Miami Herald Editorial: Insurance consumers win one — at a price

The Miami Herald published this article on December 21, 2009

Florida’s consumers scored a significant victory last week when State Farm dropped its threat to walk away from this market. The company decided instead to continue to write policies under a much smaller rate increase than it first requested — or should we say demanded?

There’s a big difference between the 47 percent rate hike that State Farm originally wanted — actually, “north of 60 percent,” as Gov. Charlie Crist noted in an interview with The Miami Herald Editorial Board — and the average 14.8 rate increase negotiated by Insurance Commissioner Kevin McCarty.

The smaller increase will mean a big savings for Floridians, and not just for those customers who have property and windstorm policies with State Farm. Everyone with non-commercial properties benefits from this decision because a huge rate hike for State Farm would have cleared a path for every other company to ask for the same.

In truth, the reduction in the rate hike is not the heart of the matter. The more important victory consisted of obliging State Farm to justify its rate increase, which the company failed to do. That’s why the rate increase approved by the state is substantially lower.

Rates have to be actuarially sound — they have to reflect real risk. We get that, and so do policyholders who want Florida to have a reasonable, stable home insurance industry. But that shouldn’t be a license for gouging. Mr. McCarty, backed by Gov. Crist, performed a valuable service by playing hardball with State Farm and doing the work necessary to make the company justify the numbers.

That’s all Florida’s consumers have been asking for — an honest accounting and a process that does not presume that the sky’s the limit for insurance rates.

While this offers a measure of relief for Floridians, State Farm’s customers will still feel a pinch.

A rate increase of 14.8 percent “ain’t peanuts.” In addition, State Farm is dropping its discretionary discounts, which is going to raise rates for some by an estimated 25 percent or more. And the company will drop 125,000 policyholders that it considers too risky. In all probability, that will hit South Florida harder than other parts of the state.

For the moment, state-mandated discounts for the purpose of mitigation — installing shutters and other forms of protection against hurricanes — will remain in force. Legislators should not renege on the public mandate for these discounts.

Homeowners who went to the expense of hardening their homes were promised a discount as an incentive. Many Floridians who want to feel safer during storms are considering mitigation. To take away this carrot now would prove counter-productive. The incentive program has shown positive results and should remain in force.

Commissioner McCarty was right: “A smaller, leaner State Farm is better than no State Farm at all.” The story of property insurance in the post-Andrew era, however, is one of consistent efforts by the industry to shed risks and raise premiums. We don’t expect that to change, so it’s up to state regulators and elected officials to remain vigilant and make sure consumers get a fair shake.