Going Bare

After windstorm insurance skyrocketed following the devastating 2004-2005 hurricane seasons, many property owners gambled and cancelled the wind portion of their property and casualty policies.

Now, more commercial and residential property owners, faced with tighter budgets, are finding other ways to lower their insurance costs. Strategies include reducing or eliminating optional umbrella coverages (coverage that exceeds the limits of an underlying policy), reducing other coverage limits, increasing deductibles, and in some cases “going bare” — meaning not renewing property insurance even when required under the terms of a mortgage.

When property owners don't renew insurance per the common boiler-plate terms of a mortgage, they get letters from the lender or its third party vendor reminding them their legal obligation to maintain property insurance. And if they fail to renew by the expiration date, a borrower is technically in default. The lender can then protect itself with “force-placed” insurance that kicks-in automatically.

The Mortgage Bankers Association explains that force-placed insurance is coverage obtained by a lender to protect its interest in a property when the borrower does not renew existing coverage.

Bud Hornbeck, president and CEO of Lutgert Insurance in Fort Myers, isn't surprised to hear about growth in force placed insurance. “I would guarantee they are as busy as can be. I
bet the force-placed business has probably been going crazy.”

He wins that bet.

“It's up substantially,” says Jose Perez, of Coral Gables-based Financial Insurance Brokers, Inc. Past clients from the Gulf Coast have included two failed banks: Riverside Bank of the Gulf Coast, based in Cape Coral absorbed by Naples' TIB Bank after failing last February, and Century Bank, a federal savings bank which had a significant presence in Sarasota before recently being shut down by the FDIC and bought by Louisiana-based IberiaBank.

Financial Insurance Brokers is one of the few big winners in the sea of losers swamped by the sinking Florida economy. In fact, its doubled the number of uninsured loan policies its written in the last 12 months according to Perez. “It's a sign of the times,” he adds.

The business model for companies in the once-small industry of force placed insurance generally entails providing relatively low cost tracking services for banks and mortgage companies. The hope is to sell the higher margin force placed insurance when borrowers fail to live up to their end of the deal.

And that insurance is very expensive — typically two to five times costlier than typical property insurance and it only covers the borrower's indebtedness for the lender. It's costly because the rates are not regulated, other than having to be “adequate and conscionable,” according to Eli Lehrer, an insurance expert formerly with the Competitive Enterprise Institute and now with the Heartland Institute think tank in Chicago. Also, the insurance underwriter doesn't have control of the property or the opportunity to fully examine it, and thus is exposed to greater risk.

The high cost of force-placed insurance also serves as a big disincentive for borrowers to let the insurance lapse in the first place. But in this economy, it's apparently not enough of a disincentive. One insurance industry executive, when asked how there can be such a market for force-placed insurance, says that in many cases borrowers are just “asleep at the wheel.”

'Insurance or basic needs'
But these days it's likely the economy is more to blame as the insurance expense is typically escrowed and paid automatically.

And some argue the over-regulation of rates has limited competition and paradoxically is now leading to some rate increases to get to more actuarially sound rates. That's the case with Citizens Property Insurance Corporation which recently raised its rates by less than the 10% maximum set by the Legislature, but far less than what experts believe is necessary for the state-run company to be actuarially sound.

The Heartland Institute's Lehrer gives Florida an F- when it comes to insurance regulation. (See sidebar.)

“Regulation has been so disruptive to the insurance industry,” Lehrer says. Massive changes to the property insurance industry are coming in Florida despite more capital in the industry this year, he says. Force-placed insurance is a symptom of the larger regulatory issues stretching from rate suppression to excessive mandated discounting for hurricane-proofing buildings that has become magnified by alleged inspection fraud.

Dave McMahon, an agent with Sarasota's Atlas Insurance, sees the disruption on the frontlines. “Florida is a tough market. The atmosphere in Tallahassee has made it impossible. We've gone from difficult to impossible. [Insurance carriers] picked up their sand toys and left.”

He sees the problems especially in the commercial insurance market where clients are ditching optional umbrella coverages, reducing coverage limits and checking property values to be sure they're not overinsured.

“Those folks have been put in a very difficult position,” he says. McMahon points out that more companies are reducing coverage that they previously thought was appropriate — and not just because of the economy, but also because of the difficulties with the commercial insurance market.

“Premiums have been sliding back the last couple years, but although they have slid back the economy has been walloping everybody. The economy went bottom up and consequently we had companies who had 30 people on their payroll went down to six.” McMahon adds, “There's not an industry that hasn't been affected by this thing.”

As Perez puts it, “Most people get to the point of asking themselves whether they go without insurance or basic needs.” And he points out the region from Collier County to Lehigh Acres saying, “That whole area, more than any other part of the state, is being affected.”

Keith Mercier, an agent with Clearwater-based Bouchard Insurance, says he's also seeing clients, particularly subcontractors, dropping liability limits and tools and equipment floaters. And some are going bare, but mostly when clients don't have a mortgage.

Still, he knows of a former client who said they were going bare on property insurance. “Some people have tried to slip it by. We walk away from those types of clients,” he says. Other agents note that some clients are electing to go bare on the windstorm part of their policy during the non-hurricane season or may be choosing to self-insure.

The Florida Association of Insurance Agents has also been affected by cutbacks in umbrella coverages. The FAIA brokers a standalone personal umbrella coverage for its members that has been “a very large piece of our pie,” according to Jeff Grady, FAIA's president and CEO.

“We sell a ton of it. We are the largest association producer of it in the country,” Grady says, before revealing, “We are dramatically down.” He explains, “We're dropping policies pretty significantly because of that being seen as an optional coverage.”

Mergers or legislation next?
From discussions with insurance executives along the Gulf Coast the anecdotal evidence is clear: commercial property owners and homeowners are cutting back on insurance coverage, and in some cases going so far as to go bare — though with the force-placed provisions protecting banks it's a strategy more to be deployed where property does not have a loan.

Commercial and residential property insurance policy data from the Florida Office of Insurance Regulation lends some statistical support to what the agents are seeing — half of the Gulf Coast's eight counties are seeing declines in premiums per policy in force. Those declines are found in Sarasota, Charlotte, Lee and Pasco counties.

Hillsborough and Pinellas are seeing the biggest increases in premiums and policies in force though fairly modest. Although Pinellas had the greatest increase in premiums at 4.6% for the six months, its premium per policy only rose 1.7%.

With the softer insurance market of the past two years being compounded by suppressed rates and a struggling economy, the financial impact on the agencies seems to be growing.
Oswald-Trippe and Company, based in Fort Myers with offices around the Gulf Coast and elsewhere, was recently purchased by BB&T Insurance.

That may be turn out to be the portent of things to come.

More mergers could be forthcoming. Just as banks like Iberia are swooping in to grab failed local banks, Lutgert's Hornbeck believes more mergers and acquisitions are in the offing for insurance agencies. Where agencies may have a lot of debt, or its book of business is based largely on sales and payroll or the hard hit construction industry, they could be a target says Hornbeck.

Somewhat surprisingly — and what must be reassuring to Perez's firm — no one stung in the wallet by being force placed has come screaming to the government for help. But according to Lehrer, it “could presumably be regulated at the state level.”

Sen. Garrett Richter, R-Naples, a banker and chairman of the Banking and Insurance Committee, and Rep. Ron Reagan, R-Bradenton, an insurance agent both say they haven't been heard any rumblings yet. Still, Reagan acknowledges, “If it's gets their attention someone could bring it up.”

Richter thinks it's not outside the realm of possibility, saying, “I would not be surprised if there is discussion relative to it, but I'm not sure what the solution would be.”

From the Property and Casualty Insurance 2009 Report Card:
Florida received an F-, the lowest overall grade in a survey conducted by the Competitive Enterprise Institute and the Heartland Institute.

A free market for homeowners insurance does not exist in Florida. Instead, a state-run agency, the Florida Citizens Property Insurance Corporation, serves as the state's largest property insurer.

Florida's rate regulatory system is one of price control. Currently, Florida limits all insurance rates to Citizens' rates plus 15%.

The state's burdensome prior-approval process and heavy government interference with the rate-setting process has led most major insurers to withdraw or cutback policy-writing in the Florida market.

Forcing the issue

Force placed insurance is insurance keeps the lender from losing coverage on his interest in properties where the borrower lets coverage lapse.
When is Force Placement Initiated?
Force placed insurance starts when a borrower defaults on an insurance requirement in the loan documents. There are typically three instances where this can happen:
• The borrower neglects to offer proof or evidence of insurance at renewal time or any other time;
• The borrower has no insurance, either through cancellation or non-renewal;
• The borrower has insurance, but the amount, coverage, deductible or insurance carrier itself does not meet the loan document requirements.
Source: Due Diligence for Force Placed Insurance, Mortgage Bankers Association, Dec. 2006.

REVIEW SUMMARY
What. Businesses, homeowners slashing insurance coverage.
Issue. Insurance agencies battling for survival on multiple fronts
Impact. More agency mergers could be on the horizon.

Jay Brady covers state and local government issues. He can be reached at [email protected], or at 941-362-4848.