The Florida Press Excoriates State Farm. Gov Crist Neither Captured or Impressed.

According the the Insurance Information Institute Mississippians pay the 6th highest rates for homeowners insurance (HO) in the country in a state with 6 coastal counties of 82 total. We are one slot ahead of earthquake prone California, three slots below the Florida, the entire state of which is prone to Hurricane wind damage.  By way of contrast South Carolina’s HO rates come in at number 16 despite being low and having a very developed coastline. North Carolina, with it’s famous outer banks of inhabited barrier islands comes in at 33 while Georgia, home to historic Savannah check in at 27. Texas and Louisiana check in with the highest and second highest HO rates respectively. While our good friend Sup can (and hopefully will) list the variety of reasons homewoners insurance rates vary so much from State to State for purposes of the remainder of this post I’ll operate under the assumption that in the complexity of the insurance marketpace and the associated state by state market fragmentation lies opportunity. Such as the opportunity for an insurer with a nationwide and global viewpoint to generate additional profit via ye old money change by statutory fiat. Perhaps this post will illustrate why.

We will begin with a compare and contrast between how Florida Governor Crist has handled big insurance versus our elected insurance commissioner’s genuflect  and beg approach. The Mississippi GOP has chosen to directly subsidize our wind pool with the money going to buy more reinsurance. Florida, OTOH now requires transparency and learned first hand that bending over backwards for insurers didn’t mean the citizens got a good deal. Does State Farm’s announcement it was leaving Florida last week really mean Mississippi’s insurance market (where State Farm is refusing to write new policies) is “healthier” than Florida’s (where the Farm is pulling out)? Let’s start with Commissioner Chaney’s press release on that topic:

Commissioner Chaney also states in the letter that the Mississippi insurance market is in a very different and much healthier position than the Florida market.

“The Mississippi Insurance Department has worked very diligently to avoid finding Mississippi in the same situation as Florida,” Chaney said.

Do average Mississippians buy into that? Let’s hear what they have to say:

“The politicians have given the insurance companies a license to steal.”

“They are a full line insurance company. They should not be allowed to cherry pick. Our insurance commission should run them out of the state.”

“Time to take the policies for my life insurance, wifes life insurance, the 3 vehicles that are insured, the RV’s insurance and health coverage somewhere else. If enough policy holders would actually do this also, we could run them off the coast. Insurance Commission won’t do it.”

“Why are we allowing the insurance companies to hold the residents of the Mississippi hostage? For decades, we’ve paid whatever they have requested, and when the first major catastrophe hits, this is the treatment we receive. If State Farm is so adamant in their position in the way they do business in our state, why are they still here? Why are we accepting this treatment?”

The difference is striking and begs a natural question. Are coasties drinking all the koolaid or are our elected officials here in Mississippi peeing on our legs claiming rain? The press and editorial boards across Florida are giving this insurance thang a hard looksie (H/T Steve). First off is columnist Michael Mayo of the Orlando Sun Sentinel who comes to the conclusion we need a good multi peril solution in his column “How do we cure Florida’s sick property insurance system?”:

Our predicament: We have a pre-existing condition that few private insurers want to touch. Namely, we’re prone to hurricanes.

And Citizens has become a ticking time bomb, the equivalent of a health insurance firm that mostly caters to the ill. Nearly half of Citizens’ 1.1 million policies are in South Florida. With roughly $422 billion in property exposure, Citizens has been shedding policies amid concerns that it will be undercapitalized if we’re hit by The Big One.

The refrain I keep hearing from industry people: Florida’s windstorm rates aren’t “actuarially sound,” meaning they should be much higher to cover the risks of a big storm.

If it’s true that we’re going to have more hurricanes, then the economics of living in Florida have changed,” said Brent Winans, a vice president at Plastridge Agency, a regional insurance brokerage in Delray Beach. “It’s going to cost more. None of us want to hear that.”

But with foreclosures already at record levels and the economy and real estate market in tatters, higher insurance premiums can only make a bad situation worse.

Steve Geller, a former state senator, said the best way out for Florida is the creation of national catastrophe insurance. The federal government already runs a National Flood Insurance program. He said adding hurricanes, tornadoes and earthquakes to the mix would be proper.

“President Obama should put it in the economic stimulus package,” he said.

But national disaster insurance has proven to be a tough political sell, especially in the U.S. Senate. The familiar cry: Why should low-risk states like North Dakota and Nebraska subsidize us for our hazardous living choices?

Geller noted Floridians pay far more into the national flood insurance pool than they get out, and that smaller states get a higher per capita share of federal tax money than bigger states.

Next up is a some staright press coverage of Florida Farm pullout fallout courtesy of the Palm Beach Post:

For 20 years, Mary Wilkinson believed in State Farm’s famous “Like a good neighbor” slogan.

The state’s largest private insurer covered not only her home, but also her three automobiles.

“I entrusted everything to this company, and they totally sold out the people of Florida,” the Jupiter Farms resident said.

She’s not alone in those sentiments.

More than 1 million State Farm Florida policyholders awoke Wednesday morning to the reality that their homeowners insurer is dropping that line of coverage – and them along with it.

………the insurer’s explanation seemed to fall on the deaf ears of hundreds of thousands of irate, confused and desperate customers Wednesday.

Wilkinson, for one, called a new insurance agent Wednesday morning about switching her homeowners coverage. Her policy doesn’t expire until October – meaning State Farm wouldn’t be dropping her under its withdrawal plan until the fall of 2010 – but Wilkinson said she did not want to waste time.

“I’m concerned about finding a new policy,” she said.

Area insurance agents said they were swamped Wednesday with phone calls from concerned State Farm policyholders.

“People are panicking,” said Kenn Nornberg, president of the Independent Insurance Agents of Palm Beach County and owner of Arden Insurance Associates in Lantana. “The consumer is very concerned that they won’t be able to get coverage.”

The Celedinas Insurance Group in Palm Beach Gardens reported a 25 percent spike in calls. The state Office of Insurance Regulation’s insurance shopping Web site ( received 3,809 visitors on Wednesday, compared with an average of 250 to 300 a day, spokesman Tom Zutell said.

A private consumer insurance Web site, Home Insurance Buyers Guide LLC, reported that it received 2,000 visitors on Wednesday compared with about 300 on a normal day.

“People aren’t going to wait until November when State Farm starts dropping policies,” said Michael Letcher, president of Lake Worth-based Home Insurance Buyers Guide. “They want out now.”

The question on everyone’s mind: Just how hard will it be for State Farm homeowners policyholders to find replacement coverage?

Wilkinson, for example, said she was concerned because her house in Jupiter Farms has a wood frame and is 25 years old.

Although she was relieved that the agent she contacted said he could place her home with another company without a problem, Wilkinson said she still plans to drop her State Farm auto coverage.

Once again we see the trend in insurance to socialize losses sticking taxpayers with the bill in the process as the story continues:

Many homeowners with older residences may not be as lucky as Wilkinson. Private insurers have been increasingly reluctant to insure older structures because they are more susceptible to damage, Palm Beach Gardens insurance agent Ray Celedinas said.

He said companies probably will toughen eligibility requirements to cherry-pick the least risky State Farm policyholders.

“People with older homes will probably end up in Citizens,” he said.

Sean Michael Shaw, the state’s consumer insurance advocate, said he was concerned that undercapitalized private insurers will drop existing customers and replace them with State Farm policyholders who own newer homes, all in an effort to lessen the chances of losses.

“State Farm leaving could cause a huge disruption to the market,” he said.

Predictably a few insurers used the news to “poor mouth” again agitating for rate ups despite posting huge profits for the past several years:

John Auer, chief executive of ASI property insurance group, said if the state doesn’t want large numbers of State Farm policyholders ending up in Citizens, it must allow private insurers to raise rates.

Auer, whose ASI includes American Strategic Insurance Co., referred to State Farm’s claim that it was losing $20 million a month insuring homes in Florida.

“The only way companies can absorb (State Farm’s) customers is to charge higher rates,” he said, adding that insurance regulators have been reluctant to grant rate increases.

But not all insurers were as pessimistic.

Security First Insurance Co. President Locke Burt posted a rate comparison on his Web site showing that State Farm policyholders could save more than half on their premiums by switching to his company.

Security First insures 60,000 policyholders but has the capital to double its customers immediately, he said.

In the end is talk of all the market complexities and related industry jargon designed to obscure a larger truth? The Palm Beach post’s editorial editor Randy Schultz cuts through the fog and comes to some striking slabbingly conclusions in his column “Like a bad neighbor…”:

Does Florida intend to let private property insurers cripple this state?

That question isn’t meant as hyperbole. To get a mortgage for residential or business property, you need insurance. In Florida, you often need two policies: one for wind coverage, and one for the standard fire, theft and liability. If the cost of insurance is too high, you won’t buy or build. If the real estate market withers, Florida withers.

So it was baffling to see, once again, the state’s leading business groups stick up last week for a big insurer threatening Florida. This time, the “victim” was State Farm, after the company announced that it would dump its nearly 1 million homeowner policies. The Florida Chamber fretted and praised State Farm for its corporate service. Associated Industries of Florida blamed government regulation.

Rep. Alan Hays, R-Umatilla, even ventured – as he did in 2006 – that the state just should stop regulating insurance and let the market sort it out. Maybe from Umatilla the property insurance market looks fine. Maybe if you overlook Wall Street full deregulation looks fine. To most of Florida and the real world, Rep. Hays’ idea sounds crazy. Unfortunately, Rep. Hays is vice chairman of the House insurance committee.

When the state successfully stood up last year to Allstate, The Post editorialized that the market had struck back. The same has to happen with State Farm. See, the company doesn’t want to leave Florida. State Farm wants to leave the hurricane insurance business, because there’s risk, and stay in the auto insurance business, because there’s very little risk.

And isn’t it curious that State Farm wants to leave not after a bad storm season but after three straight mild seasons? Isn’t it curious that State Farm wants to leave even though the company boasted that its pre-tax property/casualty profit in 2007 was $5.1”billion? Isn’t it curious that State Farm wants to leave just as the nation’s insurance commissioners – those would be the folks on the consumers’ side – reported that companies insuring Florida residences made nearly 40 percent in profit for 2007?

Here’s a theory as to why State Farm’s timing may not be curious. Insurance company finances can depend heavily on investments. We know what has happened in the markets over the past few months. The last two medical malpractice insurance “crises” came in the spring of 1988 – after the market crash of October 1987 – and in the summer of 2003 – as the markets were dipping to a post-9/11 low.

State Farm and its defenders blame government regulation. But for the 15 years after Hurricane Andrew in 1992, state government did lots of favors to keep private property insurers here. The state put all taxpayers on the hook for as much as $28”billion in losses the companies couldn’t pay. The state set up an appeal process for rate requests, and the industry usually won. The state let the industry get out of covering damage from mold, sinkholes and wind-driven water. The state set up an insurer to take high-risk hurricane policies. The state spent $250 million to help people harden their homes. The state spent $250 million to lure more insurers.

But for two years under Gov. Crist, things have been different. When the state approved a plan to help the insurers lower rates, the Legislature required that companies pass on savings to consumers. Last year, the state threatened Allstate with loss of its auto business to make the company back down on a ridiculously high rate request. Rate requests now go to administrative law judges. One such judge just agreed with the Office of Insurance Regulation that State Farm didn’t deserve a 47 percent increase.

Property insurance is a bigger problem in most of Florida than property taxes. Private insurers get to make a profit. But for a service so crucial to Florida, the profit should be on the state’s terms, not the insurers’ terms. The Legislature doesn’t represent the insurers that want to dish it out. The Legislature represents the state, which should not sit back and take it.

Nowdy I would submit others Do C It and that list grows by leaps and bounds each and every day. And speaking of that Florida administrative law judge it is appropriate to end this lengthy post with a trip down slabbed’s memory lane on an earlier post we did on the Farm’s Florida financial shellgame:

Transactions between State Farm Mutual and State Farm Florida for reinsurance and credit risk provisions totaling approximately $561.8 million, when viewed in the light of economic reality………may be transactions which State Farm Mutual engages in with itself and which lack any independent economic significance. Transactions with no independent economic significance would be sham transactions which may distort the economic costs of the reinsurance and credit risk provisions purchased from State Farm Mutual. Such economic distortions may enable the group to derive a rate advantage from the legal form in which State Farm Mutual chooses to do business in Florida.


15 thoughts on “The Florida Press Excoriates State Farm. Gov Crist Neither Captured or Impressed.”

  1. North Carolina somehow got the insurers to drink the cool ais themselves. North Carolina’s State Pool system is an amazingly bad idea for the insurers. Almost guaranteed to bankrupt some of the smaller insurers if a big one hits Wilmington. Almost everyone on the cost now uses the State policy because it is grossly under priced. If the State Pool (which is underfunded of course) runs out of money, they levy money against the insurance companies that do business in the state.

    The Old Insurance Commissioner (an elected position here) was honest,and there forever, but a bit of a grouch. One of those pound your shoe on the table type guys.I think he managed to distract the insurance companies with base rate issues enough to where they forgot to do the math on their hurricane exposure.

    He retired right before the last election, and died today after he had some sort of seizure. With the changing of the guard our coastal rates are likely to go up a lot.

  2. This is a very diificult situation to address. As for the difference in the sitautions in different states it becomes even more complicated.

    Sop, I will attempt to summarize as the original post has many points. First, Why are the states different? Let’s take GA first. Savannah and Brunswick is the exposure. Compared to the rest of the GA market it is very small. The population is inland. Same situartion with NC, but the whoever runs the windpool in NC has been asleep at the switch and now they have a serious issue. I live in Western NC and I can tell you we are not interested in subsidizing the folks on the coast. SC has a major coastal exposure, burt the “Wind Pool” has been realistic in trying to have an adequate rate structure. It is different by state based on where the folks live and the how political the regulatory climate is.

    As for FL, we are seeing what I expected. Where are these SF customers going? Citizens is a bad option because it is totally insolvent. So the folks seek other carriers, but certainly not at SF rate levels as those are inadequate. So effectively people are having to go to carriers with higher rates without the financial solvency of SF. This is not a good scenario. There is also the “domino effect” which has not begun to play out yet.

    As I posted earlier in another post. This will be a long time scenario with many twists and turns as it develops.

  3. PS I think the Bloggershere has already seen its most hardcore blogger award winner in action this week. I couldn’t imagine anyone topping this lady—

    “Erykah gave birth to a baby girl at her home on February 1, 2009 at 1:30 p.m.,” the rep tells Us. “The baby’s father, [rapper] Jay Electronica, and her two children were in attendance.”

    The Grammy-winning singer and Electronica sent Twitter messages throughout their daughter’s birth, MTV News reports.

    “Morning, I’m in labor,” Badu announced to her 4,500 followers on Sunday.

    The couple chose to deliver at her Brooklyn, New York home with the help of a midwife — who was apparently running late.

    “Labor has begun,” Electronica wrote. “Everybody stand back. No hospitals. No doctors. No medicine. We’re waiting for the midwife to show.”

    He also announced that Badu’s daughter Puma, 7, with rapper D.O.C., and Seven, 10, her son with Andre 3000 , were present, and that he was writing updates while rubbing his girlfriend’s feet.

    Shortly after delivery, Electronica posted: “Feb. 1 2009 my first child, my daughter born at 130 PM exactly. It’s the happiest day of my life.”

    See what an expert has to say about celebrity baby names.

    Badu added: “I can’t believe it’s over. Home birth, no painkillers, about five hours, she was a little past due date, but I didn’t mind waiting. Breath.”

    And the award for most Hardcore Blogger goes to…

  4. Steve, at times there is a “herd mentality” in the unsurance business. FL is one of those states that requires deep pockets and a strong stomach for a company to stay.

    I am not an expert on the FL Guaranty Fund, but SF was the largest HO insuror prior to the Citizens fiasco. With SF, by attrition other carriers will end up with a bigger bite (assessment) by the Guarnty Fund) in cases of insolvency.

    Hopefully that explains the “domino effect”.

  5. When the industry says that the pools do not charge “actuarial rates” what the mean is they want the pools to buy much more reinsurance at excessive cost beyond any economic reason. If reinsurance was reasonably priced then State Farm, Allstate, et al would buy it and cover everyone and we would not have state pools.

  6. Russell we have this on your former insurance commissioner. I’ll try to get more background as time allows.

    My long time friend and mentor, former North Carolina Insurance Commissioner Jim Long, passed away this week. Jim was a young 68, and had a massive stroke early last week. I had talked to him just before Christmas, and we had planned a long visit in the North Carolina Mountains where his mother was living. I have known and worked with Jim for almost 20 years, and he was the guy I would call when there was an insurance problem in Louisiana I was trying to solve.

    I met Jim at the Fairmount Hotel in New Orleans some six months before I became Louisiana Insurance Commissioner. Jim loved New Orleans and never missed a good reason to come down to the Crescent City. He knew every good restaurant, and took me to some I didn

  7. Because of the South Atlantic Bight, Georgia rarely gets a direct hit from a major hurricane, but when it does, it can be devastating.
    See the 1893 & 1898 hurricanes:

    I visited Savannah a couple of years ago and drove around Tybee Island and to Brunswick and St. Simon’s Island. There is a lot of vulnerable property in low-lying areas and surrounded by large trees that have not been culled by recent hurricanes.

  8. Brian, you raise an interesting point. Primary carriers have no control over reinsurance prices as they are the consumer and the market place sets the rates.

    The problem with “pools” is they have a tendency not to charge actuarily sound rates as they are impacted by “political” reasonings. Therefore, carriers want the pools to buy more reinsurance to cover the inadequate rate structure as protection for them.

    Once again, this can lead to the “domino” effect when a big player leaves the field. I remind all again, we are just at the front end of this FL/SF situation.

  9. We have covered this many times before. What the industry calls “actuarially sound” rates for the pools are not economically reasonable based on the risks. Reinsurance is not a competitive market so there is no market pricing. The pools have to pay such high rates for reinsuance that the so-called actuarial rate would be 7 to 10 times higher than the expected losses. No one should pay that much. At best, the political factors only serve to limit the gouging to 5 times the expected losses instead of 7. It doesn’t make any more sense for the wind pool to pay that than it would for State Farm or Chevron to pay it.
    A federal program could charge risk-based premiums much closer to the expected losses, spread the risk across the Gulf and Atlantic much better than the single state pools, and would not be subject to the volatility of the reinsurance market that produces wild swings in prices after every catastrophe or every down cycle in the financial markets.

  10. “No one should pay that much”. This is a plea for subsidizing rates which is not popular with the majority. Brian, you are correct the only way this could happen is with a federal program where it can be covered with other expenditures.

    The reason “pools” are charged more by the reinsurers is they are not as efficient as private carriers. The reinsurers charge market rates based on World demand. These folks are smart and they know the abitilities of primary carriers to manage risks. The fact “pools” are supposed to be markets of last resort is case in point why their reinsurance costs will be more costly. Their exposures are higher than private insurers have on their books.

  11. That just us not true. The premiums are more than enough to cover the expected claims in every pool but most of the money ends up in the offshore accounts of reinsurance and cat bond investors. Those are the guys being subsidized, not the property owners.
    It doesn’t make sense for the MS pool to pay $65 million for $470 million reinsurance for a 1 in 50 hurricane. Do the math.
    And the pool are more efficient than the companies because they are not cherry picking and not paying $11 million bonuses to executives and not dumping claims on the federal government. Those are not efficient practices. They are the gross inefficiencies of a poorly regulated market.

  12. Insurance companies are paying less out in claims as a percentage of their revenues than ever before yet they are all now losing money hand over fist. Part of that money being sucked into the insurance blackhole goes to pay lawyers fees defending bad faith denials. The larger portion goes into the blackhole paying obscene executive bonues and salary such as the tens of millions of dollars Ed Rust sucks out of State Farm each and every year and things like lavish trips for agents who steer business certain places.

    Frankly I don’t see the attraction to the BS put out by the insurance industry except the huge amounts of money they put out each year lining the pockets of their congressional yes men in people like Senator Chris Dodd.

    Cat bond holders get a lavish guaranteed returned despite the fact only one bond has ever been called to pay for a disaster. I’ve seen the “economics” Sup describes in places like the Beau Rivage in Biloxi and the Bellagio in Las Vegas.

    My question is why is this country depending on the insurance equivalent of loans sharks for capital and in the process allowing it’s citizens to be raped subsidizing offshore reinsurers?


  13. Brian, if you feel reinsurance premiums are not a good value there is an option.

    The “pool” should charge rates that are adequate to build a reserve to pay the losses without the benefit of reinsurance. Individual insureds can do that as well. In reality, it doesn’t work.

    The reason ALL and SF did not buy a lot of reinsurance is they felt they had adequate reserves to handle major events. It was a business decision and they retained the premium they would have been paying for reinsurance. That turned out to be a bad decision. Nothing has changed, state pools do not have the resources to ignore reinsurance.

Leave a Reply

Your email address will not be published. Required fields are marked *