes and condos in Florida, including almost 400 in Palm Beach County.

Ross Buchmuelle, Privilege’s founder and chairman, said the company deserved state funding because it is taking homes away from state-sponsored Citizens and lessening its exposure to hurricanes.

The value of high-worth homes that Citizens insures is $20 billion or more, Buchmuelle said.

Privilege’s policyholders own it. Members pay 50 percent of their annual premium over a five-year period as a kind of membership fee to help the insurer speed up its increase of capital.

”People are building their own capital,” Buchmuelle said.

Privilege puts profits into a subscriber account, and the policyholders take the money when the company no longer insures them.

Buchmuelle’s management company takes a 17 percent fee off the top of premiums collected, so he makes more money as more policyholders sign up.

Privilege is able to offer less expensive insurance than Citizens and other private companies because the homes of high-end individuals are better built and better able to withstand a hurricane, Buchmuelle said.

The $17 million in state funding to Privilege was awarded in December 2006. Unlike other insurance companies, who matched their state grants dollar for dollar, Privilege used its members’ fees to match its grant almost 2-1, for a total of $33 million.

State Sen. Bill Posey, R-Rockledge, chairman of the Senate Banking and Insurance Committee, said lawmakers didn’t know what insurance companies had applied for funding after lawmakers approved the capital loan program.

"It’s just like the city council doesn’t ride herd over who the police are writing tickets to," Posey said.

But the administrator in charge of the insurance capital program, Jack Nicholson, said he had some concerns about awarding money to a insurer that targeted only wealthy individuals. Still, Privilege met the requirements of the program.

"The legislature didn’t set any distinction as to who could be funded," he said.

The capital loan program also has run into other difficulties. As of March, six of the 13 companies receiving the 4 percent, 20-year matching loans were writing below the minimum levels the state set. Companies were supposed to write $2 in new premiums for each dollar in capital they had in their coffers. In addition, only around 100,000 new polices had been written as of Dec. 31, far short of expectations. Companies had estimated they would create more than 300,000 policies by the end of last year and 1.7 million within a few years.

Two of the 13 insurers, factoring in cancellations and nonrenewals, are actually writing fewer policies.

Privilege is meeting its quotas, but only because they are so modest. The company plans to insure only around 8,500 houses.

Insurers say they find the loan program frustrating.

Modern USA Insurance Co., based in Clearwater, put in $7 million in new capital to receive a $7 million state grant last June. The company anticipated writing 31,000 policies in the first year, but its latest count shows it had written just shy of 9,500.

Ray Backlidge, an attorney for Modern USA, said the company would like to write more policies but has been unable to offer a lower rate than Citizens, which no longer is required to offer rates higher than those of other companies. A rate freeze last year for Citizens policyholders undercut his and other companies’ rates, he said.

”We can’t compete,” Backlidge said.

Companies such as Modern USA also are limiting their policy writing in counties where the insurance shortage is most acute: Palm Beach, Broward and Miami-Dade counties.

”There is a tendency for the companies to shy away from coastal areas,” said Michael Colodney, an attorney who represented six of the 13 companies when they pushed for the legislature to create the incentive program.

Colodney said companies are concerned that too much exposure in those three counties could make them vulnerable to hurricane damage claims.

Under the expansion program the legislature passed this year and awaiting Crist’s signature, insurers who already have received the loans may renegotiate their loan agreements and avoid a loan penalty increase if they don’t write enough new business. The loan payments for the six insurers falling short have been increased to 9 percent.

Crist has not made a decision on expanding the program, his spokesman Sterling Ivey said, but he has raised questions about where the money will come from.

”He does have concerns about taking the money from Citizens,” Ivey said.

Crist was unaware that the initial round of funding for the program included the money for Privilege, and Ivey said he doubts Crist would have supported such a move.

Hunter, of the Consumer Federation, said he has nothing against Privilege; he just objects to the state funding. The wealthy should have been required to pay more to Privilege and the state funding would not be an issue, he said.

”This is not a smart use of taxpayer money,” he said.