Insurance agents, a former insurance commissioner and a consumer advocate have sounded an alarm about the property insurance marketplace in Florida, a market that has seen four insurers get into financial trouble in the past year.
Citing the insurers’ financial woes as well as reports showing a majority of the companies actively writing property insurance are cutting back on business, suffering underwriting losses or seeing their surplus erode, the officials called on state lawmakers to enact changes to aid struggling insurers.
Jeff Grady, president of the Florida Association of Insurance Agents, Walter Dartland of the Consumer Federation of the Southeast, and Bill Gunter, the former state insurance commissioner who is an independent agent and current chairman of the FAIA, spoke to the press about what Gunter said is a “perilous” situation for insurers, agents and insureds.
Although they did not specify a remedy, they offered support for changes that allow private insurers to charge higher rates and legislation to scale back credits for homeowners who take mitigation steps.
Sen. Mike Bennett, R-Bradenton, and Rep. Bill Proctor, R-St. Augustine, have filed bills to deregulate residential property insurance rates. Their bills would allow home insurers to charge rates without the approval of the Office of Insurance Regulation (OIR).
FAIA stopped short of offering support for the Proctor-Bennett bill as written but Grady said his group would support “whatever allows companies to earn a reasonable profit.”
Grady and Gunter questioned whether the OIR has been sufficiently diligent since 2006 in approving startup insurers that have since run into trouble, including one, American Keystone, which they said was run by a convicted felon.
“Four companies as far as we knew were financially sound and secure taken over by regulators. It is the job of the regulator to make sure that the financial underpinning of these companies is sufficient to pay their claims That wasn’t the case in these four that have gone away,” said Gunter.
“OIR may not have done its homework on some of these companies,” said Grady.
Coral Insurance and American Keystone have failed in the past year, while Magnolia Insurance is under state supervision but has not been liquidated. This month, Florida Peninsula Insurance agreed to take over policies of Edison Insurance, a move Grady said was engineered by OIR because Edison was also on shaky ground. OIR, however, denied Edison was in any trouble and said the Edison acquisition was a business decision Florida Peninsula made on its own.
Regarding the claim that a convicted felon was behind American Keystone, when the firm submitted its application to operate in Florida, “its officers and directors were thoroughly vetted by the Office of Insurance Regulation and found to be acceptable,” according to OIR. However, at some later date, American Keystone, through a holding company, transferred operational control to a person who was barred from the insurance industry in Florida. OIR says it took immediate action upon learning of this development, “which ultimately concluded in the liquidation of the company.”
OIR did not participate in the FAIA press briefing but expressed concern.
“The Office is concerned that several insurance companies have experienced financial difficulties in Florida,” Jack McDermott stated in an emailed response to Insurance Journal in which he reiterated comments by Insurance Commissioner Kevin McCarty in September.
In a September report to the Florida Cabinet on the state of the marketplace, McCarty acknowledged that insurers in Florida are experiencing difficulty, but said this is true of some insurers in other states and it is not a condition unique to Florida.
He reported that of 21 of 29 start-up companies with policies in force, six experienced underwriting gains during the first six months of 2009, while 15 suffered underwriting losses.
He also told the Cabinet that of the 210 writers “with a significant presence in the residential markets in Florida,” 150 have shown increases in their policyholder surplus, while 60 reported declines during the first six months of the year. Of these companies, 84 posted underwriting gains, while 102 posted underwriting losses based on second quarter national results.
McCarty said the experience of the startups is “generally consistent with the financial performance of other residential property insurance writers in Florida, and around the nation.” He suggested that all new insurance writers in Florida experience initial losses, which may be due to start-up costs, organization of an agent workforce, and other overhead costs including marketing expenses.
McCarty said that the companies experiencing difficulties have blamed their increase in losses on five key problems: premium reductions from the full implementation of mitigation discounts; fraud; increased reinsurance costs; replacement cost methodology and reported sinkhole claims.
“The companies have indicated the majority of these problems have been exacerbated by the weakening economy,” McCarty told the Cabinet. He said an economic recovery “may help reduce many of the problems property insurers are now encountering.”
FAIA’s Grady took issue with McCarty’s report on 210 carriers, maintaining that 98 percent of the state’s property insurance market is effectively written by 73 private carriers plus Citizens and the others are insignificant players. FAIA report found that 44 of these 73 were losing money as of the third quarter and a number showed worrisome surplus declines.
Also, while 73 carriers may sound like a lot, agents said many of them are taking smaller percentages of the market and others, including many of the startups that were founded by taking business out of the state-backed insurer Citizens, have not grown beyond their initial phase. They have “flatlined” in terms of accepting more business, according to Gunter.
The agents noted that insurer underwriting losses are being reported, even though the state has not had a major hurricane in several years. “They should be building reserves now,” said Gunter, who served as insurance commissioner beginning in 1978 for more than 10 years.
Grady also said that the business and rating plans of the startups have been closely guided by the OIR, which makes the fact that several have run into trouble even more of a concern.
Grady, Dartland and Gunter said agents and insureds want to know that their policies are with companies that will be able to pay their claims but that now there is no guarantee.
Grady said it is not possible to know what is going on in insurance company boardrooms or what the real financial situation is for most carriers but that the reports of losses and surplus declines by his own group and the OIR are of grave concern to agents.
The three officials noted that the public option, Citizens Insurance Corp., has become the leading insurer, fueled in part by rates that even its own actuaries acknowledge are 40 percent to 60 percent below what they should be and that private insurers can’t compete with. In addition, they said there is no assurance that Citizens would be able pay its claims should there be a major storm.
“I’d rather be in Citizens than a company that is not on solid ground but Citizens can’t be the only company,” said Dartland.
The OIR recently came to terms with the largest private insurer in the state, State Farm, in a deal that kept it from leaving the market but allows it to raise rates about 15 percent and cancel about 15 percent of its policies.
While urging lawmakers to take action this session, Grady acknowledged that just as State Farm policyholders will see rate hikes, the solution could mean higher costs for all property owners.
“The only thing worse than high-priced insurance is no insurance,” said Grady.
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