South Floridians turn to alternative home insurance

South Florida Sun-Sentinel–Mar. 10, 2008
By Julie Patel

With major insurers poised to shed more property insurance policies this year, Florida residents will be shopping for alternatives.

Two little-known options expected to become more popular are surplus-lines companies and self-insurance pools.

Surplus lines and condo self-insurance pools aren’t subject to Florida rate regulations, so they may be cheaper. Another perk is that they’re exempt from state fees insurers pass to policy holders. But there are risks. If a major storm hits, surplus-lines policy holders and condominium or homeowners’ groups that self-insure can’t tap the Florida Insurance Guaranty Association fund that helps pay claims when insurers fold.

"They’re extremely complex and not easily understood even among insurance experts," Jeff Grady, president of the Florida Association of Insurance Agents, said of unregulated insurers. "People [considering the option] really need to do their homework or consult with someone who understands insurance."

That’s why a group of condominium associations in Palm Beach County hired a consultant and a risk-modeling company when they formed the Palm Beach Windstorm Self Insurance Trust this year. It was one of the first groups formed under a state law passed last year allowing homeowners and condominium associations to form self-insurance pools for windstorm coverage.

At Mayfair House condominiums on Ocean Boulevard, insurance premiums that more than doubled from about $150,000 in 2006 to $320,000 in 2007 triggered condo fee increases.

"It shocked me," Ray Smith, a retired manager, said about his monthly condo bill, which went from $438 to $648 in two years. If it had gone up any more, he said, "I’d be moving and so would everyone else here."

That’s when Mayfair’s condo board president John Vivenzio, a retired nursing home operator who had experience with health insurance pools, started researching the idea of self-insuring.

"It was becoming economically onerous," said Vivenzio, president of Mayfair’s condo board. "So we began to look for an alternative and started banding together."

Mayfair joined five other condo associations for the pool. Now its share of the pool’s annual windstorm insurance cost is $108,000 — a 66 percent drop. That means no condo fee increases this year.

The pool buys enough backup coverage to pay for $194 million in losses. That’s enough to cover all buildings in the group for an unusually large storm, the kind that is predicted to hit once in 250 years, Vivenzio said.

The trust saves money because "we don’t have a lot of overhead: no corporate jets, brokers, fancy office, or fancy printing," Vivenzio said. "This is an example of what can be done when people band together."

But if several major storms hit and the pool uses up its backup coverage, fees could be levied on all condo owners, Insurance Commissioner Kevin McCarty warns in a letter he has required the trust to send with any marketing materials used to recruit more condos.

McCarty urges individual condo unit owners to make sure they understand potential fees for their building, if a major storm strikes.

"There is no guarantee of accuracy or adequacy in predicting events that have not yet occurred," he wrote. "You, the owner should be comfortable enough with the risk you are undertaking in return for the … savings."

In Mayfair, the fees would be one-quarter of 1 percent of the assessed value of its buildings, which is $39 million or about $437 per resident, Vivenzio said.

There’s a similar risk with surplus-lines companies. Regulators can’t help if the companies refuse to pay homeowner claims or drastically raise rates.

In many states, surplus-lines companies — such as Lloyd’s of London, American International Group’s Lexington Insurance Co., or Nationwide Mutual Insurance Co.’s Scottsdale Insurance Co. — charge more than regulated insurers so they don’t compete.

But in Florida where mainstream property insurers have backed off because of hurricane risks combined with aggressive regulation, surplus-lines companies are thriving and offering competitive rates, said Anita Byer, president of Plantation-based Setnor Byer Insurance.

"They function in a free market so they can reduce rates" in years without hurricanes and raise them after hurricanes strike, she said.

Most consumers purchasing surplus-lines property insurance don’t know that is what they’re buying even though insurers are required to disclose that in the policy, Byer said. Consumers with surplus-lines insurance are typically advised to do so by their agents. Byer said agents in her office recommend that residents or business owners opt for surplus lines when it’s cheaper or rated better. Agents in Florida aren’t supposed to recommend surplus-lines insurers to property owners who have coverage options available with regulated insurers.

Surplus-lines companies sold about 135,000 residential policies with about $330 million in coverage last year, according to data from the Florida Surplus Lines Service Office. Of that, about 23,000 residential policies with about $73.5 million in coverage were sold in Broward, Miami-Dade and Palm Beach counties.

Like condo self-insurance pools, surplus-lines policy holders don’t pay fees that help offset deficits for state-backed storm funds. But taxes for surplus-lines companies are higher than regulated companies and the newest companies are required to have about $15 million in assets to help pay claims.

Agents say that Citizens Property Insurance Corp., Florida’s insurer of last resort, is often cheaper for residential coverage, but that could change after its rate freeze expires in January.Consumers should opt for Citizens either way, said Bob Hunter, insurance director of the Consumer Federation of America.

"There are really safe surplus-lines companies and their reputation depends upon" their customer service and paying claims promptly, he said. "There are other fly-by-night companies that are nothing more than a post office box with no assets and they may grab your money. How do you sort out which is which?"