COLUMN: Don't bet the (State) Farm

By Randy Schultz, Palm Beach Post Editor of the Editorial Page

June 14, 2009

http://www.palmbeachpost.com/opinion/content/opinion/epaper/2009/06/14/a20a_schultzcol_0614.html

The State Farm Bill, which would allow Florida's largest property insurers to charge whatever they want, finally got to Gov. Crist on Friday. Here's another story that explains why the governor who wants to be a U.S. senator should veto House Bill 1171. And Gov. Crist is part of this story.

On Aug. 15, 2006, the Florida Cabinet held its monthly meeting. The Cabinet included Gov. Jeb Bush, Chief Financial Officer Tom Gallagher, Agriculture Commissioner Charles Bronson and Attorney General Charlie Crist. On the agenda was property insurance. After two bad storm years, premiums were shooting up. Mr. Bush was term-limited, but the other three were on that year's ballot. What to do about the public outrage? There was one option.

The Legislature and Gov. Bush had just created My Safe Florida Home, a $250 million program that offered free inspections of a home's ability to withstand a hurricane. If people made improvements based on the inspection, they could get discounts from their insurer, which stood to pay less in claims. Other homeowners might find from the inspection that they already qualified for discounts.

No one seemed more eager to offer those discounts than Joe Formusa, then the president of State Farm Floridian. "We support giving mitigation credits." Translation: State Farm would give discounts for storm protection. Mr. Bush said that whenever he flew over Tampa he worried about storm surges. Mr. Formusa said, "...I would just like to add that I live in Tampa, and I have a hair-on-fire philosophy (about discount credits), and I'll spread it to the rest of town."

Mr. Formusa added helpfully, "...lowering insurance premiums, and, of course, reducing the exposure to companies is good for the economy as well." Cool. Discounts are good for Floridians, good for insurance companies and good for Florida. Let's get going!

Cut to July 2008. Florida had had two mild storm seasons, and would have a third. State Farm had received a 52 percent statewide rate increase in 2006 after the bad seasons. Yet the company now wanted - ever so reluctantly - another 47 percent increase. A State Farm news released stated: "We are ... aware of the growing financial burden on Florida property insurance consumers, and that a rate filing of this magnitude could add to that burden. But prompt action is needed."

And why did State Farm need such "prompt action." According to the release, "A significant portion of State Farm Florida's rate need is due to hurricane loss mitigation discounts." Wait a minute. Weren't these the same "mitigation credits" that the company's CEO had touted barely two years ago?

Ah, well. State Farm's "experience with these discounts has been anything but as expected." Having heard about the discounts - "hair-on-fire philosophy" - a lot of people wanted them. Also, regulators had the nerve to make the discounts specific. A certain improvement meant a certain rate reduction. A company actually had to deliver on a promise. In this case, State Farm didn't deliver.

Why not? Who really knows. Only nuclear launch codes are bigger secrets than insurance company finances. Maybe the stock market swoon hurt State Farm, since insurers often make money off investments, not insurance. Whatever the reason, State Farm wanted 47 percent more. Regulators said no. So did a judge. State Farm then announced, with just enough lead time for the legislative session, that it would drop all 1 million policies in Florida.

And then along came the State Farm Bill. Supporters claim that it would give customers the "choice" of paying much more for the certainty of an established company. Of course, House Bill 1171 contains no guarantee that State Farm would keep all those 1 million homeowner policies. There's no guarantee that any of the other companies would keep all their policies, let alone write more and take policies out of state-run Citizens. The only guarantee is that people would pay more.

Oh, and there's one other guarantee. Voters would remember the governor who heard the 2006 promise that State Farm broke but still signed the State Farm Bill.

Randy Schultz is the editor of the editorial page of The Palm Beach Post. His e-mail address is schultz@pbpost.com