of paper moons and cardboard seas – first “the scheme” now State Farm reveals “the scam”

Say, it’s only a paper moon
Sailing over a cardboard sea
But it wouldn’t be make-believe
If you believed in me

It’s a Barnum and Bailey world
Just as phony as it can be
But it wouldn’t be make-believe
If you believed in me

State Farm’s decision to withdraw from Florida adds rich context for “the scheme.  Take a look at  the scamreported in the Miami Herald.

As part of State Farm Florida’s plan to stop writing property casualty insurance in the state, the company must move about 161,000 auto insurance policies from an affiliated company that sells homeowners coverage nationwide but not in Florida.

The shift is State Farm’s attempt to comply with a state law that prohibits an insurance company or an affiliate from selling auto insurance in Florida if doesn’t offer homeowners coverage here as well.

State Farm Fire & Casualty, a national subsidiary of State Farm Mutual, sells auto insurance nationwide and has about 161,000 auto policies in Florida.  It also offers homeowners coverage, except in a few coastal states including Florida.

Drivers covered by State Farm Fire will be offered policies by State Farm Mutual Insurance, the parent company for both State Farm Fire & Casualty and State Farm Florida.

State Farm Mutual doesn’t sell homeowners coverage in any state.

That’s right, State Farm Mutual is a shell – pick that one and you’ll find the money that could keep State Farm Florida from going under.

… when a wager for money is made…[a shell game becomes]… a confidence trick used to perpetrate fraud.   In confidence trick slang, this famous swindle is referred to as a short-con because it is quick and easy to pull off.

Pick another, however, and you’ll find State Farm scamming its agents.

Florida Chief Financial Officer Alex Sink is urging State Farm Florida to “immediately” let its agents do business with other insurance companies for their more than one million policyholders now that State Farm is withdrawing from the state.

But State Farm has rejected the idea.

Sink called State Farm Florida’s contracts with its agents “inappropriate” for limiting them to placing business only with State Farm but stopped short of calling the arrangement illegal.

State Farm announced on Jan. 27 that it is beginning the two-year process of withdrawing from the state’s property insurance market. The company said it would go insolvent if it did not act now to drop out of the market. It criticized state regulators for keeping it from charging prices it believes it needs in order to stay in the state’s risky property environment.

State Farm Florida agents are not employees; they are independent contractors. But under the terms of their contracts they can only sell policies for State Farm or place them in state-backed Citizens Property Insurance. Unlike State Farm agents, independent agents have contracts with multiple private carriers.

In a letter to State Farm Florida President Jim Thompson, Sink said the contractual limitation forces the company’s 826 agents either to preserve their relationship with their customers by placing them in the state-backed Citizens Property Insurance or sever their customer relationships so customers can find coverage with another private market insurer.

“Given State Farm Florida’s projected insolvency within the next two years and intended withdrawal, I find it inappropriate to limit your agents’ ability to help your customers find the best possible property insurance coverage,” Sink wrote.

“Your loyal insurance consumers deserve the opportunity to keep their relationship with their State Farm agent and be placed with the property insurance company that best meets their insurance needs,” she stated.

Chris Neal, public affairs manager for State Farm Florida, rejected the CFO’s proposal. “We’re simply not even considering brokerage issues now,” he told Insurance Journal.

Maybe that’s because they considered brokerage issues back in 1990 and this may simply be how it was supposed to play out.  The New York Times told that story.

“We are building functional offices, not palaces,” said Mr. Rust, who became State Farm’s chairman in 1987 and whose father, Edward B. Rust Sr., also headed the company.

State Farm is also trying to curry favor with its agents, apparently in the hope that happy agents are more likely to identify and root out bad risks.

State Farm’s latest push is to hook up about 2,500 agents not already linked to State Farm’s computer system. The system provides each agent with an up-to-date electronic record on policyholders, including policy provisions, claim histories and property inventories. This way, for example, the computer system might reveal that a motorist insured by State Farm might also need boat insurance.

But before long, the computer system’s biggest benefit could be to help State Farm reduce its claims rate by prompting agents to obtain information that is sometimes overlooked but important to assess coverage and premium rates.

The question remains whether even State Farm’s computers will prove to be enough to hold down or offset claims expenses. Many of the company’s future expenses, like paying for car repairs and hospitalization of accident victims, will be out of the company’s control. That makes it hard to say anything beyond that State Farm could end up being a big winner or a big loser.

Six years later, a blurb in the February 22, 1996 NYT  foreshadows what is currently taking place story in Florida.

The State Farm Mutual Automobile Insurance Company said yesterday that it was taking steps to limit its financial exposure in Florida. The company said two of its subsidiaries, State Farm Fire and Casualty and State Farm General Insurance, would not renew insurance policies for commercial property in Palm Beach and Hillsborough counties, beginning on Aug. 1. Commercial property coverage will also not be renewed in the parts of Dade, Broward and Pinellas counties that are not eligible for insurance through the Florida Windstorm Underwriting Association, State Farm said.

Paper moon policies, hanging over agents adrift in a cardboard sea –  a “good neighborhood”  not.

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