24% rate drop just a dream; insurance nightmare is back

How quickly the hope of homeowner relief faded.

Article Courtesy of The St. Petersburg Times

By Tom Zucco
Published  March 18, 2007

It sounded like a good idea at the time.

Require property insurance companies to lower rates an average 24 percent statewide and make them double the discounts they give to homeowners who do things such as buy storm shutters or reinforce their roofs.

"Today we have a message for the people of Florida: 'Help is on the way!' " Gov. Charlie Crist beamed that day in January when he signed the insurance overhaul bill into law.

Crist even added a poke at the industry, which claimed the new law might make some companies stop writing policies in Florida.

"They shouldn't fearmonger that way," Crist said. "That's wrong for them to do, and that day is over in Florida now."

The harsh reality is that nearly two months after the legislation was signed, the prospect for higher rates and more cancellations later this year and in 2008 looms as large as ever. Maybe even larger because of the higher discounts that insurers will have to give those who hurricane-proof their homes.

Homeowners say they aren't seeing anything close to significant rate reductions, the insurance industry says it's being forced to place itself at even greater risk, and, in a rare moment of agreement, both sides claim the stage is being set for a return to full crisis mode next year, even if no hurricanes hit the state this season.

Savings disappear

The new law allows insurance companies to buy cheaper back-up insurance, or reinsurance, from the state-backed Florida Hurricane Catastrophe Fund, or from a private company at CAT Fund level rates, and pass the savings on to policyholders.

At a news conference March 1, regulators placed the average savings at 24 percent. For the first time in three years, homeowners could breathe a littler easier.

But insurance companies aren't falling over themselves to take the CAT Fund bait. For at least three-quarters of the Florida property insurance market, as the state learned last week, the proposed cuts are a fraction of that 24 percent.

What's worse, those small reductions come on top of sometimes substantial rate increases that were approved last year. State Farm, for example, says its average savings for reinsurance is 7 percent, and Nationwide says its savings is 4.5 percent.

But last year, State Farm and Nationwide won average rate increases of 52 percent and 71 percent, respectively, for policies that come up for renewal this year.

So for a Nationwide policyholder in western Pasco County whose rate was scheduled to go up 80 percent this year, if the savings mandated by the Legislature are factored in, the actual increase will be more like 75 percent.

"That's relief?" asked Ginny Stevans, president of New Port Richey-based Having Affordable Coverage, the state's largest grassroots advocacy group.

"Decreasing an increase is not giving relief to people who have to put their insurance bill on their credit card or take out a home equity loan to pay for it."

State regulators are miffed, too.

"I'm shocked at 4 percent," said Bob Hunter, a director of the Consumer Federation of America who was enlisted by the state to help determine what the average savings should be.

"And I don't believe 7 percent works," Hunter said of the State Farm number. "We'll have to wait and see what the Florida Office of Insurance Regulation does with those."

While we wait, here's how the insurance industry is responding:

Less than two weeks after Crist's remarks, Michigan-based Auto-Owners Insurance sent letters to its Florida agents telling them the company would no longer write new policies in the state and acknowledged that it would drop 40 percent of its Florida policyholders.

"We cannot rely on purchasing hurricane reinsurance from any organization that is financially unreliable," the letter reads. "The new law also requires companies to reduce rates, as if additional reinsurance was purchased from the (CAT Fund). This is simply a rate roll back."

And a license to drop policyholders. Since the rate reduction filings began this month, Nationwide Florida has notified 25,000 policyholders that they will be dropped in the next year, Allstate Floridian resumed its program of dropping about 250,000 policies, and other companies such as Liberty Mutual did the same on a smaller scale.

The new law also prompted rating agencies such as Standard & Poor's, A.M. Best and Moody's to cast serious doubts on Florida's ability to pay its obligation in the event of catastrophic storms.

Ratings worries

"The ratings agencies are telling the carriers that if they have large exposure in Florida, they're going to see their ratings go down," said Jeff Grady, president of the Florida Association of Insurance Agents.

And if the ratings go down, the companies are less likely to attract new capital.

"At some point investors start to doubt the viability of being repaid in a state that is having to issue large amounts of debt with the possibility of more of the same," Grady said.

"If we're storm-free ... we'll be okay," he said. "But if we get storms, we'll probably be in this posture for some time.

"Just lowering the (reinsurance) price doesn't solve the problem."

And then there is the issue of the discounts for hardening homes - the shutters and the roofs - known as mitigation discounts.

"Our biggest issue is mitigation discounts," said Kelly King, chief financial officer of St. Petersburg-based Edison Insurance, a small homeowner insurer that started last year. "You can't force a company to give back more than half of a premium and expect them to stay in business.

"If you give discounts to homes that deserve it," King added, "somebody else has to make up the difference - the homes that don't have it."

"If (the policy) is implemented as required, the $20-million we took in premium is reduced to less than $10-million. I can't stay in business."

Florida Insurance Commissioner Kevin McCarty counters that mitigation discounts shouldn't account for large deficits for most companies. He notes that all companies are required to make secondary rate filings before Sept. 30.

"And we will thoroughly review and vet those filings," McCarty said. "This is just the first round."

As for the rating services, McCarty said A.M. Best "has been wrong for the last 12 years, and I'm very concerned about that."

Citizens' losses

The wild card in what happens next, besides the weather, is the largest property insurer in Florida - state-backed Citizens Property Insurance.

The rate rollbacks mandated by the Legislature will cost Citizens about $350-million this year, and the doubling of the discounts will cost $270-million, making the total in lost revenue for 2007 about $620-million.

Citizens' last rate hike was in 2006 and was based on a 2005 filing. It will make a new rate filing at the end of August.

"It won't be a huge jump," said Citizens spokesman Rocky Scott. "But it will be an increase."

Citizens is taking in about $200-million a month in gross revenues, but its exposure to risk, the total value of everything it insures, has doubled in a year and is now at a staggering $432-billion.

"This is something that's going to have to be addressed as a matter of public policy, and therein lies the rub," Scott said. "It's a long-term project."

That's something many Floridans are just beginning to find out.

When Don Shimp opened a letter from Liberty Mutual last week to find that the insurance on his Lithia home had jumped from $2,869 to $5,284, he called his agent, thinking it was a mistake.

"She told me, 'Oh, no. Those decreases don't apply to our company,' " said Shimp, 62, a retired Verizon manager. "It's not that I can't come up with the money. It's just so absurd.

"The whole purpose of insurance is to spread the risk. I would say to the governor that if we can't spread the risk, we should just take over the insurance industry and have Citizens provide everything.

"Because either way, the state pays for it."

What has happened?

After state regulators promised rate cuts averaging 24 percent, most homeowners in Florida will see reductions closer to half that size. That's not the only bad news. Fearing that they won't be able to attract new capital, many companies are not writing new policies in or near coastal areas, or are dropping policies altogether.

Insurance How will the new law affect me?

It depends on the age of your home, where you live and who insures you, but don't be surprised by an overall rate increase when your policy comes up for renewal. In some cases, the rate hike could be 100 percent or more. Contact your agent for more specifics.

 When will I get the change in my bill?

The discounts are set to begin June 1 but won't be reflected on individual policies until the policy comes up for renewal, which could be next year.

What can homeowners do?

Contact the governor's office and/or the state legislator in your district.