Insurance rate cut may turn into hike

Florida consumers have been told mitigation could be the sure way to reduce insurance costs, but one insurer says it’s killing its bottom line and wants a big rate hike.

BY BEATRICE E. GARCIA
Miami Herald–August 12, 2008

When Edgar Wilson qualified for mitigation credits for his Fort Lauderdale home, his State Farm insurance premium dropped by more than half to $1,467, and he was able to reduce his deductible to 2 percent.

”Now I’m going up and down my street telling my neighbors they can save a substantial amount of money if they mitigate their homes,” says Wilson, who installed a reinforced garage door and finished putting shutters on all his windows.

What Wilson and other policyholders may not know is that State Farm says it needs a 47.1 percent rate increase — and more in much of South Florida — in part because the large mitigation credits the insurer has been forced to pay out have whacked its bottom line.

State Farm will make its case for its rate request at a public hearing Tuesday in Tallahassee.

No one argues that measures like adding shutters or reinforcing roofs make a difference in protecting a home. Indeed, regulators, lawmakers and even insurers have been preaching mitigation for the last three years as the best way to keep insurance rates down. The logic: Reduce the risk, and the cost of protecting that risk will go down.

”Mitigation pays for itself when claims happen,” says Robert Hunter, director of insurance research for the Consumer Federation of America and a former Texas insurance commissioner.

True, but the question for regulators and insurers is how to value that protection.

For instance, are hurricane shutters worth a 30 percent discount on a premium? Is impact-resistant glass just as effective and deserving of the same discount? Should homes with straps or clips to further secure roof trusses to walls get an additional 10 percent off? Or do 10 extra nails for attaching roofing material to panels translate into a 5 percent discount?

The current discounts were originally based on 2002 research. Since then, there have been substantial advancements in building materials and construction practices. In 2006, Insurance Commissioner Kevin McCarty required insurers to double the discounts to give extra relief to homeowners.

These values should be based on extensive, up-to-date research and ”not on numbers pulled out of the air,” says William Stander of the Property Casualty Insurers Association of America, an industry trade group.

State Farm, with about 1 million policies on its books is the largest private insurer of homes in Florida, appears to be on the same page.

”We’re fully supportive of mitigation. But we want the discounts to be appropriate,” says Chris Neal, a company spokesman.

State Farm expects the number of its properties that qualify for these discounts to go beyond 300,000 this year, with some discounts being greater than 90 percent of a windstorm premium.

”These developments have triggered a significant and unanticipated decrease in State Farm Florida’s projected revenue for 2008, 2009, and beyond,” said the company in a prepared statement.

Life insurers and their actuaries have data to show that a nonsmoker is a better risk than a smoker. So, based on this data, rates for nonsmokers are set lower than people who smoke.

That kind of specific data doesn’t yet exist for home insurers.

More research is being done at universities around the state and by the computer modeling firms that forecast hurricane losses. The experience of the 2004 and 2005 hurricanes provided much information that’s being incorporated. Some of it is already being used to set rates, especially at the reinsurance level.

Part of the problem for insurers like State Farm and others is regulators and reinsurers are working with different numbers. Insurers say they’re being required to give bigger discounts by regulators, say for impact-resistant windows, than reinsurers will give them credit for.

John Auer, president and CEO of American Strategic Insurance in St. Petersburg, says he’s required to buy reinsurance — that’s insurance for insurance companies — for a higher amount of risk because the reinsurers value mitigation features at a lower level.

American Strategic tries to offset this by insuring more newer homes than older ones. It also charges higher rates for the older homes.

When losses are estimated by a modeling firm like AIR Worldwide, it considers the current average building stock, which already includes newer buildings and older ones with mitigation measures already applied. The risk should change only when one more home installs shutters or puts in new doors, says David LaLonde, the firm’s senior vice president.

However, insurers are being required to give many homeowners credits for mitigation measures already installed. That’s why there is a disconnect between how insurers and reinsurance companies value the mitigation measures and how regulators require insurers to apply the discounts.

There’s no denying that consumers are taking the mitigation message to heart and acting on it.

Citizens Property Insurance, the state-run company and the largest insurer in Florida, says in the first three months of this year, it issued credits totaling $85 million. That’s up from $60 million for all of 2007.

Susanne Murphy, Citizens’ executive vice president, says the company did see that new homes with mitigation fared better in the 2004 and 2005 storms than older homes.

The Property Casualty Insurers Association of America has launched an ad campaign to further educate consumers about the importance of mitigation. ”Discounts are important, but they’re not the No. 1 reason for making our homes stronger,” Stander says.

The big savings for consumers come when they avoid paying the deductible, which can be as high as 10 percent of a premium, because damage after a storm is minimal or nonexistent.

Coral Insurance has found mitigation discounts can reduce the windstorm premium on some of its policies by as much as 50 percent. The Hollywood insurer prefers to insure what it calls ”golden oldies,” older homes that have been renovated and upgraded to meet today’s stricter building codes.

Of course, only a hurricane will really test if mitigation measures are valued correctly, says Robert Meyers, Coral’s president.