Why your rates keep rising even without hurricanes

Article Courtesy of The News Journal

Published November 30, 2009


Wayne and Nancy Haller were in the "good hands" of Allstate for 42 years.


The Hallers insured a house, cars, a motorcycle and a boat. They were grateful to Allstate, too, after Hurricane Charley blew apart a pool screen and caused about $9,000 in damage to their New Smyrna Beach home.


So, Wayne Haller didn't grumble much when his property insurance premiums went up, doubling from about $600 a year to $1,200 in 2006, even though the house near Interstate 95 is hardly a coastal property.


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.


"I remember getting a renewal notice for the car not long after that," he said. "I said, 'To heck with you.' "


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.

But now, five years after Hurricanes Charley, Frances and Jeanne plowed into Volusia County and four years after Florida saw its last major storm, all of that upheaval should be over. Right?


Don't count on it.


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.


"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.


But trying to limit discounts could be difficult, especially after years of insurance-industry and state officials urging homeowners to add storm shutters, upgrade roofs and make other improvements.

"God forbid they should give mitigation credits, right?" Robert Hunter, director of insurance for the Consumer Federation of America, replied sarcastically when asked about the issue.


Insurers say the large amounts of discounts add to the financial pressures of doing business in Florida, where name-brand carriers have stopped writing new policies and have dropped hundreds of thousands of others.


Most notably, State Farm Florida announced in January it would gradually stop selling homeowners insurance in the state because it was in danger of going insolvent -- a problem it partly attributed to losses from the discounts.


State Farm's wholesale withdrawal from the market has not started because of ongoing negotiations between the company and insurance regulators. If the withdrawal happens, however, it will mean hundreds of thousands of customers will have to find new coverage.


Other insurers, meanwhile, are choosy about where they will write policies and the types of homes they will cover. Though companies have different strategies, an example might be reducing risks in South Florida and coastal areas while competing for business in safer North Florida.


"You've got to really pick your spots very carefully," said Robert Ritchie, president and chief executive officer of the Tampa-based American Integrity Insurance Group.


Like other large insurers, Allstate dropped hundreds of thousands of policies in recent years.

But its Florida subsidiaries -- which changed their names this year to Castle Key Insurance Co. and Castle Key Indemnity Co. -- are expected to add about 100,000 policies over three years under an agreement reached in 2008 after a dispute with regulators.


While that could give a boost to the state's insurance market, many former customers of Allstate and other large insurers still have raw feelings about losing coverage after the 2004 and 2005 hurricane seasons.


Haller, the New Smyrna Beach resident, said he ignored Allstate's suggestion to go with another company, Royal Palm Insurance, because an Allstate agent would have sold the policy.

Haller wound up paying a little more with a small company but felt good about doing it.

"I felt like they were dropping us for no reason," he said. "It really showed me. They're not out to help you. They're out to make a profit."


Comparing rates


Property-insurance rates can vary widely by company. Using information from a state Internet site, here are examples of average rates in Volusia and Flagler counties under two different scenarios.


Scenario one: A masonry home built in 1990 with a replacement value of $150,000, a $500 deductible on non-hurricane damage, a 2 percent hurricane deductible, no claims in the past three years and no wind-mitigation features.


Volusia County

Frontline Homeowners/First Protective Insurance Co.: $1,009

Southern Fidelity Insurance Co.: $1,034

Citizens Property Insurance Corp.: $1,417

First Community Insurance Co.: $1,966

State Farm Florida Insurance Co.: $2,118


Flagler County

Frontline Homeowners/First Protective Insurance Co.: $799

Tower Hill Prime Insurance Co.: $805

Citizens Property Insurance Corp.: $1,174

Universal Property & Casualty Insurance Co.: $1,656

First Community Insurance Co.: $1,749


Scenario two: A masonry home built in 2005 with a replacement value of $300,000, a $500 deductible on non-hurricane damage, a 2 percent hurricane deductible, no claims in the past three years, discounts for limited wind-mitigation features and a non-sloping roof.


Volusia County

First Community Insurance Co.: $986

Florida Farm Bureau Casualty Insurance Co.: $994

Citizens Property Insurance Corp.: $1,847

St. Johns Insurance Co.: $1,884

Federated National Insurance Co.: $2,126


Flagler County

Frontline Homeowners/First Protective Insurance Co.: $857

First Community Insurance Co.: $892

Citizens Property Insurance Corp.: $1,559

Liberty Mutual Fire Insurance Co.: $1,824

Southern Fidelity Insurance Co.: $1,927

Source: www.shopandcomparerates.com


Note: While these are average rates approved by the state, companies might not be writing new policies in the counties.