Boardroom in the News
July 21, 2010
Florida's home insurance rate hikes: Questions and answers
Sun Sentinel House Keys Insurance Blog
We reported this weekend that homeowners have been hit with property insurance rate hikes this year despite four relatively quiet hurricane seasons and Gov. Charlie Crist vetoing a bill that would have made it easier for insurers to raise rates.
Sun Sentinel readers had lots of questions that we'll start addressing here.
Q: Why were insurers allowed to set up separate Florida-only affiliates? Why don't regulators require insurers to sell homeowners policies if they want to sell types of insurance that are considered more profitable such as automobile coverage? Bill Robertson, who worked for years at a life and health insurer, said companies should spread their risk outside of Florida. "While I recognize that insurers should be allowed to set rates based on risk...I object to national companies setting up separate state subsidiary corporations. I'm quite willing to share the risk of California mudslides [and] Kansas tornados," wrote Robertson, who bought a policy from Tower Hill Insurance recently after State Farm increased his premium from $1,050 to $1,555.
A: In the late 1990s, State Farm, Allstate and Nationwide created Florida-only companies to help them buy backup coverage more easily, according to a Sun Sentinel story at the time. U.S. Sen. Bill Nelson, who was insurance commissioner then, approved the Florida-only subsidiaries on the condition they be well-capitalized even though insurance experts had warned that the move went against the industry practice of spreading risk.
There's already a Florida law that requires insurers that sell both automobile and home insurance in other states to sell both in Florida. But the law lacks teeth because it doesn't say how much home insurance is required. "You can literally write one policy in Florida" to meet the requirement, said Monte Stevens, the Office of Insurance Regulation's legislative affairs director.
Q: Regulators said Florida's insurance problems stem from a dramatic increase in development and in turn, in insurers' potential claims payouts. But what happened to premiums and profits over that time?
"Doesn’t that growth translate into a proportional bigger pot of premiums being paid into the insurance coffers? If I double the number of insured properties, it doubles my exposure to claims – but doesn’t it also follow that the same growth doubles the amount collected in premiums? So how does extra customers generate a need for large premium hikes?" said Gary Carlson of Davie.
A: We reported that the maximum possible catastrophic damage nearly tripled from $747 billion in 1995 to about $2.23 trillion in 2010, according to projections private insurers provided to the state. During that same time, the premiums collected more than doubled -- increasing 2.7-fold -- from $435 million to $1.16 billion.
As for insurers' profits, A.M. Best released a report Monday saying the U.S. property and casualty insurance industry's net profit after taxes was $11.5 billion for the first quarter of 2010 compared with a net loss of $900 million in 2009 -- largely due to the economy improving. But premiums dropped for a record 10 quarters in a row in part because there's more competition among insurers to cover businesses and there wasn't much of a need for new policies or higher coverage on existing policies due to the economic slowdown.
Most Florida insurers reported losing money last year due to higher claims costs and other expenses. Consumer-friendly insurance laws combined with "uncontrolled reopening of claims after several years have contributed to rapidly escalating claims frequency and severity and have been a major contributor to higher premiums," wrote Roger Desjadon, president of Florida Peninsula Insurance. "If the state is so profitable why do you suppose so many companies have left and aren’t returning?"
Herbert Haber, a retired executive and former insurance agent in Tamarac, echoed the point: "Is there anyone who believes that insurance companies which were earning fat profits have left Florida or have severely curtailed their Florida risk underwriting?"
Q: "Why is it mandatory to have more insurance on your home than what you owe the bank?" asked Joseph Tamargo, who said he wonders if banks and insurers are in cahoots.
A: Patrick McNamara, an insurance agent with Insgroup in Fort Lauderdale, said insurers want to sell policies that provide enough coverage to rebuild a home. That is called the "replacement cost."
"As far as I know homeowners must insure the home for replacement cost. Insurance companies require replacement cost coverage," he said. "This all has to do with the insurance company collecting the proper premium."
He added that if a homeowner's loan is for more than the cost of rebuilding "the mortgage company can only require the home be insured for the replacement cost and not more."
Q: Why are some insurers requiring condominium unit owners to buy coverage for "certain structural parts" and how is that different from what's covered by the condo building's master policy?
Robbye DeFrancesco said her insurer, Universal Property & Casualty Insurance in Fort Lauderdale, wanted to require him to buy the coverage. "How can an insurance company require that I take out an additional $47,100 for structural parts when the structural parts are covered by the Condo Association's coverage policy -- which we pay for through our monthly maintenance fees? We are being penalized by insurance companies so that they can gain more revenues," she wrote.
A: Some lenders required additional coverage on condo unit policies in situations where the master policy lapsed but we'll post more information here when we hear back from Universal P&C officials and others.
