If Citizens Property Insurance raises rates, private insurers likely to follow

The company’s decision on whether to pursue dramatically higher rates for new policies will be felt far beyond the company’s 1.43 million customers, including the 90,000 in Sarasota and Manatee counties.

Private home insurers have curbed price increases in recent years to stay competitive with state-run Citizens, a development that is causing widespread displeasure in the industry.

Still, private home insurance companies filed 74 requests with state regulators to increase rates in the first six months of 2012. The majority also still exceed the 10 percent annual increase Citizens is allowed by law. One Allstate affiliate wants a 33 percent boost, while State Farm is seeking 15 percent.

But insurance executives increasingly worry that their rates are rising too rapidly compared with those of Citizens, which writes more policies than any other company locally and statewide. Some are seeking smaller price increases to ensure they do not lose business to the government insurance giant.

Florida’s fourth-largest home insurance company, St. Johns, initially asked for a rate boost of less than 1 percent last year even though regulators said 43.4 percent could have been justified. Regulators pointed to Citizens’ rates as the limiting factor in St. Johns’ decision.

That Citizens partly acts as a brake on statewide property insurance rates is not widely understood by Florida home insurance customers, 77 percent of whom are not covered by the government insurer but may still pay less because of its cap on increases.

This dynamic is at the heart of a growing debate over Citizens’ proper role in Florida’s home insurance market, and what kind of rates the company’s board should approve.

Private insurance executives closely track Citizens’ rates and argue that the company should lift its 10 percent cap on increases.

“If I buy reinsurance at a certain price with a certain book of business and lose 30 percent of my book to Citizens because my rates are higher because my costs are higher, I have lost a lot of money,” said Tom Jerger, who runs two small Pinellas Park property insurance companies.

Jerger said Citizens charges too little because it does not buy enough reinsurance to cover a massive hurricane, relying instead on the ability to tax insurance products throughout the state to cover any shortfall.

Gov. Rick Scott and many state leaders agree. They worry that Citizens is absorbing too many policies and they want to force customers out of the company by raising prices and decreasing coverage.

But some consumer advocates say private insurers already charge too much because of accounting gimmicks that inflate their costs.

Lifting Citizens’ rate cap could encourage private companies to charge even more than is warranted, said Jay Neal with the Florida Association for Insurance Reform.

“If Citizens raises rates more rapidly, then the private market will as well,” Neal said.

The ripple effect on the economy, he said, could be “huge.”

Property insurance is now a more pressing issue for many homeowners than property taxes, which declined along with real estate values during the Great Recession.

Just a 10 percent increase in statewide home insurance premiums would cost Floridians another $1 billion annually.

Property insurance rates are on the upswing again in Florida after a brief reprieve under former Gov. Charlie Crist.

Crist pushed a series of reforms in 2007 that expanded Citizens, froze the company’s rates and forced all property insurance companies to buy more cheap reinsurance from the state, decreasing their expenses and the need for rate increases.

The result: Statewide home insurance rates declined in 2008 after years of steady increases.

The average statewide rate for the most common homeowner’s policy dropped to $1,390 in 2008, down from $1,534 the year before, according to data compiled by the National Association of Insurance Commissioners.

Prior to the 2008 dip, home insurance rates had increased 65 percent over the previous four years.

But insurance companies were not happy with the reforms and fought back.

Responding to insurance industry complaints, the Legislature replaced Citizens’ rate freeze in 2009 with the 10 percent “glide path.”

Statewide home insurance rates began increasing again, rising 5 percent statewide in 2009.

The NAIC has not released data for 2010 or 2011 yet, but rates almost certainly rose more dramatically over the last two years as private insurers looked to make up for lost ground.

Castle Key Indemnity Company, one of Allstate’s Florida subsidiaries and the state’s seventh-largest home insurance company with 128,377 policies, boosted rates by 36 percent in 2011. Universal Property and Casualty, the state’s second-largest insurance company with 567,187 policies, had a 15 percent rate hike.

Last year 50 different insurers received approval from the state Office of Insurance Regulation to increase prices for the most common type of homeowner’s policy beyond 10 percent.

But some companies asked for much smaller increases, and even the larger rate hikes may have been tempered by Citizens.

Florida Insurance Commissioner Kevin McCarty noted in a speech last year that St. Johns could have requested an increase of up to 43.4 percent.

“Companies must lower their prices to compete with Citizens,” McCarty told insurance industry leaders gathered at a conference in Miami, according to a transcript of the speech posted on an industry website.

McCarty said competition from Citizens is not good for the home insurance market. He said regulators have forced private insurers to accept larger rate increases than initially proposed because they needed the money. That included St. Johns.

Neal, of the Florida Association for Insurance Reform, said Florida home insurers hide profits and make their balance sheets look weak to justify rate increases.

“They’ll always set up their insurance company entity to break even or lose money so they can submit a rate filing,” Neal said.

A 2010 Herald-Tribune investigation found that overhead costs for property insurance companies in Florida are 50 percent higher than the national average. Insurers funnel money to affiliated companies that handle almost every aspect of the business but are not subject to strict regulatory oversight and profit limitations.

These affiliated management agencies can make huge profits even as the main company declares a loss.

Competition from Citizens could force some insurers to be more efficient and move less money into unregulated entities.

But Citizens was set up to take policies private that insurers do not want, not compete with the private market, said Sam Miller with the Florida Insurance Council.

The deck is stacked in Citizens favor, Miller said, because the company does not pay taxes or buy large amounts of reinsurance.

“Competition is good, even when it hurts some private carriers, as long as you have real competition,” he said.

Others say Citizens acts more like a traditional insurer then Florida’s private companies, socking away huge sums of cash in years with no storms. Citizens’ surplus is now large enough to handle all but the most catastrophic hurricane without resorting to taxes on insurance policies statewide.

In contrast, private insurers have added little to their cash reserves despite an unprecedented six years without a hurricane hitting Florida. Instead, they buy vast amounts of expensive reinsurance from unregulated offshore entities and pass the cost on to consumers.

“They buy reinsurance from affiliated companies,” Neal said, decrying the insurers’ “accounting tricks.”

“If Citizens is allowed to jack up rates because of political pressure it might be a way for some of the private carriers to get stronger,” Neal said. “But it’s an awfully tenuous conclusion.”

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