In Print: Wednesday, April 21, 2010

It is no secret that Florida’s property insurance market is far from healthy. More than 1 in 4 homeowners are insured by the state-run Citizens Property Insurance Corp., and private coverage remains unaffordable or unavailable in many areas. But it also is no secret that too many state legislators are too cozy with insurers, and their free-market proposals are not the answer.

House Republicans have taken the most extreme anticonsumer position. The legislation (HB 447) scheduled for a House vote today would enable insurers to raise rates up to 10 percent a year statewide and up to 20 percent on individual homeowners without seeking traditional regulatory approval from the state. Insurers are lobbying hard for the flexibility, arguing they are losing money in Florida despite several hurricane-free storm seasons. But the free-market principles espoused by the bill’s supporters don’t work for property insurance, because homeowners with mortgages must have coverage and their options are limited.

At least the Senate has offered a more palatable compromise. The bill (SB 2044) now says insurers could raise their rates by up to 10 percent a year for individual homeowners with the approval of state regulators. The House bill essentially ends all review by regulators, and insurers would be looking out for themselves while no one looks out for homeowners. No wonder Gov. Charlie Crist has threatened a veto.

The fate of rate regulation is not the only concern in these bills. Other provisions also would hurt consumers more than help them. For example, homeowners with replacement coverage would no longer be able to get all of their money up front for damage to their homes or contents. That would make it harder to get homes repaired after storms and create more hardship and expense for families already suffering enough.

Then there is the bait-and-switch on mitigation efforts. For several years, the state has wisely encouraged homeowners to invest in reinforced garage doors, storm shutters and other improvements to harden their houses and reduce the potential for hurricane damage. In return, insurers were required to offer mitigation discounts. But now the insurers are complaining the policy worked too well and costs them too much money. Mitigation discounts need to be better linked to the actual savings in avoided damages, but legislators are going too far in allowing insurers to reduce the discounts or raise rates to make up for the cost of the discounts.

Legislators are on the right track in some areas. For example, they would increase the amount of capital required for new insurers, and they are pursuing a variety of antifraud efforts related to home inspections and mitigation discounts. But on balance, they are listening too closely to insurance lobbyists and not acknowledging consumer concerns in a difficult economy. The governor should keep his veto pen ready.

The trends in property insurance are not all bad. Reinsurance costs for insurers have declined or stabilized. Citizens now has more than $13 billion in cash and financing available, enough to handle a 1-in-25-year storm. And with good luck, Florida will be better positioned after another hurricane-free season.

Ultimately, though, for this state to avoid financial disaster after a major hurricane there will have to be far broader solutions than those the Legislature is offering. Congress still needs to pass a national catastrophe plan to help spread the risk of major storms. And Florida still needs to seriously study whether it would make sense for the state to collect premiums and insure against hurricane risk in return for private insurers servicing the policies and insuring everything else. Until then, legislators are just tinkering around the edges at homeowners’ expense and hoping for the best.

State Rep. Bill Proctor’s House Bill 447 — aimed at consumer   choice in property insurance and deregulation of rates — heads to the state House floor Tuesday.   Backers are optimistic it will pass   both the House and the Senate, where a companion bill (SB 876) is moving through committees. Once that is accomplished, they believe they will have a bill that Gov. Charlie Crist will sign.

The latter may be optimistic as Crist has already said he will veto this legislation as he did a similar Proctor attempt last year.

Crist and Proctor disagree over whether the bill really is consumer choice and if allowing unregulated rates have consumer protection built in.   The key here is the consumer has a choice and is not being forced to take the unregulated rate. But the bill also includes a cap of 10 percent on a statewide rate increase and 20 percent on an individual policy increase.

Furthermore, the bill requires the Office of Insurance Regulation to start up a shop-and-compare Web site for consumers.

Other critics have said a recession is no time to be allowing companies to raise their rates.

But Proctor said the choice   is imperative because the state’s private insurance market is eroding. He tells whoever will listen, “We are   just one hurricane away from a (financial) disaster.”   Even before that comment sinks in, he explains that if a major storm hits a large metropolitan area, damage could exceed $80 billion.

He goes on to say that the state’s two major insurance entities — Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe (Cat) Fund –   do not have the resources to pay all   the losses from a year’s first devastating storm, let alone a second one. 

Citizens, the primary insurer of many properties, would have about $12.9 billion to draw on, leaving a deficit of $8 billion toward its obligation of $21 billion. Likewise, the CAT fund would only be able to provide up to $17 billion toward claims, leaving a deficit of $6 billion.

Proctor  says the state needs to attract more claims-paying capital through companies having   a substantial surplus on hand. We agree. Proctor’s bill requires a minimum amount of surplus on hand of $15 million for   each new company coming in the state after July 1.   That should provide greater stability for the market.

Proctor isn’t the only one saying the state’s insurance market is in trouble. In March, the Sarasota Herald-Tribune   published a special report.  It said, “Over the past year, without having to weather a single hurricane, Florida led the nation with a half-dozen property insurance failures. For the first time, state regulators openly warn that more failures will come, even if a storm does not.”   

Florida Tax Watch, a nonprofit, nonpartisan taxpayer research institute and government watchdog, said, “Florida faces a property insurance crisis,” it said. It also said that Citizens and the CAT fund cannot cover their potential liabilities. “Florida may be one hurricane away from depending on federal relief or facing a financial crisis.” It reinforces what Proctor has been saying — there’s much for Crist to mull over.

We supported the choice plan last year and we’re doing it again this year. Insurance companies should be able to offer consumers a choice in rates. If consumers choose to pay   unregulated rates   and accept the risk, then let them do so.

A serious threat to Florida’s economic recovery is the possibility that a major hurricane will strike a large metropolitan area this summer or next. The resulting damage to residential and commercial properties could exceed $80 billion.

Many of the claims would be the responsibility of the state. Unfortunately, the state’s two major property insurance entities, Citizens Property Insurance Corporation and the Florida Hurricane Catastrophe Fund (known as the “Cat Fund”) do not have the financial resources necessary to pay losses of such magnitude.

Citizens, the primary insurer of Florida homeowners, will have about $4.2 billion in cash and $8.7 billion in expected reinsurance coverage this year to meet its potential $21 billion obligation from a catastrophic hurricane. Thus, Citizens could be underfunded by more than $8 billion.

Equally concerning, insurance companies would rely on about $23 billion in state Cat Fund coverage. Yet it is projected that the Cat Fund will only have about $6 billion in cash this year, and may be forced to incur debt through bond issues of more than $17 billion to pay its claims.

This leads to a frightening reality: Whatever debt Citizens and the Cat Fund incur must be paid back by Floridians through hidden hurricane taxes — of an unknown amount and duration — that are levied on their auto, boat, homeowners and business policies. In the event of an $80 billion storm, these taxes could cost individual families and businesses thousands of dollars. Most Floridians don’t realize it, but they’re already paying hurricane taxes on their insurance policies to bail out the state’s flawed property insurance system. In fact, we’re all still paying taxes for the 2004 and 2005 hurricanes, because the state ran out of money to pay its claims.

The threat to Florida’s economic recovery arises from three possibilities: additional hurricane taxes may intensify the current recession; the state may not be able to issue enough bonds to pay all of Citizens’ and the Cat Fund’s claims; and the state would have few resources left to pay claims from a second major storm. These possibilities could occur soon, unless we abandon the policy of suppressing insurance rates below actual risks.

The private insurance market is eroding. National companies are reducing their exposure or leaving the state; small “start-up” companies do not have the resources to fill the void and many are facing financial difficulties. Florida insurance regulators recently reported that 100 out of 206 private insurers sustained underwriting losses in 2009; 60 companies saw surpluses decline. We must attract and retain private claims-paying capital; otherwise, the burden shifts to the state.

There is no immediate solution, but two actions are imperative. Citizens must be required to charge rates that truly reflect risk. Additionally, private market rates must be based on price competition, regulated by consumers in a competitive environment – not by government.

This spring, I am again sponsoring the Consumer Choice property insurance bill (HB 447/SB 876). This bill would allow consumers to decide for themselves what they want to pay to have their home protected by a private insurer that they know and trust.

Under HB 447, insurers could offer Consumer Choice policies at rates established through price competition. To protect consumers from dramatic price swings, the bill presently provides that any future rate increases would be capped at five percent in year one, 10 percent in year two, and 15 percent in year three and beyond.

Buying a Consumer Choice policy would be entirely voluntary — Floridians could still buy a policy from a private insurer at a fully regulated rate, or from state-run but underfunded Citizens. The intent of my bill is to give Floridians more choices and options for buying homeowners insurance, to attract more private claims-paying capital to our state, and to reduce the state’s unfunded risk in Citizens and the Cat Fund.

Some critics oppose allowing Citizens and private insurers to charge rates that reflect actual risks. It is then the obligation of these critics to propose a solution that does not entail hidden hurricane taxes.

Florida cannot afford to wait for a solution from Congress. We must take action now to ensure the rates of Citizens and private insurers are actuarially sound, and to minimize the state’s role in the homeowners insurance business. Otherwise, we face the threat of bankrupting the state after a major hurricane.

Proctor, R-St. Augustine, represents state House District 20, which includes part of Flagler County.

News Service of Florida

Posted: 8:50 p.m. Wednesday, March 17, 2010

TALLAHASSEE — Property insurers would be able to raise premiums without regulatory approval, but only by up to 15 percent a year, under a wide-ranging insurance approved in a House committee Wednesday.

The proposal (HB 447) was amended to add the 15 percent cap on unregulated premium increases, and to include other reforms that were requested by the property insurance industry including allowing companies to withhold most of replacement payments until the work is completed.

Sponsored by Rep. William Proctor, R-St. Augustine, the original proposal allowed property insurers to raise premiums in excess of those approved by the Office of Insurance Regulation without the agency’s approval. OIR would retain authority over other aspects of insurance regulation.

The amended version would ramp up the ability of companies to raise rates. An insurer could boost rates by 5 percent the first year, 10 percent the second year and 15 percent from then on without OIR approval. The House Insurance, Banking & Financial Affairs Policy Committee approved the measure on a 11-3 vote.

Backers say the increases are needed to shore up an industry ravaged by non-hurricane losses and rates that are not actuarially sound. Such rates have resulted in a market in which state-run Citizens Property Insurance Corp. is the largest property insurer in the state.

“I find it incredible that some people would think that the market we have now is working,” said Rep. Alan Hays, R-Umatilla. “That flies right in the face of the facts. The only reason why it’s working is that we haven’t had a 100-year storm.”

Critics, including state insurance regulators, say the bill provides too many concessions to the industry at the expense of consumers — the policyholders. They also said the measure lacked provisions to prevent unapproved increases after rates become actuarially sound.

“There is a balancing act between consumer interests and market interests. This bill is askew in regard to that balance,” said Sean Shaw, consumer advocate for the Office of Insurance Regulation.

Added to the bill were a number of provisions that had been part of separate legislation addressing a slate of recommendations insurers say they need to remain able to pay claims.

The measure now would allow companies to withhold 60 percent of payment for replacement until the repairs or purchases are made. Since 2006, Florida law has required insurers to pay the full replacement payment up front regardless of whether the repairs are made.

The measure also excludes medical malpractice policyholders from being assessed in the event of storm.