From Cuba to Capitol Hill

June 4, 2007

Not your typical agent: Big “I” President and Miami independent agent Alex Soto in a one-on-one interview

Alex Soto, president of the large InSource agency in Miami, and president of the Independent Insurance Agents & Brokers of America, is not afraid to speak his mind or criticize his own industry. He’s familiar with the continuing insurance crisis in Florida, and his personal story of fleeing Cuba and getting into the insurance business is not typical. Soto spoke with Insurance Journal’s Andrew Simpson at last month’s IIABA annual legislative conference in Washington, D.C. The following are excerpts from the complete video interview, which may be viewed at www.insurancejournal.com.

Your story of entering this country and the business may not be typical. Could you would share it with us?
Soto: My family and I fled communist Cuba when I was 11. We didn’t speak any English, came as political refugees to this country and had to start our lives completely over, learning the language, customs and assimilating. But this is … probably the most accommodating nation in the world that gives people opportunities to progress and shine.

I went to Florida State University, where I met my bride, Pat. I was waiting around a bit for law school and was hired by a great individual who eventually became my mentor, Tom Pennekamp. He hired me when I was in graduate school, and I came back to Miami and joined his agency, Pennekamp Insurance Agency.

Eventually, the agency changed its name to Pennekamp & Soto. I became a partner, and when he got ready to retire, I bought out his interest. Had some good friends in town that had similar sized agencies, so we merged them and created what is now known as InSource.

InSource is a general agency, but it’s larger than the average Big “I” agency. We have about 60 employees, two branches, and do all types of insurance. It has been a wonderful ride, a wonderful opportunity to get into this industry and this career as an independent agent.

What did you and your family leave behind in Cuba?
Soto: Well, we left our homes. My father was an attorney. You really could not practice in the United States because Cuba follows a Napoleonic code, whereas in the United States we follow precedent and common law. So he would have had to study all over again. He also had a difficulty with the language.

We left our home, our property, certain members of our family. It’s been now 48 years, and I have never gone back because it is against my principle to leave any money that will prop up a communist regime. Cuba is a 100 miles from Miami — and these strings draw me to my land of birth. My family got to Cuba in 1513, so we have a long and deep history of being involved with the island, but we will be back.

Now I’m an American through and through. I’ve been here 48 years, and I really, truly love this nation with every fiber of my body. I respect and admire the constitutional process and the freedoms that we have. Would I have a second home in Cuba, travel back and forth? Yes. I would love to have a piece of property in the land of my birth.

There has been negative press over unsettled Katrina claims. What do they say about how our industry handled Katrina?
Soto: I’m glad you asked about that. The reality and perception are worlds apart. The reality is an overwhelming majority of the Katrina claims have been settled. Surveys indicate that the majority of people are satisfied with the way they were treated and the way they were paid.

If you, on the other hand, listen to the press and to the people who are getting in front of the microphones, it is a constant barrage of criticism, of hyperbole, that seems to almost tell the story that almost no one has been paid, and that everyone is very dissatisfied.

If I have one criticism of our industry, it is that we have not done a very good job of getting the story out, the real story, which is our industry had an obligation — a legal and moral obligation — and just as with 9/11, we have fulfilled that obligation to the overwhelming majority of the residents and the policyholders. Sure, there are a few dissatisfied, there are a few claims that are in dispute, but they are a very, very small group of them.

What is the effect of that perception that things were just not handled correctly?
Soto: It can be very dangerous and harmful. If you have an industry that is wrongfully perceived to be an industry that has not performed and has mistreated the people that they have a responsibility to, it becomes much easier to enact onerous and, quite frankly, legislation that is injurious not just to the industry but ultimately to the clients and consumers that it serves.

Is that some of what’s happening in Florida?
Soto: It’s not only happening in Florida but it’s happening in Congress. There are debates and discussions, for example, on the repeal of McCarran-Ferguson. The discussion of repeal is an offshoot of one thing: to punish an industry, and particularly a few large insurance companies, that in the eyes of those elected officials behaved badly. The irony is that eliminating McCarran-Ferguson does exactly the opposite. It favors and it helps the large companies to the detriment of the smaller, the regionals and the super regionals.

McCarran-Ferguson allows … insurance companies to share historical loss data, which then allows smaller companies to get to the level of the law of large numbers. Smaller companies rely on this aggregation of information to go into particular geographic areas and difficult-to-write lines of insurance. Once that’s taken away, they will withdraw. When they withdraw markets, you have less competition. When you have less competition, you hurt the consumer.

Do the politicians understand or even care about that argument?
Soto: They’re beginning to, even the ones who wanted to punish the industry and punish large insurance companies, primarily some direct writers. We have indicated to them that they are doing precisely the opposite.

Those very large companies have enough individual homogeneous units to look at, so they can set their own rates with confidence. What is going to hurt is the withdrawal of smaller regional companies. So you’re actually helping those that you wanted to hurt and hurting the ones that had no guilt or involvement.

What’s the solution in your home state of Florida to the property insurance crisis?
Soto: Very complex. The populous is hurting because insurance companies are withdrawing; prices are going very high. We’ve got to build stronger buildings and residences. Even more important, we have to make it easy for our citizens to retrofit existing homes. If you change the building code in Florida to make it the strongest in the nation, you still have a large inventory of 99 percent of buildings that were not built at that code. So along with new construction codes, we need to do a tremendous amount of research, work, encouragement, tax credits to allow citizens and show them how to retrofit and strengthen their homes. When they do that, losses will come down, companies will return and premiums will abate.

Unfortunately, Florida has gone in the other direction. It has passed punitive measures against a few insurance companies that have remained. The government of Florida, in its infinite wisdom, has put itself and its citizens at great risk and at great peril. The largest insurance company in Florida is us, the Floridians. We are gambling with our economic future; we are gambling with our own well-being. We’re praying and hoping for a benign hurricane season. If we do not, we will be paying for these mistakes for a long, long time.

Some of those solutions look to the long term. Yet there are Floridians who are suffering now, not able to find coverage. How do you solve that immediate problem?
Soto: That’s what Florida tried to do, to immediately mandate lower rates and order insurance companies to roll back their rates. Unfortunately, there are no easy solutions. We have a thousand people moving in every day to the peninsula of Florida. We’re building closer and closer to the water. Construction costs continue to go higher. Those problems cannot be solved by simply dictating that an insurance company charge half of what it should charge. Letting rates seek their own level and having competition drive them down is the solution.

We as an association are a proponent of an ultimate federal solution. We ought to engage at least in a study of what are the better solutions for the coastal natural disaster problems. We need to expand that discussion to include flood, earthquakes and other natural disasters. I suspect that the federal government could and should provide a reinsurance mechanism, where it sells, not gives away, but sells reinsurance at actuarially sound rates to the states.

Independent agents have supported an expansion of the limits of the federal flood program and a federal terrorism insurance backstop. Now you’re arguing also that some federal program should at least be studied. How do you square that with a general opposition of the association to government involvement in the business?
Soto: That’s a wonderful question because we believe in free enterprise, but there certain circumstances, and we can take them very quickly one at the time …

For example, TRIA and terrorism really don’t lend themselves to the mechanisms of underwriting. No. 1, there are not a sufficient number of homogeneous units to observe to pick what the cost of insurance ought to be and do an appropriate underwriting.

No. 2, when insurance companies underwrite a risk, they get a great deal of information on the particular peril. For example, for fire insurance, they want to know where the fires occur, where the problems occur in terms of maybe wiring, and do a complete study of the underpinnings of the risk.

When it comes to terrorism, a lot of the information that the insurance companies would like to have to be able to underwrite it is secret information, [which] the intelligence agencies of this country are not going to want insurance companies to have, such as activities by people who want to hurt us. So in effect we’re keeping the information away from the people that need the information to underwrite the coverage properly. Totally justifiable.

For flood insurance, many years ago it was decided that the private marketplace could not handle it and would not handle it because of adverse selection, because of the magnitude of the problem. We started the National Flood Insurance Program in 1968, and it has grown.

What is interesting is that we’ve known for a long time that additional living expense and business interruption were Achilles’ heels of the program. Ironically, there are people in Louisiana that did everything right. They had their homeowners and they had all the flood insurance possible. But once their homes were inundated and they have to leave their homes for six months and for a year, they continued to have to pay their mortgage and they had no money to pay for a rental home or a motel or a hotel. They went bankrupt because the tools and mechanisms that we had to take care of them were insufficient. The same thing occurred with businesses. People that did everything right still went bankrupt. So we need to modify and add those coverages.

No. 2, the amount of coverage that we have in the National Flood Insurance Program needs to rise, because quite frankly, it’s out of step with reality and cost of reconstruction.

Should flood coverage be more integral to the homeowners’ policy or mandated?
Soto: I would put flood insurance back in the homeowner’s policy maintaining the federal government as the reinsurer, because then you get away from the people that say, “I didn’t know, I thought I had it in my homeowner’s and I don’t have it.”

Also, we need to bring more people into the system, and it is not bringing the guy in Iowa who lives nowhere near a river, a mountain a lake or any kind of flooding. That person will have it in the homeowners and that person will pay nothing for it or will pay a nickel. What we want to bring is the people who live near the coast that believe they’re not at risk or they believe they already have the coverage. We need to bring them into the system and have them pay a little bit for that coverage.

Either we do it in an organized fashion, by prepaying for insurance, or we do it in a post expensive disorganized fashion, where Air Force One flies over an affected area and starts shoving FEMA money out the door. And that is paid by your children and your grandchildren. It’s not even paid by current taxpayers, because this is all deficit spending.

For the complete video interview, visit www.insurancejournal.com

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