Florida's Property Insurance Market in Peril, Insurance Agents and Consumer Advocates Warn

May 14, 2009

TALLAHASSEE - Just weeks away from the start of hurricane season, Florida's independent insurance agents and a leading consumer advocate warn that Florida's perilous property insurance market puts homeowners at serious financial risk and that Florida is "one storm away from disaster."

Speaking for Florida's 2,000 independent insurance agencies, which represent all but a handful of the companies writing residential coverage, Florida Association of Insurance Agents' President Jeff Grady said, "In pursuit of artificially low rates, Florida has created a fragile, unstable insurance market that leaves Florida homeowners and taxpayers in grave financial risk."

Grady said the warning signs are growing that Florida's "dangerous experiment with forcing short-term savings at the expense of long-term stability renders Florida an unsupported insurance island that will collapse under its own weight."

Among the signs are these:

• Florida faces a shortfall in the state's Hurricane Catastrophe Fund estimated to be as high as $12 billion, and the federal government has signaled an unwillingness to extend Florida a bailout to cover it. This could result in delays or non-payment of hurricane claims for homeowners and business owners and test the viability of the state-run insurance company, Citizens Property Insurance Corp., and many small Florida-only property insurance companies.
• In a startling new revelation, FAIA found that nearly 40 percent of Florida's residential property insurers lost money last year - after three years of no hurricanes. In one telling example, FAIA triggered an investigation of a carrier making "too good to be true" claims about premium savings. Both the Office of Insurance Regulation (OIR) and the Department of Financial Services (DFS) found numerous violations including unfair trade practices and the use of "unlicensed" personnel by People's Trust Insurance Company. The OIR, however, which approves carrier solvency, also uncovered serious financial problems, including a lack of reinsurance, and immediately ordered the company to cease selling new policies.
• While only 16 percent of Florida homeowners are covered by the state-backed Citizens, their coverage is subsidized by assessments on the remaining 84 percent, many of whom get coverage from smaller insurance companies that are less than three years old. Those who don't own property also pay assessments on their auto, renters and small business coverage. Employers would have to pay 40 percent of all the assessment taxes, which could also be passed on to consumers in the form of higher prices.
• Demotech, the company that rates insurers in business less than three years, recently threatened to downgrade carrier Financial Stability Ratings because of over reliance on Florida's Hurricane Catastrophe Fund, which could be underfunded by as much as $12 billion. If the rating agency were to take this step, tens of thousands of homeowners would be in default of their mortgage requirements.

Consumer advocate Walt Dartland, executive director of the Consumer Federation of the Southeast, warned that taxpayers and policyholders ultimately will pay the price and that day may come sooner rather than later.

"The only thing worse than expensive insurance is worthless insurance," Dartland said. "In trying to artificially drive down insurance premiums, Florida taxpayers may be set up to face the biggest tax increase in our history, and Florida homeowners may be forced to pay for 'force-placed' coverage that only protects their mortgage holders' interest in their homes."

Grady said Florida has turned its back on decades of sound insurance principles and actuarial science that make sure companies have adequate reserves and reinsurance to pay claims. While legislators may have attempted to correct problems in the recent legislative session, Grady said the "deregulation" bill creates an uneven playing field, "deregulating only a few example of the market players at the expense of all the rest."

The Legislature also capped Citizens' rate increases, extending the time the company's rates will be artificially low and increasing the likelihood of assessments for everyone in Florida who is insured by companies other than Citizens. FAIA says these changes will further strain Florida's precarious insurance market. The best strategy for restoring stability to Florida's property insurance market is to allow market competition to drive down rates and eliminate subsidized competition from the state-run insurer, Grady said.

"New Jersey and Massachusetts tried unsuccessfully to artificially force down auto insurance rates for decades," Grady said. "Only when state leaders let market forces take hold did competitive choice return and rates began to drop."

The Consumer Federation of the Southeast (CFSE) is a not-for-profit consumer advocacy group founded in 2003 and dedicated to consumer advocacy in the Southeastern United States. Our goal is to establish a vigorous, new, pro-consumer agenda built upon public awareness, consumer education, and coalition-building. For more information visit http://www.consumerfederationse.com

FAIA is the oldest and largest insurance association of any type in Florida. It represents over 1,700 independent property and casualty agencies, employing close to 18,000 licensees. Independent agents are not employees of companies but are independent contractors representing all but a handful of Florida's admitted insurers and are free to sell policies for any number of companies. For more information, visit www.faia.com.