Summit: Curb On Higher Rates Could Push Insurers Out of Florida

The Tampa Tribune–February 25, 2009

By RUSSELL RAY

State Farm won’t be the last property insurer to pull up stakes in Florida if insurance companies aren’t allowed to charge their customers higher rates, industry experts said Tuesday.

During a property insurance summit hosted by the Florida Chamber of Commerce, participants urged Florida lawmakers to reduce the state’s regulatory grip on homeowner rates and find a way to fully fund Florida’s Hurricane Catastrophe Fund. Without those changes, more property insurers will join State Farm on its path toward insolvency, they warned.

“Solvency means everything,” said Steve Pociask, president of the American Consumer Institute’s Center for Citizen Research. “Without solvency, insurance doesn’t work. Without solvency, there is no reason for consumers to buy the policy.”

When states pass laws designed to keep premiums “artificially” low, as Florida has, the availability of insurance inevitably declines, Pociask said.

“Insurance companies begin to leave the market and stop writing new policies,” he said.

State Farm requested to raise in homeowner rates 47 percent on average statewide, saying it is losing $20 million a month in Florida because its rates aren’t high enough. Without a rate increase, the company said it would be insolvent by 2011.

But Ed Domansky, spokesman for Florida’s office of Insurance Regulation said in a phone interview that if the state had allowed State Farm to raise rates the requested amount, some homeowners would have seen their premiums rise to unaffordable levels, as high as 90 percent in some parts of Florida.

“The office reviews these companies for solvency,” Domansky said. “You can’t have a totally free market when mortgage companies require that you have property insurance.”

Domansky said his office, which rejected State Farm’s request, wasn’t invited to the two-day summit at Walt Disney World’s Grand Floridian Resort.

Guy Marvin, president of the Florida Insurance Council, which represents Florida insurers, told summit participants several smaller Florida-based insurers are willing to absorb the more than 700,000 homeowners policies State Farm plans to cancel over a two-year period beginning in November.

“These companies are for-profit companies. If they believe they can make a decent return and match return to the risk, they will be in business in Florida,” Marvin said.

But those companies will need a reliable source of reinsurance, backup coverage for insurance companies, Marvin said. Under state law, Florida insurers must buy a certain amount of reinsurance from the state’s Hurricane Catastrophe Fund. The problem is the cat fund is obligated to pay out $29 billion but only has $10 billion in the bank.

Given today’s tough economic times, the cat fund may not be able to borrow the money it will need to pay insurers’ claims after a major hurricane.

“This is something that has to be addressed if the market is to function here in Florida,” Marvin said. “There are all kinds of rumors about fixes. Most of them have to do with trying to get some type of a federal backstop.”

After State Farm announced last month plans to drop 1.2 million policies–including homes, condos and rental units–lawmakers introduced legislation that would limit the number of policies a company can drop each year. Such a moratorium, however, would prevent insurers from managing their risk, Marvin said.

“The moratorium is a bad idea. It’s one that cannot move forward,” he said.