Florida hasn’t been hit by a hurricane since the disastrous years of 2004 and 2005, but the state’s property insurance companies say they are still losing money despite collecting billions in premiums.
That has industry leaders, Gov. Rick Scott and Republican lawmakers hoping that a recently signed bill will make them profitable and spur competition. Proponents say that would drive down rates in the long-run and allow private insurers to compete better for some of the 1.3 million customers of the state-backed Citizens Property Insurance Corp. in hopes decreasing the exposure to taxpayers.
The legislation, among other things, allows private companies to pass on 15 percent of their reinsurance costs to their customers along with whatever increases state regulators approve.
The new law also tightens restrictions on sinkhole claims, which the insurance companies say are costing them $500 million annually, and allows insurers to hold back part of a claims settlement until repairs are completed.
Former Gov. Charlie Crist last year vetoed a bill that was similar except for the sinkhole provisions.
But some consumer advocates think lawmakers gave away too much.
“If a hurricane comes and the industry is not ready to deal with it, they’re not going to have an excuse,” said Sean Shaw, founder of a policyholders of Florida coalition. “They ought to be pretty happy.”
The Office of Insurance Regulation reported that Florida property owners paid just over $7 billion in premiums in 2009 compared to $5.6 billion five years earlier after the first four of the eight storms that hit the state in two years had made landfall. Despite the 25 percent increase in premiums during the intervening quiet years, the insurance industry says it is losing millions of dollars each year in Florida. Several companies also became insolvent and disappeared.
OIR, meanwhile, has approved rate increases of about 30 percent for the top 20 property insurance companies in the past two years. Still, the industry says it has been unable to stockpile sufficient reserves it could tap after a major storm. The industry says it was stockpiling between $7 billion and $9 billion in surplus annually for several years before the 2004-05 storms hit.
“We needed every penny of that surplus we had in 2004 and 2005 and it still wasn’t enough,” said Sam Miller, vice president of the Florida Insurance Council, an industry group. “It’s a very foreboding situation when you don’t accumulate billions of dollars when you don’t have a hurricane. No company is building the surplus it should be building during non-hurricane years, no company. That’s the crisis.”
But many homeowners dispute the industry’s claims.
“If they thought they passed something they thought was going to work, they’re in for a rude awakening,” said John Thompson, a 45-year-old small businessman from Spring Hill. “Nothing we’re doing here makes common sense.”
Thompson’s $2,200 annual homeowners premium has roughly tripled in the last decade. He is covered by Citizens after being canceled by four different commercial companies.
Florida’s property insurance system has been an almost annual legislative headache since shortly after Hurricane Andrew struck South Florida in 1992 — the Category 5 storm caused about $16 billion in insured damage.
Legislators in 2007 tried to protect consumers from crippling rate increases, thinking that was the best way to go. But most of that backfired, accomplishing none of their goals.
“They did a number of things they thought were pro-consumer that seemed like a good idea at the time, but it turned out there was potential for abuses that we did not anticipate,” said Kevin McCarty, the state’s chief insurance regulator.
“Unfortunately the abuses and costs of other cost drivers, particularly sinkholes, has been a real drag on the surplus of our companies even without hurricane season,” McCarty said.
Many private carriers, including giant State Farm, began to cut back on the number of policies they were willing to write in such a risky climate, both politically and from storms.
“Insurance companies operating in Florida generate billions of dollars in jobs, payroll, tax revenues, and economic impact,” said former state Rep. Don Brown of DeFuniak Springs, a longtime insurance executive. “Yet, the political attitude has been mostly punitive toward insurance companies and the industry.”
But backers believe that the new bill will solve the problem.
In addition to shoring up regulations on sinkhole claims and activity but public adjusters suspected in having a hand in many of the suspicious claims, McCarty believes the new legislation is better than what Crist rejected a year ago.
“It really attempts to get around some of the fraud and abuse in the sinkhole process,” McCarty said.
They also say that by allowing insurers to pass along part of the cost of reinsurance, that will help shore up private insurers and make others want to sell here. The provision is expected to cost the average homeowner more in the short run, although no company or regulator could say yet how much that might be.
“Clearly total premiums will be less with this bill than without it,” Miller said, predicting that “someday premiums could be less than they are now.”
Jim Massie, Florida counsel for the Reinsurance Association of America, said the state “is on the edge of a financial catastrophe, all in the name of keeping homeowners’ insurance premiums lower than the risk they’re supposed to cover.”
“Businesses, automobile policyholders, charities, environmental groups, are beginning to push back,” he said.
The ultimate goal is to reduce the exposure and shore up the finances of Citizens, which would be hard pressed to pay off after a major storm without an additional assessment on Floridians who buy auto or property insurance. And while a separate proposal to substantially shrink Citizens failed in the recently completed legislative session, many of the provisions in the comprehensive bill will benefit the publicly backed company.
And that remains a problem.
“We should not be subsidizing million dollar beach homes on Florida’s coast and we should not be going into every hurricane season hoping for a miracle,” said Jose Gonzalez, vice president of Associated Industries of Florida.
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