Senator Mike Fasano Op-Ed on Insurance Rate Regulation and Florida Association of Insurance Agents Chairman Bill Gunter’s Reponse

The following editorial opinion piece by State Senator Mike Fasano was published in the February 10, 2010 edition of the Tallahassee Democrat.  The text of Senator Fasano’s editorial is reprinted below, followed by a response from Florida Association of Insurance Agents Chairman Bill Gunter:

Historic insurance crisis taught us that regulation counts

By Florida Senator Mike Fasano
Published February 10, 2010 in the Tallahassee Democrat “My View” Section

Re: “Insurance Customers Still Deserve a Choice,” (My View, Jan. 26).

Former Insurance Commissioner Bill Gunter’s article makes the case that Floridians are suffering because of what Gunter calls “political rate suppression.” He supports legislation that would allow insurance companies to charge an excessive rate that will “bolster the voluntary marketplace, creating competition and ultimately driving the cost of insurance premiums down.”

As Gunter should recall, however, in the late 1960s the Legislature was dealing with issues strikingly similar to those he described in the Democrat. Only the issue of the day was not homeowners insurance but rather auto insurance. Rates at the time were higher than many Floridians could afford to pay. Although auto insurance was required by law, many residents were going without because they simply could not afford the premium.

Many companies were making the business decision to leave the state because of what they deemed excessive regulation. In response to this epidemic, the 1967 Legislature passed a bill implementing the “California Plan,” which essentially allowed auto insurers to charge excessive rates without regulatory review.

The theory at the time was identical to Gunter’s theory now: Increased competition would yield lower rates and add more companies to the marketplace.

Not surprisingly, that theory proved to be incorrect. Shortly after the California Plan was implemented, the Legislature was forced to reverse course and recommit to regulatory oversight of insurance rates. In fact, Florida’s newly elected insurance commissioner at that time issued a report entitled “A Program to Solve the Automobile Insurance Rate Crisis,” which summarized the issue well.

The proposed solution to it all, in 1967, was to abolish the so called “prior approval” system of rate regulation. If companies could set their own rates without prior approval of the State Insurance Commissioner, then insurance would be available to virtually everyone on the free market and the natural pressures of free enterprise competition would keep rates from becoming excessive.

Not unpredictably, rates went into a dramatic upswing as companies exercised their newfound authority to set their own rates. The public was outraged by the rapidly increasing rates and by the inability of insurance regulators to do anything about them. The public, to a great extent, had identified the California Plan as the culprit in the growing rate crisis. Its fate was sealed, as well as it should have been.

At the time of this report, March of 1977, Florida’s economic condition was similar to what it is today. For many families, bills were piling up and difficult choices had to be made about how to prioritize the household budget. The Insurance Commissioner’s 1977 report again illustrates just how difficult the situation was. Thousands of Floridians were telling him they could no longer afford automobile insurance at the “impossible rates.”

I don’t have to tell Mr. Gunter that families across our state are struggling.

As a former elected official, Mr. Gunter understands the plight of average Floridians who struggle to meet their daily obligations.

How do I know that he understands? Because the report to the Legislature that I have referenced and which so keenly summarized the feelings of thousands of Floridians – the report that is overtly critical of the failed efforts to deregulate insurance rates and offers detailed proposals on how to increase regulation and oversight of insurance companies – was written by Bill Gunter.

Floridians deserve to know that before he became an insurance agent who lobbies the Legislature to allow for unregulated insurance rates that he was once an Insurance Commissioner who, upon winning his first statewide election, told The Boca Raton News, “Our victory is a testimony to the fact that Floridians are ready to insist that effective action be taken to correct the upward spiral in insurance rates – a message that must be heeded and a mandate that must be obeyed.”

In his report to the Legislature, he even described the insurance industry and its lobbyists as “vested beneficiaries of the status quo” who are “highly organized” and “well-heeled.”

It is appalling that someone who had the foresight to warn of special interests trying to improve their bottom line on the backs of hard-working Floridians would himself become one of those special interests.

A lot has changed since 1977. But many things remain the same. Florida’s families deserve to know that their elected officials are listening to them. It wasn’t that long ago that Mr. Gunter said he would work to make sure insurance companies did not charge excessive rates. He spoke of “a mandate that must be obeyed.”

Sir, that mandate is still in place, and I for one will learn from history and do everything in my power to make sure it is not repeated.

Mike Fasano, R-New Port Richey, is President Pro Tempore of the Florida Senate. Contact him by email at fasano.mike.web@flsenate.gov.

 

Below is a response from Florida Association of Insurance Agents Chairman Bill Gunter:

 

Florida Association of Insurance Agents
3159 SHAMROCK SOUTH
P.O. BOX 12129
TALLAHASSEE, FLORIDA 32317-2129
TELEPHONE: (850) 893-4155
FAX: (850) 668-2852
WEB SITE: http://www.faia.com

BILL GUNTER,FAIA CHAIRMAN
Rogers, Gunter, Vaughn Insurance, Inc., Tallahassee

February 8, 2010

The Honorable Mike Fasano
Florida Senate
404 Senate Office Building
404 South Monroe St
Tallahassee FL 32399-1100

Dear Senator Fasano:

First, I want to thank you for taking the time to share your thoughts regarding the Consumer Choice bill for property insurance. While we may not agree on the best solution, I’m sure we can agree that Floridians deserve both the lowest possible premiums and an insurance company that can pay their claims after the wind blows.

You mentioned my previous status as a public official. I am very proud to have been elected to serve the people of Florida in the US Congress, as a member of the Florida Senate, and, critical to this issue, as State Treasurer and Insurance Commissioner for twelve years, beginning in 1976. It was in this last capacity that I, like you, developed an appreciation for quotes from Winston Churchill. While you chose to quote his advice to learn from the past, I think the following from Churchill is more applicable to the current system you have created for Florida’s property insurance market: “However beautiful the strategy, you should occasionally look at the results.“

So, let’s review the results of the current system. First, an often overlooked fact-the current “strategy” is not only failing to keep homeowners premiums down, it also unjustly overburdens less fortunate consumers who can’t afford a home at all by levying assessments on their auto, rental dwellings or mobile homes, apartment, small business, and other insurance policies. There is also an additional tax on all those living inland and even those who have invested in mitigation to protect their homes and families. And, we all pay twice when commercial policyholders pass their assessments down to the consumers who buy their products. These are the overwhelming, often forgotten, majority of the consumers, which your current system has ignored. Statewide, around 83 percent of “homeowners” are not insured in Citizens. Even in counties with record numbers of Citizens policyholders (such as those you represent), non-Citizens insurance customers are the majority-and they are taxed “mostly” to subsidize those living nearest the water. This “majority” has become increasingly vocal about assessments they don’t deserve and that often exceed the rate increases your strategy has failed to curtail.

As you pointed out, in the late 1970s, as an elected official, I opposed the deregulation of automobile insurance. I oppose it today. But, your letter implied that such a stand was inconsistent with my support of the Consumer Choice bill. Let’s be clear, if today’s homeowners market was the same as the “auto” market in the 1970s, not only would I be opposed to any deregulation for property insurance, but…Floridians would all be much better off. I think you know that neither today’s homeowners market nor the Consumer Choice bill by Senator Bennett and Representative Proctor bear any resemblance to the problems we addressed with no-fault automobile insurance in the 70s. In fact, I’m sorry to say, Florida’s homeowners market is so much worse that, in my opinion, if the “big one” hits, it will create a catastrophe beyond anything we could have imagined 30 years ago, or today for that matter. And, the real tragedy would be seen in the financial aftermath created by the current property insurance scheme.

With auto insurance three decades ago, the large out-of-state carriers were “threatening” to leave. Today’s out-of-state homeowners carriers have already left. And the largest remaining, State Farm, is non-renewing 125,000 policies after being granted a premium increase of 42 percent (14 percent in base rate plus 28 percent through elimination of credits) for those it is still willing to insure. This was “agreed” to, in part, because State Farm reported a net underwriting loss of $331 million, according to Office of Insurance Regulation (OIR) reports. As an aside, I understand you are insured by State Farm. Please tell me, is a 42 percent increase in premium the “result” you were seeking with the current strategy? Is it the “result” that over 700,000 other Florida State Farm policyholders were promised when you voted for and implemented HB 1A in 2007? It’s certainly not the result I would’ve wanted when I was Insurance Commissioner.

Maybe some Florida policyholders, your constituents perhaps, are happy with their homeowners premiums; my clients are not. Consumers, particularly those who own property near the coast, are upset about the price of protecting their home and possessions. But, there are other problems which, up to this point, have not been given the full airing Florida consumers deserve. They are:

• Without a single hurricane in four years, a period of time in which the state (Citizens) and all insurance companies should’ve been building their surplus, more than half of the insurers are showing losses and many have serious depletions of surplus. Commissioner McCarty reported to your insurance committee that 102 of 210 insurers had net underwriting losses.
• Citizens’ rates, according to its own actuaries, are between 40 and 50 percent too low. Some might say that is “political rate suppression.” Citizens will add another layer of assessments to the “undeserving” majority with even the smallest of hurricanes striking in south Florida.
• The state’s top two carriers (Citizens and State Farm Florida) insure almost two million structures, and neither is on sound footing. But, the next four largest writers insure nearly 800,000 additional Floridians, and…they are all losing money. That’s nearly half of Florida’s policyholders insured by carriers that are struggling…even without a storm!
• Several companies have folded recently-Coral Insurance went bankrupt last year. Now, Magnolia, the twelfth largest property insurer in the state with more than $24 billion in exposure, including 44,000 policyholders in Palm Beach, Broward, and Miami-Dade Counties, has been taken over by regulators. Additionally, American Keystone was declared insolvent late last year and is currently being liquidated.
• Our commissioner has referred to the current reports from companies as “dire.” In what I believe is an attempt to keep these “dire” reports below the public radar, the OIR is brokering deals to have some companies absorb the policies of others that are falling behind, such as Edison and Magnolia. But, it is also communicating with a number of additional companies with concerns over their ability to pay claims.
• One recently insolvent company, American Keystone, had been approved by the OIR despite connections it had with a convicted felon, the former head of another collapsed insurer.
• Rate suppression has led to 44 of Florida’s top 73 property insurance writers posting net underwriting losses.
• I recently visited with 17 insurance companies, every one of which posted net underwriting losses. Coincidentally, several had filed and received OIR permission to increase their rates 14.9 percent. First, why would the OIR approve increases if they weren’t deserved and needed? Second; why 14.9 percent and not 20 percent or 15.1 percent or something else? I was told that it’s because at 15 percent a public hearing is required and “…the OIR would like to avoid that if possible.” Again, some might call that political rate suppression.

Soon, the 2009 figures will be out. I believe they will reflect even more dire “results.” Rate increases, non-renewals, net underwriting losses, and…we have not had a single major storm in over four years! What’s being done to protect Floridians after the wind blows? The Consumer Choice bill is one answer. But, I would gladly welcome any proposal you have to offer as well.

Keep in mind, one of the big differences between today’s homeowners market and the auto market you compared it to over 30 years ago, is that homeowners today have a public option insurer with suppressed rates; Citizens. It provides essentially the same coverage as private carriers and is one option under the Consumer Choice bill. Your current system leaves consumers the choice of either “Citizens” or a hundred or more private carriers who might not survive the next storm, which, if they do survive, will be assessed to pay the losses of the public option insurer, Citizens. That’s not a choice…it’s a Ponzi scheme.

When I was insurance commissioner, sometimes, despite my best efforts, a carrier would fail. But…I knew I had done all I could to keep that from happening. The “results” stated above, and to some extent in your letter, seem to reflect the opposite philosophy of…”Who cares if they fail?”

Remember the information I have shared in this letter is all verifiable with data from the OIR and the National Association of Insurance Commissioners (NAIC). I take seriously my responsibility as an agent to advise my clients as to which companies will pay their claims. But, agents like me are losing faith in the regulatory system that is producing the “dire” figures above. I cannot continue to explain to my clients which company they can trust to make good on its promise and which one might fold after the “big one.” But frankly, isn’t that the state’s job, the OIR, the Legislature, perhaps? So, I must ask you, which company would you advise someone to buy insurance from, one of the 102 the commissioner says are showing “dire” results or the one the state has given a lower price and, through assessments, a guarantee of claim payment?

Senator, I ask that you and your colleagues at least look at some of the proposed solutions to this pending crisis with an open mind. Under the Consumer Choice bill, consumers can choose from a solvent carrier or go to Citizens; what’s wrong with giving them that choice? If you have a proposal that will guarantee the “insurance promise” of payment of claims, perhaps we can work together to get it implemented. After all, Churchill’s wisdom applied to Florida’s insurance system would be that our strategy may have been “beautiful,” but the people of Florida deserve better “results.”

 

Sincerely,

 

Bill Gunter, Former Insurance Commissioner
Chairman of the Florida Association of Insurance Agents