Low tide, rising rates sink all ships

The study is expected to have many benefits. For one, it would give leaders a clear cost-to-benefit analysis. As important, the wind mitigation study would allow for systematic improvements in the hurricane resistance of buildings in the six counties on the Mississippi Gulf Coast (Hancock, Harrison, Jackson, Stone, Pearl River and George) by utilizing wind-resistant construction techniques to reduce property damage and/or loss.

This would result in a significant reduction in insurance premiums, as well as reduce the negative economic impact of a hurricane on the entire state and its citizens, the MID said.

Florida’s mitigation discount experience suggests any premium reduction in Mississippi will be short-lived, according to the latest news from Tallahassee.

In the coming months, hundreds of thousands of Florida homeowners will see insurance bills increase.  And many others will open their mailboxes and get the insurance industry’s version of the pink slip, forcing them to buy coverage from the state or turn to companies they might never have heard of.

Bottom line, as another peaceful hurricane season ends this week, property insurers still look at Florida’s beautiful beaches and see big, fat financial risks.

Wayne and Nancy Haller were in the “good hands” of Allstate for 42 years…But Haller felt betrayed when he received a letter in 2007 saying Allstate was dropping coverage on the home where they’ve lived for 20 years…The Hallers were among countless Floridians who had to dig deeper into their checkbooks — or lost property-insurance policies altogether — after eight hurricanes hit the state in 2004 and 2005.

SLABBED reported the trend this past September:

Insurers, led by State Farm Florida, are complaining that the discounts for installing shutters and other protections have become so popular that they are undercutting the industry’s bottom line. Last year, citing the cost of the discounts, State Farm asked for a 47.1 percent rate increase.

Robert Hartwig, naturally, had the spin:  “There is no other place on the planet with such a high concentration of risk,” said economist Robert Hartwig, president of the industry-backed Insurance Information Institute.

The state’s Citizens Property Insurance Corp., the largest insurer in Florida, is moving forward with plans to start raising rates in January in areas including Volusia and Flagler counties.

Meanwhile, private insurers have been quietly filing proposals with state regulators to increase rates. In some cases, insurers say they are losing money, despite the lack of hurricanes.

Sean Shaw, the state’s insurance consumer advocate, said he looks at each company on a “case-by-case basis.” But he said policyholders have “zero appetite” for rate increases after four years without any major hurricanes.

“It’s just hard for people to imagine that we have not had a hurricane in years and for insurance companies to say, ‘We’re losing money; we need rate increases,’ ” Shaw said.

On a basic level, insurers are not supposed to increase rates to recoup losses from past storms. But they say they need to collect enough money in quiet years so they will be able to pay claims when hurricanes inevitably hit.

“We’re making money so we can pay our claims, which is a good thing,” said Lisa Miller, a former deputy insurance commissioner who lobbies for insurance companies.

But Florida’s insurance puzzle is far more complicated than insurers simply wanting to prepare for a rainy day — or beef up profits.

That puzzle has pieces ranging from global reinsurance firms in London and Bermuda to computer modelers who use mounds of data to create hurricane scenarios and estimate potential damages.

And never underestimate the part played by politics. It is a rite of spring in Tallahassee for legislators to change insurance laws, and often their decisions have a direct bearing on how much you’ll pay for coverage.

Frenzy of rate hikes

Florida’s property-insurance market has been tumultuous for years, particularly since Hurricane Andrew mowed through parts of Miami-Dade County in 1992.

But the crisscrossing hurricanes of 2004 and 2005 caused roughly $36 billion in insured losses. That touched off a frenzy of rate hikes and dropped policies, as insurers tried to limit their future risks. Allstate reported a record $5 billion profit for 2006. State Farm saw profits climb 65 percent that year.

Gov. Charlie Crist and lawmakers gave relief to homeowners in 2007, freezing rates for Citizens Property Insurance and expanding another state program, known as the Florida Hurricane Catastrophe Fund, to help push down rates of private insurers.

The catastrophe fund sells low-cost reinsurance, a crucial form of backup coverage that insurers need so they can pay hurricane claims. In exchange for making more cheap reinsurance available, the state required insurers to reduce homeowners’ rates — with the reductions ranging from single digits to more than 20 percent, depending on the company.

But freezing Citizens rates and expanding the catastrophe fund also had a major downside. The state effectively took on billions of dollars in financial risks and, if a big hurricane hit, residents and businesses throughout the state would be forced to pay the tab.

So far, with the calm 2007, 2008 and 2009 hurricane seasons, Florida has been lucky.

But worried about the financial risks, lawmakers this spring agreed to allow Citizens to raise rates as much as 10 percent a year. At the same time, they started scaling back the size of the catastrophe fund and taking other steps to bolster its finances, which ultimately will lead to increased rates for many homeowners.

Citizens will begin charging higher rates for hundreds of thousands of customers in January. Meanwhile, numerous private insurers have sought rate increases, with regulators approving hikes of as much as 15 percent.

Insurance Commissioner Kevin McCarty said a number of factors are driving higher rates, including private reinsurance costs that increased about 15 percent this year.

Many reinsurers are based in Bermuda or Europe and are largely unregulated, which can lead to big swings in the amounts Florida insurers have to pay each year for the backup coverage.

Cost of discounts too high?

But another rapidly emerging issue in Florida centers on discounts that insurers are required to give homeowners who upgrade their houses to better withstand hurricanes.

Insurers argue many of the discounts — known as mitigation credits — are larger than justified and that the process of inspecting homes is filled with fraud and errors.

Locke Burt, president of Ormond Beach-based Security First Insurance Co., said discounts are costing his company about $22 million annually in lost premiums. Burt said he supports giving discounts to customers, but that other policyholders will be forced to pay more if some people get unjustified breaks.

“It’s not fair to the other customers to be giving discounts to people who don’t qualify,” said Burt, a former state senator.

When insurance is unaffordable, it’s the economic security of property owners and communities that is at risk.  Adding wind coverage to the NFIP is the answer.  Mitigation is also an answer – but tax credits for property owners, and not premium discounts, are the appropriate public policy.

6 thoughts on “Low tide, rising rates sink all ships”

  1. It is very interesting watching this FL situation unfold. What is happening is rates have been held in check at levels that are not profitable long term. The regualtors and politicians created this with keeping the Citizens rates artificially low.

    Now there is “dialogue” about keeping State Farm in the market. The reason for this is Governor Crist was wrong when he said it didn’t matter if SF left as there were plenty of carriers. What the citizens of FL are telling him is, “Yes, there is coverage with “B” rated carriers at rate levels higher than what SF wanted to charge.” Keep in mind the Gov is running for the Senate.

    Nowdy, a good point about reinsurance being unregulated and carriers do not control the cost of reinsurance. Therefore, it is like auto makers having to adjust prices when the cost of steel (plastic) goes up. The good news for everybody is there hasn’t been a major hurricane year for FL. Then it will really get ugly.

  2. Market and Government Failure in Insuring and Mitigating Natural Catastrophes: How Long-Term Contracts Can Help
    Howard Kunreuther, Erwann Michel-Kerjan, The Wharton School, University of Pennsylvania
    http://opim.wharton.upenn.edu/risk/library/WP2009-03-18_HK,EMK_AEI.pdf

    Kunreuther has proposed long-term insurance contracts that would lock in rates as a way to encourage mitigation. He makes the logical conclusion that if we want homeowners to make substantial mitigation improvements, they have to be confident that they will get the savings in future premiums. The insurance industry has shown no interest in the idea. They want the government to fund mitigation efforts through grants and tax subsidies but with no guarantee or requirement to lock in savings on future premiums. Once again, the insurance industry wants the government to help reduce their risk while allowing them to increase premiums.

  3. Hey, now, if we’re going to write about Fla. and our little cities, let’s spell them right….TALLAHASSEE….(not Tallahassie)….hey, if i didn’t know, i would’ve guessed that as well! You would never know unless you lived in Fla ! Heck, even alot of Fla. residents get it wrong and we have more cities harder to spell than that one! :) Tallahassee is home to FSU and their Seminoles!

  4. Let’s also look at the larger problem…the state is also in the insurance game and has taken millions of dollars out of the pockets of the private insurers. Just like this new health care idea-let’s get the government involved and save everyone for a short time but in the end; everyone pays more.

  5. Joe, the state did not get in the insurance business to take anything from insurers. The industry has demanded that every state set up some sort of risk pool so they could dump high risk exposure while cherry-picking the well-built high-end properties whose owners have other other insurance needs in easy money lines. The industry has been in complete control of the process in every coastal state. After every disaster they succeed in covering less risk but charging higher premiums and then complaining about it. Homeowners and taxpayers are the victims here, not the insurance cartel.

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