Ever since Florida Gov. Charles Crist signed legislation early this year to vastly expand the public catastrophe fund’s capacity, while allowing primary insurers to buy discount reinsurance from the state, Tallahassee has been on the industry's case, pushing for anticipated rate reductions they believe is due to homeowners. The fight is getting ugly, and it could get a lot worse before long, with vague charges of collusion in the air.
The law's champion, Republican Gov. Crist, hammered away at the industry over the summer, accusing insurers of “breaking their promise” to cut homeowners’ insurance rates to Florida residents by at least 24 percent to reflect their savings in reinsurance costs.
Carriers were quick to lash right back, insisting that a 24 percent cut was never promised by the industry, and instead was nothing more than an estimate from state officials and regulators wearing rose-colored glasses--indeed, more of a fantasy of the best-case scenario, rather than an actuarially-sound prediction.
There has been much posturing back and forth since then, with various requests for stiff rate hikes rejected, but more recently, as NU reported on Oct. 2, "State Farm has agreed to reduce homeowner rates 9 percent, as well as pay almost $23.3 million in customer refunds and $1.5 million in legal costs to the state of Florida."
More ominously, however, the Florida Office of Insurance Regulation and state attorney general's office said State Farm agreed to cooperate on further investigations “related to potential collusion between insurers, trade associations and rating organizations.”
The industry's reaction to the implications of this latest suggestion of not just bad faith, but outright wrongdoing, really sparked an angry reaction.
Sam Miller, executive vice president of the Florida Insurance Council, told NU in an article last week that an ongoing probe of “potential collusion” over rates charged by Florida property insurers is the result of a “warlike” political atmosphere pitting state public officials against carriers.
State Farm insists that whatever Florida officials say, the company is “not involved in anything like that” and referred questions to the OIR. But then who is the state government targeting in this probe, and what does State Farm know about it? Or is the state just off on a fishing expedition, trying to intimidate more carriers into settling by offering refunds and lower rates?
As reported by NU's Dan Hays, Mr. Miller does not believer there has been any collusion on the part of his industry. “The companies have always been very aware what they can and can’t do,” he said, adding that “it’s ridiculous to think insurers get together in a room and conspire on rates. We can’t even get them in a room to agree on legislation.”
He went on to state unequivocally that “there is no collusion. This is an incredibly political, warlike situation, and it’s about rate struggles between public policy officials and insurers.”
Mr. Miller said some 300 companies had made rate filings with the OIR, and that “most have been trashed because we can’t magically produce the rate savings they want.”
Is this a simple matter of scapegoating because Florida's controversial legislative "solution" is failing to deliver the promised rate cuts? Or are insurers reaping the benefits of cheaper reinsurance, but pocketing additional profits, rather than passing along savings, at the expense of policyholders?
I tend to agree with Mr. Miller. Getting insurers to agree on any substantial matter is like herding cats. Their trade associations in Washington can't even convince the industry to agree on whether the federal government should be involved with regulating the industry, and if so, then how? The idea that insurers are secretly fixing prices sounds crazy.
But then again, it sounded crazy to me when I heard that major commercial insurers and mega-brokers were conspiring to stage elaborate role-playing stings to rig bids and fix prices under the noses of risk managers and regulators. Who could have imagined that--until the smoking-gun e-mails were released by New York's then attorney general, Eliot Spitzer?
I have a bad feeling Florida regulators are onto something big. If they're bluffing, don't play poker with them, or you might lose your shirt.
Stay tuned!
Comments (5)
All I can say is that I am glad my company is not currently writing property insurance in the state of Florida!
Posted by Anonymous Actuary | October 9, 2007 11:32 AM
Posted on October 9, 2007 11:32
IF in fact there is collusion, then bring down every player involved, and do not just give out fines, but some jail time as well.
IF carriers did buy extra re-insurance to hedge what Florida sold them, where is any collusion involved? I would hazard a guess that someone, somewhere put a pencil to the numbers and felt that in the event a solid Category 4 or 5 hurricane struck South Florida, the state would not have anywhere near enough capital or bonds to cover a $50 billion loss.
If residents living in North or Central Florida and were told that their premiums were going to double for the next X years to pay for South Florida damage, there would be a massive revolt by the citizens.
Residents would file suit to stop payment to carriers under the reinsurance plan, and eventualy the carriers would have to file suit and pray they got some of the reinsurance payment from paid losses.
It seems that people have forgotten that Florida is a peninsula with water on three sides of the state. That makes it a very attractive target for windstorms and resulting losses. You get what you pay for. Sunshine, warmth and storms that bring the cost to insure a property higher than anywhere else in the country.
As you said, stay tuned.
Posted by J R Baker | October 9, 2007 11:47 AM
Posted on October 9, 2007 11:47
"IF carriers did buy extra reinsurance to hedge what Florida sold them, where is any collusion involved?"
There may be collusion involved if the reinsurance purchases were not arm's-length.
The fact is that Florida has created a system of assessments that will funnel money into the state reinsurance/cat fund.
It is a post-event tax, and unless the insurance industry thinks that the entire state of Florida will get up and leave after a catastrophe, then the state's reinsurance promise is as good as (or better) than any private reinsurance promise.
Sam Miller is right that there is a "war" going on in Florida between the government and the industry. It's unfortunate, because the policyholders are the ones in the crossfire.
If insurers want to retreat and exit the state, they are free to do so. But these guerrilla warfare tactics of surrender and attack will not get them anywhere.
These days the war ends with executives heading out in handcuffs. Is that really what the industry wants?
Posted by Robert H. Friedman | October 9, 2007 2:01 PM
Posted on October 9, 2007 14:01
Florida requires that a carrier disregard the replacement cost holdback provision in a policy, and pay any and all residential dwelling claims in full. This can and does lead some insureds to do only repairs instead of replacing building items.
Then come the next claim, they file for the same thing. Hard to determine if the insured replaced an item when there is a fresh coat of paint on it. A roof can be easy to spot, but interior damage is another animal.
Imagine what money has been spent and replacement never done. You can bet if the company initially paid for repairs, that insured would have screamed.
Just another example of how Florida got into this mess and won't look at the past to try to get itself out of the current situation.
Does anyone think that Florida will go back to enforcing the policy as it reads?
Posted by Rocke Baker | October 10, 2007 3:35 PM
Posted on October 10, 2007 15:35
Florida's politicians and tactics are doing incredible harm to their voters and the policyholders in the state.
Florida needs to be thinking beyond the carriers that are currently doing business there (who they should be praising) and thinking instead about the carriers that AREN'T there.
Every carrier that has thought about entering Florida is sitting back and thanking their lucky stars they aren't writing business in the Sunshine State.
Until the state adopts a stance that allows existing carriers to earn a reasonable profit for the SIGNIFICANT risk they are assuming, other carriers will remain outside the state looking in.
This isn't idle talk. I know of at least one potential $50 million-plus investment in the Florida homeowners market that didn't occur specifically because of fears about the regulatory environment in the state--fears that proved well-founded, in retrospect.
Posted by Anonymous | October 10, 2007 9:55 PM
Posted on October 10, 2007 21:55