We noted in our continuing coverage of the Florida Senate Hearings concerning their property insurance mess that Allstate used unapproved short term weather models to make actuary decisions on the purchase of reinsurance. Those poor business decisions have caused losses for Allstate’s Florida operating company, losses they now wish to dump on Florida consumers.
Allstate has since been joined by Nationwide and Farm Bureau in admitting the use of unapproved short term models to drive reinsurance purchase decisions. Farm Bureau also admitted losses deriving from that fact.
In a refreshing change, we have a story from the Miami Herald that Florida based American Strategic Insurance testified Tuesday they used approved long term models and have profited from the better decisions that resulted from that fact.
American Strategic, a St. Petersburg company that managed to cut rates an average 11.5 percent due to the money it saved by buying a portion of its reinsurance from the Florida Hurricane Catastrophe Fund.
The company also lowered rates another 9.5 percent later in the year, mostly because it paid a lower cost for additional reinsurance bought in the private market and had fewer claims and better cost controls.
”Generally speaking, apples to apples, reinsurance costs were coming down for everyone in 2007,” said CEO John Auer, who expects to see another drop this year.
Unlike many insurers, American Strategic said it is writing new homeowners policies, even some on the coast. The company has 260,000 policies, making it the third-largest insurer behind state-run Citizens and State Farm.
Sen. J.D. Alexander, R-Winter Haven, questioned American Strategic’s heavy use of reinsurance to cover potential losses. He asked if it would be in financial trouble if its reinsurers, especially the state catastrophe fund, couldn’t make good on their
Auer said the company, started 10 years ago, has already lived through highs and lows in the reinsurance market, noting that reinsurers are pleased with American Strategic’s management. And A.M. Best raised American Strategic’s rating to A-minus from B++ last December.
As I opined on the Allstate Yahoo Finance Message Board, the testimony of Allstate, Hartford, Farm Bureau and Nationwide Insurance reminded me of the confessions of an accomplished three card monte dealer. They expect their customers to foot their mistakes; both the mistaken decision to purchase more reinsurance and the decision to buy expensive reinsurance at all for that matter, rather than the cheaper variety offered by the State of Florida. Is insurance the only line of business that doesn’t have to pay for their business mistakes? In the small business world where I come from there is no government backstop save bankruptcy so the concept of profit entitlement is foreign to me.
In any other line of business the shareholders, not the public would be eating these business mistakes. So while we congratulate American Strategic and their owners for their ability to profit while their competitors languish we also hope free market principles apply equally to those who make bad business decisions.
Simply put there is a point where the insurance industry needs to take ownership of their mistakes. The mess in Florida illustrates exactly why so few present day insurers would survive in a truly competitive marketplace without that anti-trust exemption they currently enjoy. Our position is that the free marketplace should reign supreme where ever possible and the culture of big insurance profit entitlement should end.
Finally the events in Florida now have me wondering if our state regulators here in Mississippi have been hoodwinked by similar tactics. Our wind pool premiums are in the stratosphere, largely due to the astronomical cost of reinsurance. Given what we have learned through the application of Sunshine to the insurance industry by the Sunshine State, I challenge Mr. Chaney to hold rate hearings for any increases in property insurance, not just those he arbitrarily deems too high. We have quickly arrived at the point where he should put the interests of the citizens of this state ahead of the profit interests of these out of state insurance companies.