We don’t win in State Farm vs. Charlie Crist
Mike Thomas | COMMENTARY
June 16, 2009
If all goes according to prediction, Charlie Crist will give State Farm the boot this week.
It is an interesting political gamble taken by the premier politician of our time.
State Farm says it is bailing out of Florida because regulators are blocking it from raising rates. A bill headed for Crist’s desk would allow State Farm and other larger insurers to charge pretty much what they want.
A customer then could decide whether he is willing to pay the higher premium to keep the bigger insurer and its deep pockets.
If Crist vetoes the bill, he most certainly will be blamed if State Farm carries through with its threat of dumping a million policies on a state that’s in no position to absorb them.
But if Crist signs the bill, there is no guarantee State Farm will stay.
The company’s position goes something like this: Veto the bill and we leave. Don’t veto it and we may still leave. We don’t know yet.
I doubt State Farm will leave once given control over its rates.
But I do think the company still would move to shed policies to reduce its hurricane risk.
The old model of a few big insurers covering everybody is being replaced by a new model in which a lot of small insurers spread the risk of massive hurricane losses. This is why you have all these mom-and-pop outfits setting up shop. Depending on whom you listen to, State Farm needs to dump up to two-thirds of its policies to bring its risk down to an acceptable level.
The fear is that State Farm would use this bill to accomplish that objective. It would raise rates unmercifully in areas where it wanted to dump policies, forcing those customers to flee to another carrier.
It would opt for smaller increases in areas where it wanted to continue doing business.
This scenario would bode well for Central Florida, which is a much better hurricane risk than the coast. It’s about time we get a break. We inlanders have subsidized coastal insurance long enough.
But it’s an interesting predicament for Crist.
If he vetoes the bill, he will make a lot of people very unhappy when they lose State Farm and face higher rates with another insurer. This is because the policy holders will get dumped while still enjoying rates that have been suppressed for years by state regulators. And their new insurers will charge more.
If he does not veto the bill, he will be blamed for the big rate increases that State Farm would impose, particularly near the coast. And there is no guarantee State Farm wouldn’t still dump a lot of the policies anyway.
Given that he has based much of his political career on lower rates, it’s pretty much a given that Crist will break out his veto pen. And then, as he has done with the state budget, he will cross his fingers that the insurance market holds together long enough for him to get safely out of Tallahassee.
That is by no means a given.
First of all, if we get slammed by a major hurricane, the state is going bust and we face a fat 30-year tax increase to pay off damages. Crist’s insurance reforms and lower rates are based on the premise that we have no hurricanes.
Even if we don’t, the threat of them weighs heavily on the market.
Insurers that rely too heavily on the state’s catastrophe fund to pay hurricane damages face financial downgrades. This could put their customers in default of mortgage contracts.
Also, a major insurance-rating agency, Demotech, warns the private market can’t absorb all those policies. The result could be market instability as hundreds of thousands of State Farm policy holders are dumped into state-run Citizens Property Insurance, creating more risk for taxpayers.
At least Crist seems to recognize this reality.
This month, he signed a bill allowing private insurers to bolster their books with 10 percent rate increases. This begins the effort to transfer risk from taxpayers back to the private market.
This weaning process will take years and will entail rate boosts for years to come. It also raises this question: Why veto the State Farm bill? If the goal is to strengthen the private market, why risk chasing our biggest private insurer out of the state?
Only Charlie can answer that.
Mike Thomas can be reached at 407-420-5525 or firstname.lastname@example.org.