INDIAN RIVER COUNTY – Newly sworn in Governor Rick Scott has said Florida’s property insurance system is broken and in the 7-7-7 plan on which he ran as the “Blueprint to Secure Our Economic Future,” he outlined what he would do to fix it.
What he didn’t say in that document was that the fix will very likely mean the property insurance premiums we all pay will be going up.
The trade-off, he says, is that the insurance industry under his reforms will return to a solvent, market-based system where those with the most risk would not be subsidized through assessments paid by all of us.
The key culprits in our current state of affairs, Scott said, are Citizens Property Insurance Corporation and the Florida Hurricane Catastrophe Fund (Cat Fund), which are underfunded and could lead to hundreds of millions of dollars in after-the-fact assessments when the next major storm hits Florida.
“Florida’s current property insurance system is broken and is putting us all at risk,” he wrote in the blueprint. “Driving out solvent private insurers from our state and forcing homeowners into a government run company that is not financially sound is a huge gamble that has put homeowners and taxpayers at risk. … I want to open the property insurance market back up in Florida so that financially solvent private insurers can compete, allowing consumers to choose what they want from a free market.”
Local insurers agreed with the new governor’s assessment and that rates will most likely have to rise if we are to honestly manage the risk and attract national companies back to our market.
“There may be some short-term premium paying pains, but shortly the marketplace will reach parity and then the competitive nature of the marketplace will take over and competition will truly begin,” said Gene Waddell of Waddell Insurance Group.
Many people in the industry point the finger for the current state of affairs at former Gov. Charlie Crist.
Under Crist’s tenure, they say, he turned Citizens as the insurer of last resort into a competitor in the marketplace with the full backing of the state government.
“I think Charlie Crist took a populist approach and made Citizens competitive with the marketplace to provide cheaper insurance rates to Florida consumers,” said Brad Emmons of Vero Insurance. “Short term that works great, especially when you don’t have any storms, but what that means is right now the state of Florida is not in a position to handle a big claim.”
Waddell said Floridians have been living on borrowed time and the regulatory reforms Scott is considering need to be enacted.
“The industry has been warning since the ill-conceived market monkeying that the process was not going to work,” he said.
With the competitive rise of Citizens in the marketplace an unintended consequence was the departure of national carriers, who claimed they could not compete in the new regulatory landscape.
“Because of the reforms put in place by Gov. Crist, we no longer have national carriers willing to write, we have to look at our regulatory environment and the statutes we have on the books so national carriers have the desire to come back to Florida,” said Kyle Ulrich, Senior Vice President of Public Affairs for Florida Association of Independent Agents.
That void has been filled by regional carriers, some of which have questionable balance sheets for paying clients’ claims should a hurricane hit our shores.
“I hope that Mr. Scott succeeds in reducing Citizens’ policy population, allowing the private market to take some of those policies on and make it where consumers, especially beachside consumers, have more choices,” Emmons said. “There are options out there, I am just hoping there are more in the future that are sustainable businesses where agents don’t have to worry after a storm about a company going under.”
The Legislature has already recognized that Citizens is, in insurance vernacular, not actuarially sound and has begun raising its rates at 10 percent a year.
The problem with that is it could still take years to properly fund the quasi-government agency and that may be too late.
Don Brown is a former member of the state House of Representatives from DeFuniak Springs and former chairman of the House Insurance Committee who is part of a transition team advising Scott.
He is squarely in the camp to return Citizens to its original mandate as the insurance company used when no other policy could be acquired.
“We are taking a gamble as long as (Citizens) premiums are below actuarially sound,” he said. “If there is a storm and if there is a deficit, the Citizens insurance customers will not only have to pay, but everybody else in the state as well.
Our recommendation to the governor was to do everything he could to minimize the likelihood that Citizens would incur a deficit that would require an assessment, which means the people that didn’t take the risk end up contributing to those that did.”
Brown said they did not advise Scott on how fast or how far he needed to raise the rates.
Although all rate increases must be approved by the state, if Citizens rates go up it will most likely mean other insurers will seek increases as well.
The Florida Office of Insurance Regulation has begun to allow premium increases to go through recently and that is expected to continue.
Critics of the rate increases say insurance companies are crying poverty on the one hand and raking in huge profits through sister affiliates with the other.
The Sarasota Herald-Tribune recently reported on this and found $1.9 billion in payments in 2008 for, in effect, such in-house services as claims adjusting, management services and other tasks.
And, since those payments are determined as a percentage of the premium, an increase to a policy means an increase in those ancillary charges.
The other part to the insurance mess is the state-run Cat Fund which insurers use to buy re-insurance. Insurers use this fund to spread their risk and that allows them to write more policies.
The Cat Fund is underfunded as well and could mean huge assessments paid buy us all should a catastrophic storm hit Florida.
“Our recommendation to the governor is to seriously look at the Cat Fund and consider ways that it can be restructured so that it can come closer to meeting its originally intended purpose,” Brown said.
“As with Citizens, the Cat Fund has an extensive assessment base, it can assess homeowners’ premiums, it can assess liability insurance premiums, it can assess every policy holder in the state except for worker’s compensation and medical mal practice.”
Brown said he has not had any one-on-one conversations with Gov. Scott. His only contact has been as a member of the transition team. However, from his days as chairman of the Insurance Committee his position on the recent changes to the insurance industry are well known.
“The promise we made was this,” he said of the transition team’s recommendations to Scott. “It’s always better to finance risk with capital than it is to finance risk with debt. Right now we depend heavily on debt when it would be far better for the people of Florida if we used capital to finance our risk.”