Florida Homeowners

Let’s hear it for the free market! Seen at Business Insurance:

Florida property catastrophe reinsurance rates will likely fall by 15% on average during mid-year renewals, according to a report released by Guy Carpenter & Co. L.L.C.  [...]

The sharpest price decreases include 18% to 25% reductions for the higher layers of reinsurance, attaching above the Florida Hurricane Catastrophe Fund, according to the report.

Lower layers of reinsurance, below the FHCF, are declining by 7% to 10%, while private reinsurance layers usually placed alongside the FHCF are decreasing by 12% to 15%, compared with June 1, 2007, renewals, according to the report.

I know that a lot of reinsurance departments at property insurers are looking forward to a bit of relief, given the softer market and a couple of relatively quiet years in North America. (Yes, it’s been a bad tornado season , but such storms don’t generally impact cat reinsurance industrywide.)

I expect that regulators in certain states will also welcome the news that primary insurers will see a little relief.  I do wonder, however, if regulators will remember that it’s difficult to reduce rates when increases requested in part due to increased reinsurance expense weren’t fully granted in the first place.

The Sun-Sentinel is celebrating Easter with a lengthy article discussing the conflict between the Florida House and Senate on what to do on property insurance reform. (Existing reform legislation lapses on 1 January, and attempts to sell bonds to support the state cat fund haven’t gone over so well in the current credit market.)

The Senate seems to be taking a decidedly pro-consumer tack, while the House is reflecting more of a Republican lassiez-faire attitude. For a pretty good synopsis, check out the article.

There is one comment in the story that I love:

Florida Chief Financial Officer Alex Sink, who oversees Citizens as a member of the state Cabinet, said it’s time for Citizens’ premiums to start climbing so the company can build more of a cash surplus before the next storm.

“It’s not fair to the 70 percent of Floridians who are not in Citizens,” she said. “When they can’t cover their claims, guess who does? All of us.”

So, it seems that the Florida Senate Select Committee on Property Insurance Accountability has, in spite of the time and ink wasted repeating that mouthful of a committee name, come up with a few ideas on further property insurance reform in the wake of their hearings this winter. According to Insurance Journal, those suggestions include:

• Extend temporary prohibition on insurers making “use and file” rate filing.
• Require rates be based on hurricane loss models approved by Commission on Hurricane Loss Projection Methodology
• Require that approved models be used by an insurer in determining its probable maximum loss
• Require or authorize the Florida Office of Insurance Regulation (through the Financial Services Commission) to adopt rules establishing standards for allowable profit and contingency factors in rate filings
• Prohibit rates from including reinsurance costs that duplicate coverage provided by the Florida Hurricane catastrophe Fund, regardless of the effective date of coverage
• Provide criminal penalties for insurance officials who knowingly, with intent to deceive, make false statements or reports to the OIR
• Require insurers to certify in a rate filing the number of policies they intend to non-renew and to calculate the reduced risk into their rates

I suppose that no one on the committee noticed that limited long-term profitability concerns…as well as the sheer amount of paperwork (or the its electronic equivalent) is in no small part what makes the state such an unattractive market to insurers?

It’s a shame that “profit” has become such a dirty word (in a Republican-run state, even!). Excess profits are a good thing in a free market—if they existed, they would attract additional lower-priced competitors to the marketplace, who would presumably be happier with not-so-excess profit.

You almost wonder if such anti-capitalistic policies define the property insurance path the state wants to follow, perhaps they should simply move to a state-run monopolistic insurer. I know a few entities who would be willing to help administer such a beast…for a fee, anyway… if the state’s citizens are willing to foot the bill when the next big storm comes.
• Strengthen the excess profits law

Last week saw a couple of days of grueling hearings before a Florida state Senate committee looking into why insurers haven’t honored legislators’ promises of lower property insurance rates.

Apparently, the committee hasn’t had enough fun yet. Seen in Insurance Journal:

After two more days of grueling questions to Florida state regulators and insurance company executives, a special Senate panel wrapped up its business Tuesday as confused as when it began.

In fact, the Select Committee on Property Insurance Accountability decided they wanted more sworn testimony from industry executives in mid-February to gather additional information on why many companies haven’t reduced premium costs to property insurance customers.

“At some point in time we’re going to have to recognize that we can’t have it all,” said Steve Geller, D-Cooper City, who co-chaired the panel.

A meeting notice posted on the committee’s website only shows a couple of cat modeling experts on the docket for the 19th. Perhaps they’ve been having problems trying to subpoena the Gecko as they threatened?

It seems that Florida legislators might be coming to take a few of the industry’s toys away. Seen in the Orlando Sentinel’s Political Pulse blog:

With the annual legislative session starting in March, lawmakers said they could consider fixing loopholes in last year’s law.

In one such gap, the law didn’t explicitly indicate methods insurers can’t use to predict risk and ultimately set insurance policy prices, said Sen. Steve Geller, D-Cooper City.

Insurers such as Allstate Floridian Insurance Co. and Nationwide Insurance Co. of Florida based rate increase requests last year on storm risks over the next five years instead of the customary 100 years. A special state commission approves risk prediction methods, but use of unapproved methods, such as the five-year projection, results in higher insurance rates.

Of course, it should be noted that if there’s a significant disconnect between what insurers are permitted to use and the models that adequately financially secure reinsurers use when negotiating cession rates, Florida will become an even less attractive property market.

Seen on the AP wire:

A row of Allstate officials went before the Senate Select Committee on Property Insurance Accountability to answer questions about why the company has asked to increase home insurance rates despite a new law intended to lower premiums.[...]

One of the main differences between what the company has asked to charge customers and what state regulators have determined is appropriate is how or whether to factor in the prospect of more or stronger hurricanes because of rising ocean surface temperatures.[...]

For some of lawmakers’ questions, company officials had trouble giving a simple, direct answer. Many were complicated actuarial questions, and the responses didn’t always please the panel.

“I haven’t seen so much bobbing and weaving since Muhammad Ali did the rope-
a-dope,” said Sen. Bill Posey, R-Rockledge. “When we get the nebulous answers,
it just gives me more questions.”

While I haven’t been able to track down a likely source for transcripts of the session, I do note that the committee has its own web page, from which a the 233 page meeting packet for Monday’s and Tuesday’s meetings can be obtained.

Well, maybe not the gecko (especially since Geico farms out their homeowners program to other carriers), but it does seem that a few pointy-haired folks from around the insurance industry will be summoned to Tallahassee.  From a blog post at the Orlando Sentinel’s website:

Top insurance executives are being summoned — and maybe even subpoenaed — to testify under oath next month before a newly formed Senate select committee examining why last year’s legislative overhaul of homeowners’ insurance has not caused rates to plummet. [...]

“We’re going to be looking for CEO’s” to testify, said Senate Minority Leader Steve Geller, D-Cooper City. “We’re going to be looking for Mr. Farm from State Farm. From GEICO, we’re going to want the Gecko himself….We want people in authority.”

The post mentions that State Farm, Allstate, Travelers, and the Hartford could receive the summons.  There’s also a quote from a PCI rep hoping that the industry gets a fair hearing, as they try to explain why they can’t fulfill legislators’ promise to voters that property insurance rates would drop significantly in the wake of last year’s reform.

I’d hope that legislators will be willing to listen…and that the summoned insurers actually try to explain the analysis involved, rather than fall back upon standard government relations lines.  But…well, I see nothing here to dispel cynicism when looking at either side of that table.

In the continuing saga of Tallahassee’s refusal to believe that it is expensive to insure properties in hurricane-prone areas, we have this article from Southwest Florida’s News-Press:

Gov. Charlie Crist has asked three politically connected lawyers to take on the state’s property insurance industry, much the way a prior governor went after Big Tobacco.

Crist’s office said the governor met last week with his transition team adviser Bobby Martinez, former general counsel Dexter Douglass, and Bob Hackleman, a former law partner of the governor’s chief of staff.

Apparently Crist wants to see a class-action suit brought against insurers for failing to follow the intent of HB 1A.

You know, if the Governor is looking for some legal talent with impressive credentials, I hear tell that the Scruggses have a much shorter to-do list these days…although perhaps they’d be better working on their own, rather than with other attorneys.

It’s not every year that studies performed by actuarial consultants generate so much press.

A couple of months ago, I mentioned work Tillinghast has done looking at the potential impacts on the new Florida cat facilities if a storm were to hit — the conclusions being that current cost savings is being achieved at the risk of some hefty assessments in the future if a storm hits, and that inland Floridians were effectively subsidizing the risk of coastal south Floridians.

Now, in the past couple of days, there have been several articles about two new studies. (See: Insurance Journal, Jason Kennedy’s recent blog post for the Orlando Sentinel, and this article in the Sun-Sentinel).

Both studies were put together by Milliman. One was commissioned by PCI, to look at the impact of Florida’s reforms. PCI’s press release is here. I haven’t been able to track down a copy ot the study itself, but the conclusions are similar to the Tillinghast report — renters, auto insurance customers, small business owners, and residents of northern Florida will subsidize South Floridians through assessments if a hurricane hits, and the state will potentially be burdened with a need to borrow a lot of money if we were to see a bad storm season in that state.

The other study was put together by Milliman for a group calling itself Protecting America. An executive summary of the Milliman report is available for download at the Protecting America website. The big headline coming out of this study is that Milliman believes that $11.6 billion in savings could be generated for homeowners in key states if the feds were to form a national cat fund.

Reading the executive summary, the premise behind that take-away appears to be that the federal government can underwrite risk far more cheaply than insurers and reinsurers, given that the feds are an infamously not-for-profit operation, and given the feds’ ability to borrow money theoretically risklessly.

That’s a premise I don’t necessarily disagree with…but there is a certain element of risk, of variability that the feds ought to consider in any premiums. The nature and magnitude of that element is not discussed within Milliman’s executive summary. Neither is a discussion of to what extent a federal backstrop will create unfair subsidization from less cat-prone Americans to those who choose to live in harm’s way.

I could see that some level of subsidization is appropriate, be it at the state or federal level. For example, I could believe that a consumer living in Tallahassee derives some benefit (e.g., Florida’s lack of an income tax) by virtue of the state’s having such a vibrant tourist industry fueled by all these magnificent destinations constructed in hurricane-prone areas. If that’s true, it could be argued that the inland homeowner ought to help pick up a small part of the cat-prone property’s insurance cost.

I’d love to see a study done to measure those effects.

However, the lack of details in the second Milliman study’s documentation leaves me a bit uncomfortable. Specifically, I’d love to read more about the mechanism of funding the federal pool, or the sensitivity of the assumptions made.

I am not, however, going to get too excited yet about the potential of a federal cat fund. It’s been talked about for a long time…and given the expected contentiousness of the 2008 election cycle, I doubt that too many politicians will want to be connected with a bailout of the perpetually unpopular insurance industry.