I recently received an email from a Florida “snow bird”. If you’re not familiar with the term, it refers to people who make their home in two places. In the warm months, they make their homes in northern climates, such as New York, New England, and Canada. When the snow starts to blow (or in the case of my grandparents, no later than October 15), they pack up their car, truck, or RV and migrate to Florida.
Some live in their RVs in a RV park where they pay for lot rent for the season (many of them actually leave their RVs in place all year round. Others own manufactured (mobile) homes in a manufactured home community. Still others have frame or masonry homes in neighborhoods. For as long as I can remember, my father’s parents lived in a house in Zephyrhills, Florida and when they got bored of that, they bought an RV to split their snow bird time between Florida and Arizona. My mother’s parents for several years had a home in Florida, too.
I have to get back to the Assignments of Benefits (AOB) discussion because it is that important. I’m not the only one talking about it. Our Southeast Editor, Amy O’Connor, reminded us recently just how long this topic has been an issue. If you haven’t read it yet, I recommend her article, Will 7th Time Be the Charm?
You might be thinking that you don’t live in Florida and you don’t do business in Florida. My response is that these kinds of issues don’t stay in one place very long. In Florida, we have seen the issue of Assignment of Benefits abuse migrate from southeast Florida to the rest of the state. The issue will migrate out of Florida to other areas.
I just had the opportunity to watch Florida Insurance Commissioner, David Altmaier, speak to the Florida Senate Committee on Banking and Insurance. You can watch the video at thefloridachannel.org. The Commissioner begins to speak at about 5:30 and he’s speaking for only about 10 minutes. He responds to questions starting around 52:40. I want to bring to light some statistics that he shared, and I think are particularly important.
He mentioned some interesting data compiled by the Florida Office of Insurance Regulation (OIR). We are dealing with claims related to water. This could be a leaking pipe or a leaking roof. It wouldn’t be flood because we all know that flood is another issue that requires a whole other soap box.
From 2010 to 2015, the number of water claims rose from about 140 for every 1,000 policies to 195 for every 1,000 policies.
From 2010 to 2015, the number of those claims that were accompanied by an AOB rose from about 5% of those claims to about 16% of water claims.
You might be saying that doesn’t sound like a lot of claims and it doesn’t sound like a lot of AOBs and that’s fair. Let’s look at those numbers in a slightly different light.
In 2010, approximately 868,000 water claims were filed around the state.
In 2015, approximately 1.2 million water claims were filed around the state.
In 2010, approximately 43,400 of those water claims included an AOB.
In 2015, approximately 193,000 of those water claims included an AOB.
The other problem with Assignments of Benefits is that when there is one attached to a claim, the value of the claim payout goes up. Let’s go back to the OIR’s numbers. The numbers we are looking at include the indemnity payment (what goes to the insured, or insured’s assignee) and the loss adjustment expense (the money that it cost the insurance company to handle the claim).
In 2010, the average water claim cost insurance companies about $10,000.
In 2015, the average water claim cost insurance companies about $13,000.
Now let’s compare that to our previous numbers.
If the 2010 average water claim was about $10,000 and there were about 868,000 water claims, the total that insurance companies paid out was about $8.68 billion.
If the 2015 average water claim was about $13,000 and there were about 1.2 million water claims, the total that insurance companies paid out was about $15.6 billion.
These numbers don’t include losses related to other major causes of loss, like fire or hurricane. These are just the water losses, which have been largely leaking pipes.
You might still be thinking that it’s no big deal because insurance companies receive money in premiums to pay out in claims. That’s right, but the more claims that insurance companies pay, the less money that they have for other things.
What do insurance companies spend money on?
They pay claims. We already talked a little about that.
They pay people. Insurance companies employ a lot of people. There are underwriters and claims adjusters. There are actuaries and bookkeepers. There are administrative professionals and executives. There are a lot of people that work at insurance companies and many of them work there because they love what they do and who they get to work with. But they also do it because they get a paycheck. By the way, the agent that sold the insurance policy also gets some of this money. They aren’t employed by the company, but they represent the company to the public.
They pay for stuff. Like any other business, insurance companies need offices and desks and printers and all of that stuff. Yeah, they like to have a nice place to work. Don’t you?
They set aside some money for later. People may not believe it, but sometimes more money has to be paid out than what the company takes in during a year. That’s why when there’s extra money, some of that goes to making sure that there’s money for a rainy day (so to speak). Whenever there is extra money during a year a percentage goes to what is called policyholder surplus. What’s that for? It’s for the policyholders if the company needs it to pay their claims. Another way that insurance companies set aside money for later is by purchasing reinsurance or by securing other ways to finance future losses.
They set aside some money for profit. Yes. Insurance companies want to make a profit. Yes. Insurance companies do a public good by financing the losses that the rest of us can’t afford by ourselves. I’ll also agree that the attorneys out there that represent insureds also want to do good for society to help insurance companies to live up to their promises, but let’s not fool ourselves. Insurance companies, attorneys, public adjusters, contractors, and everyone else involved in the process is also looking to make some money.
What happens when the cost for claims goes up? Remember that insurance is priced based on an estimate of what it will cost the company to provide it, subject to what the market will pay. So when an unexpected increase in the number and cost of claims happens, the cost of insurance goes up in the future. When that happens, all consumers lose because of the actions of a few that are gaming the system for their benefit.
Do we need to fix the system? Yes, we do. It’s broken and when a system is broken, everyone in the system loses.
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