Some answers for Florida homeowners

Miami-Herald–Posted on Mon, Feb. 11, 2008

The Florida Senate committee hearings on property insurance may have uncovered more questions than answers last week. Lawmakers still are searching for ways to stabilize insurance rates for Florida homeowners. More hearings may come soon.

Yet it is clear that the Legislature’s reinsurance program worked to lower rates, at least with some insurers. Other insurers, though, took advantage of the same program and requested massive rate hikes based on unapproved hurricane-loss models.

Allstate Floridian is in the latter category. Last year, the Legislature expanded the Florida Hurricane Catastrophe Fund to offer insurers low-cost back-up insurance, called reinsurance. The law required insurers to pass on the savings to customers.

Higher losses calculated

At the hearing, Allstate executives said savings weren’t passed on because rates were still too low. They raised concerns about warmer sea temperatures causing increased hurricane activity, which were factored into the hurricane-loss computer model they used. The model focuses on a short time horizon, which includes the hurricane seasons of 2004-2005.

Of course, such a model will calculate higher losses and rates — like the 42 percent rate-hike requested by Allstate and rejected by state regulators. The model is not approved by the state.

Yet the science of hurricane activity is not settled. A recent study by South Florida researchers concluded that global warming, in fact, is lowering the likelihood of hurricanes striking Florida and the rest of the United States, as happened in the last two years. Will Allstate and other insurers factor this data into their models to lower rates?

A mutual need

In fact, there is good reason to set insurance rates on longer time frames. The results even out the abnormal years, such as 2004-2005, over periods in which few, if any, hurricanes hit. This is what insurance is supposed to do. Policyholders’ premiums pay for years in which there are few claims. Insurers build surpluses and buy reinsurance to cover catastrophic events.

The reality is that residents and insurance companies need each other. No one should begrudge insurers making a reasonable profit — that is why they exist. But insurers also need to play by the rules.

The example here is American Strategic Insurance of St. Petersburg. The 10-year-old company has seen good and bad years, including 2004-2005. Yet it cut rates an average of 24 percent by passing on the savings from the state reinsurance program and even from cheaper private reinsurance. It did not use short-term models, either. ”We’ve managed to get along pretty well,” CEO John Auer said. This is a model for others to follow.