TALLAHASSEE - In the frantic last days of the 2006 legislative session, lawmakers were desperate to prevent insurers from fleeing the state.
The previous year's hurricane season was still fresh on people's minds; some lawmakers were still fixing homes damaged by downed trees. The philosophy, at least among Republicans responsible for shaping the insurance package, was to give insurers a reason to stay in Florida.
Use a carrot, not a stick.
It didn't work. Rates went up. Insurers dropped policies and not a single new private carrier entered the state that year.
Fast forward to the special session in January. Profits became a dirty word. Lawmakers bandied about terms like "crackdown" and "corporate greed."
More stick, less carrot.
But the new law hasn't worked so well either. The reason, in part, is because of the old law.
It's all about reinsurance - the coverage insurance companies buy to protect themselves.
In 2006, lawmakers gave some of the bigger insurers an incentive to buy reinsurance from their parent companies. The corporate family should be allowed to make a "reasonable" profit on money pledged to pay future hurricane claims.
Companies say it's just a cost of doing business in hurricane-prone Florida. But they can also pocket double-digit profits from it. Most insurers can't afford to take advantage of the perk, but at least two companies enjoy the benefits, making up a quarter of Florida's private insurance market.
Less than a year later, the Legislature reversed course. It wanted insurers to stop buying reinsurance from themselves and start buying cheaper reinsurance from the state and pass on the savings. Regulators said rates would drop 24 percent.
"Like a rock," Gov. Charlie Crist said.
But the real savings are more like 10 to 12 percent. And companies that like buying reinsurance from their parent under the older law are among those companies that are still charging the highest rates.
"It's really jacking up our prices and helping their own bottom line," said Bill Newton, executive director of the Florida Consumer Action Network, a Tampa consumer group.
This idea of companies reinsuring themselves is not new. For years, State Farm Florida has bought reinsurance from State Farm Mutual based in Bloomington, Ill.
The Legislature simply made it more lucrative.
Until 2006, state law had been silent on what kind of profits insurers could collect if they reinsured themselves. So regulators created a rule allowing companies to make a small profit, no more than 3.7 percent.
But to insurance companies, especially those that had lost hundreds of millions of dollars in hurricanes of 2004-05, 3.7 percent didn't seem fair. A bad storm season could wipe out a reinsurance fund and any profits in a matter of months, said John Rollins, a Tallahassee-based property insurance actuary.
So the 2006 Legislature came up with the "reasonable" standard.
For Nationwide Insurance Co. of Florida, reasonable meant 15 percent profit, more than an investor can expect from the U.S. stock market in an average year.
To get that profit margin, Nationwide asked regulators for a 72 percent rate hike.
"We are mindful of the statutory change that the Legislature acknowledged," said Jon Palmquist, chief attorney for Nationwide in Florida in a September rate hearing.
State Farm asked for a 71 percent rate increase that included a 15 percent profit for its parent company's reinsurance, according to a consumer advocate's report.
The companies ended up getting rate hikes of 52 and 54 percent. State Farm ended up with a slightly lower profit margin. Nationwide's profit margin is still unclear.
Seeds of rebellion
Gov. Charlie Crist won election riding a tidal wave of homeowner resentment against insurance companies. Voters didn't think it was fair for insurers to raise rates so high - especially in a hurricane-free year.
At Crist's urging, lawmakers decided the best way to cut rates would be to enlarge the state reinsurance pool, called the catastrophe fund. Then all companies would have to buy into it and pass on savings.
Knowing that some companies, like State Farm and Nationwide, reinsure themselves, the Legislature foresaw a potential problem. Its solution was to create a fail-safe. Companies could still reinsure themselves, but they couldn't charge any more for reinsurance that does the same thing as the state version.
Trying to crack down
In the meantime, regulators, following the governor's lead, got tougher on insurance companies looking to make profits by reinsuring themselves.
Higher profits didn't seem right when companies were supposed to be cutting rates.
"I don't want to be cynical, but why on earth we would approve a rate increase in order for you to pay more to a parent company?" Belinda Miller, an Office of Insurance Regulation deputy commissioner, said at an April rate hearing with Nationwide. "I don't think people understand why that makes any sense."
The regulators declined the request.
It's still a little unclear what kind of profits insurers will be allowed to make for insuring themselves - reasonable, double-digit or otherwise. But for the time being that uncertainty is getting in the way of rate cuts for consumers.
Last year, when Nationwide fought for its 15 percent profits for reinsurance, the Office of Insurance Regulation said no. But an arbitration panel overturned that and said yes.
The arbitration panel doesn't have to explain how it came to its decision, said insurance office spokesman Jonathan Kees. Nationwide sees it as a win.
"The overall point we are trying to make is that this rate is going to help Nationwide maintain financial stability in Florida and across the country," said spokesman Eric Hardgrove.
The company has held off charging the higher rates, because its 54 percent rate hike under the old law is at odds with its 4.5 percent rate cut under the new law. Nationwide's Hardgrove says the company is working with regulators to "pursue a final resolution of the rate" to comply with all Florida laws and regulations.
Last week, Florida Farm Bureau defended against its meager rate decrease of about 1 percent, adjusted down from an earlier prediction of a 25 percent cut.
Florida Farm Bureau is in a peculiar situation. While the old law encourages companies to reinsure with affiliates and the new law encourages companies to buy cheaper state reinsurance, Florida Farm Bureau told regulators that it had been so underinsured that it needs to do both. And its rates won't come down much because of that.
In Florida Farm Bureau's case, it's unclear which company is profiting on reinsurance, whether it's a Farm Bureau affiliate or a private reinsurance company. But somebody is, Office of Consumer Advocate actuary Steve Alexander said during the hearing.