Florida’s property insurance companies haven’t suffered hurricane losses for nearly five years, but many claim to be losing money even while collecting hefty premiums. It’s a complex paradigm for almost anyone to follow.
“We keep going round and round and we always end up back at square one,” Agriculture Commissioner Charles Bronson said with a hint of frustration at a recent Cabinet meeting.
Confusing as the formula is, Florida regulators think the Legislature came up with part of the elusive answer in the recently completed session and Insurance Commissioner Kevin McCarty is pushing Gov. Charlie Crist to sign their bill (SB 2044).
The legislation, its sponsor says, reduces regulatory pressure on insurance companies and creates more competition in the marketplace — a factor they hope will stabilize rates for consumers.
“It’s another step forward in reforming property insurance in the state,” said Sen. Garrett Richter, a Republican banker from Naples who guided the measure through the recently completed legislative session. “We’ll probably need to do it a couple more times until we get this completely turned in the right direction.”
A longtime critic of the property insurance industry, Crist remains uncertain whether he’s sign the legislation. He could, however, allow it to become law without his signature. Some feel Crist has complicated the problem, railing against insurers as part of his populist approach to winning votes.
The industry claims to have lost $700 million in the high-risk Florida market last year — even though no hurricanes hit the state. They say revenues have been cut roughly 30 percent in the last three years as a result of a rate rollback ordered in a January 2007 special session simultaneously with a doubling of discounts homeowners get for hurricane mitigation measures like shutters and strapped roofs.
Profits have also been dissipated by a variety of other factors, including the recession.
Bronson also worries about the state-backed Citizens Property Insurance Corp.’s ability to pay its claims if a major storm struck, which would increase costs for all other Florida home or car policy owners as they would get with a surcharge. Citizens is presently the largest property insurer in Florida with over 1 million policyholders.
But getting a real fix to Florida’s property insurance woes has existed at least two decades. A resolution to property insurance has eluded lawmakers since Hurricane Andrew in 1992 sent shock waves through an industry. It was rocked again a decade later by eight serious storms in 2004 and 2005 that resulted in many major private carriers either leaving the Sunshine State or reducing the number of policies they carry.
“Florida remains a very, very tough place to do business,” said Locke Burt, whose Ormond Beach-based Security First Insurance is among one of the more successful of the three dozen startups in Florida in recent years. “The homeowners market is in very serious shape.”
If Richter’s bill does become law, it would reduce insurer expenses by restricting activities of public adjusters, who were blamed for thousands of reopened cases after Hurricane Wilma in 2005 that cost insurers millions of dollars to resolve questionable claims.
Now adjusters will have just three years to complete a case instead of five and the bill restricts how they will be able to advertise.
Sam Miller, vice president of the Florida Insurance Council, estimated that the Hurricane Catastrophe Fund, and Floridians who are paying their assessments, would have saved roughly $1 billion if a three-year statute of limitations had applied to the 2004 and 2005 storms.
The catastrophe fund, a state-backed reinsurer supported by a 1 percent assessment on nearly all insurance policies sold in Florida, sold nearly $700 million in revenue bonds this month to help pay for late claims from the 2005 storm season.
Wilma is now the second-most expensive hurricane in Florida history in insured losses behind only Andrew and larger than Hurricane Charlie, a 2004 storm that devastated southwest Florida.
Insurers are now scrambling to buy reinsurance before the 2010 hurricane season begins June 1. Reinsurance in effect increases an insurer’s capital. Reinsurers, mostly offshore companies with a large presence in Bermuda, don’t pay policyholder claims, but reimburse companies for the claims they pay out.
“That’s the real challenge going into hurricane season,” said McCarty, who has recently begun to crack down on startup companies who have been pouring much of their profit back into their parent operations.
Reinsurance costs account for roughly half of an insurer’s overhead.
Non-catastrophic losses, Miller noted, include questionable sinkhole claims in the Tampa Bay area on top of an increased number of fraudulent claims that often accompany difficult economic times
The new legislation also boosts the amount of capital required for a startup from $5 million to $15 million.
Regardless of the solvency requirements, Mother Nature owns the answer. A big enough storm — or a series of smaller hurricanes in a short period — would wipe out many insurance companies anyway as Florida’s worst-case $2.1 trillion exposure dramatically exceeds any available coverage.
One part of the formula never changes.
“It’s all about risk,” Bronson said.
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