We all feel it in our pocketbooks. The insurance rates for homeowners, wind, and flood coverages in the State of Florida have been escalating since Hurricane Andrew hit in 1992. Add corruption and mismanagement in Citizens Insurance Company, the financial vehicle the State authorized as the “insurer of last resort” and you have an even bigger problem.
The Problem
- Corruption and mismanagement of Citizens’ Insurance Company, the State sponsored “insurer of last resort”
- Too few solvent insurers to underwrite Florida risks
- Availability of affordable homeowners’ insurance in Florida
- Too many risks that have high risk exposures e.g. sinkhole and hurricane that are not acceptable to the underwriting guidelines of most insurers underwriting in FL
- Too many risks that have risk elements e.g. old roofs, out-dated electrical and plumbing, that do not meet underwriting criteria of most insurers underwriting in FL
- Too many risks that have been forced into Citizens, the ‘insurer of last resort’
- Under funded expenses/losses of Citizens requiring a 7% surcharge on all policyholders — Even those not insured by Citizens — creating a “tax” on all insured’s in Florida
- CAT fund now under funded for future hurricane losses
Background
Hurricane Andrew was not the event that triggered the Homeowners’ crisis in Florida. Years ago, the Florida legislature decided that insurers in the State should cover the sinkhole peril, a peril not covered by homeowners’ policies anywhere else in the United States. The action by the Legislature placed homeowners in Florida into a separate ‘risk pool’ from those across the rest of the United States.
NOTE: Coverage for the sinkhole peril is not included on the Insurance Service Office’s (ISO) standard homeowner forms! When insurers file their own forms with state departments of insurance, they do not add the peril of sinkhole. It is not a peril insurers are comfortable insuring because of the catastrophic nature of the peril and the inability to receive adequate premiums to cover the exposure.
…And then there was ‘Andrew’! Before Hurricane Andrew, Allstate had computer models that told them how much loss they would incur if a Category 5 hurricane hit in south Florida. They chose to ignore their models and continued to tell their agents to “sell, sell, sell!”
After Andrew, both Allstate and State Farm cancelled large numbers of homeowner policies because they recognized that their concentration of risk in the State was too large. Put another way, they had not collected enough premium in this ‘risk pool’ — the State of Florida - - - to pay for the actual losses let alone future similar losses.
Nationwide chose another course. While they did not cancel existing policyholders, they chose to reduce and limit the number of new policyholders. Nationwide also allowed policyholders to transfer their HO policy from one home to another when moving within the State. Otherwise, they limited their agents from writing more than 1 or 2 homes/condos a month unless the policy was written x-wind. They have also attempted to find and form relationships with non-admitted carriers whom they deem financially sound so that their agents would have other markets, acceptable to Nationwide’s Umbrella underwriters, to fill the needs of the clients who cannot get a Nationwide policy. At the time, Nationwide acted very responsibly, but has now started to cancel policyholders. They now recognize that their concentration of risk is too great in Florida.
The concept of insurance is based on the ‘law of large numbers’. Each policyholder pays a proportionately small premium, which is then paid out to the few policyholders that actually sustain a loss. Unfortunately, hurricanes and sinkholes typically cause catastrophic losses. In order to solve Florida’s homeowners’ insurance crisis, one of the first problems to be addressed is encouraging more financially stable insurers into the Florida homeowners’ market.
The Solution
Based on the problems that currently exist, I believe the legislature must:
- Pass legislation that will prohibit conflict of interests, graft, and corruption in Citizen’s
- Talk to insurers operating in Florida and out-of-state to determine what is needed to bring new, solvent insurers into Florida to underwrite property and casualty risks
- Explore the idea of making the entire State eligible for the ‘wind pool’ both for personal and commercial risks
- Rescind the requirement that insurers writing property insurance in Florida include ‘sinkhole’ as a peril to be insured (NOTE: it is usually excluded on most homeowner’s forms)
- Add the ‘sinkhole’ peril to the ‘wind pool’ and make it a ‘wind/sinkhole pool’
- Link the CAT fund to the ‘wind/sinkhole’ pool
- Replenish the CAT (catastrophe) fund using the anticipated $3 billion surplus for 2005-06
- Require all homeowners to purchase a ‘wind/sinkhole’ policy if they purchase a HO policy
- Retain the requirement that anyone in a Flood zone must purchase flood insurance if they purchase a ‘wind/sinkhole’ policy
- Allow homeowners who have paid off all financial liens on their home to purchase coverage in the ‘wind/sinkhole’ pool (subject to the flood requirement) but NOT require them to purchase a regular homeowner’s policy
Comments
Republicans claim that they are refusing to allow any new tax increases. They claim to be the Party of tax refunds. Where your insurance premium dollars are concerned, Republicans are playing a shell game. They try to make you think they are giving you a tax break with a “Tax Holiday” when, in fact, they are collecting taxes by adding a 7% surcharge to every homeowner’s policy in the State in 2005-06 to cover the cash deficiencies of Citizen’s in 2004-05. If State Farm, Nationwide, Allstate or another insurer other than Citizen’s insures you, check your bill. That 7% ‘tax’ is there!
Given the fact that the catastrophe fund is close to insolvency and severe hurricanes are predicted in our future, I believe that we should place a portion of the anticipated surplus in the catastrophe fund to replenish it.
I do not think that our older citizens living on fixed incomes should have to choose between paying an insurance premium versus purchasing food and medication they need to sustain themselves. Affordable Homeowner’s insurance is not a problem that is going away. It is time to solve the problem, not create new ones.
Links cited in above proposal:
(1) State’s auditors savage Citizens – January 27, 2006 – Joni James, St. Petersburg Times
(2) Insurance rates raise beyond their reach – January 29, 2006 – Garrett Therolf, St. Petersburg Times
(3) Another insurance shock is forecast – January 20, 2006 - Joni James, St. Petersburg Times
(4) Insurance rate hikes on agenda – January 24, 2006 – Tom Zucco, St. Petersburg Times
© Zimmermann2006 – February 1, 2006
