Free to Choose

REVIEW SUMMARY
What. Residential property insurance rate regulation.
Issue. Will short term politics get in the way of lower rates in the long run?
Impact. Consumers may have fewer choices if not free to choose the best insurance company for their needs.

It's a piece of legislation aiming to give Florida consumers more choice when it comes to selecting a residential property insurer with the capacity to pay claims, but once again, one man — Gov. Charlie Crist — may end up doing the choosing for millions of Florida homeowners.

The late economist Milton Friedman would groan.

Friedman, winner of the Nobel Memorial Prize in Economics, and his wife Rose, authored “Free to Choose,” their 1980 best seller espousing economics based on the themes of human freedom, economic freedom and equity.

Last June, after 86% of legislators voted for freedom with the “Consumer Choice Act,” the governor vetoed the bill, citing a growing residential property insurance market based on data provided by state Insurance Commissioner Kevin McCarty. A Florida Chamber of Commerce poll also showed strong support for the bill with 60% of voters wanting the governor to sign it.

McCarty's manipulated data camouflaged the fact that a number of companies on his list were not writing property insurance for homes and mobile homes. His list also included capital incentive loans from the state, meaning from taxpayers.

McCarty has been widely criticized for wildly overstating new capital entering the market. That criticism has come from legislators, Chief Financial Officer Alex Sink, business groups and in editorials and news stories across the state. It was also documented in the Gulf Coast Business Review. (See McCarty's Camouflage, July 16, 2009.)

Florida House Speaker Pro-tempore Ron Reagan, R-Bradenton, and also an insurance agent with MGA Insurance Group in Lakewood Ranch, supports the bill and says, “I am for free market enterprise.”

Reagan says the new bill is “a step in the right direction,” but Crist is now on the record saying he would “probably not” support the current bill.

A veto override was seriously considered last summer. But with Crist having another year as governor, and then leading in the polls in his Senate race against former House Speaker Marco Rubio, the political risk outweighed legislators' collective will to pursue it. Crist is in a weaker position now as Rubio has taken the lead in the latest poll.

Perhaps no one has been more critical than Sen. Mike Bennett, R-Bradenton, who called for McCarty's resignation in a tersely worded letter accusing McCarty of meddling in legislative matters and misleading the governor with fallacious figures.

These figures were subsequently discovered to be not from insurance companies writing homeowners and mobile home policies, but instead from so-called surplus lines insurers. Such insurers write policies for commercial and industrial property and high-risk coastal condominiums. Ironically, surplus lines rates are largely unregulated.

“Going awfully wrong”
Now Bennett and Rep. Bill Proctor, R-St. Augustine, who sponsored the bill last year, are ready to give it another shot with some changes to it. Proctor is sponsoring House Bill 447 while Bennett is sponsoring Senate Bill 876.

Based on the premise that competition ultimately pushes premiums lower, the legislation gives carriers more flexibility to increase rates when needed to better guarantee the ability to pay claims in the event of a major hurricane or other natural disaster. With that flexibility comes an added comfort level for insurers previously unwilling to enter the Florida market.

As these companies come to the state to compete, rates can be expected to come down. “Eventually, the prices will come down substantially,” says Proctor, whose day job is chancellor of Flagler College.

More importantly, they point out that less regulated rates lead to greater solvency of the carriers and better assurance that homeowners' claims get paid.

In last year's bill, that flexibility only extended to larger capitalized insurers, so it was opposed by many of the generally less capitalized domestic carriers.

A new provision eliminates a loophole that allowed Citizens Property Insurance Corporation policyholders to avoid assessments against a policy by dropping it.
Now, policies will contain an “acknowledgement of potential surcharge and assessment liability.” It's what Jeff Grady, executive director of the Florida
Association of Insurance Agents (FAIA), calls a “traveling assessment,” because, as he says, “It follows you out of there.”

By agreeing to such terms, a Citizens' assessment would still be payable upon renewal, cancellation or termination of the policy to fund claim deficits. The surcharge could be as high as 15% of the premium to cover deficits in each of three Citizens accounts.

More and more private property insurers are now facing financial difficulty even without big losses since 2005. In a presentation last fall, McCarty advised that 102 of 210 Florida carriers have posted net underwriting losses.

Sixty companies have reported declines in policyholder surplus while Florida's residential property exposure increases.

A recent analysis by the FAIA, shows that 73 companies write 98% of the residential policies, and as of the third quarter of 2009, 44 of those are “losing money in a large, large way” Grady says. (See table.)

And according to a Jan. 13 FAIA press release, three Florida-based insurers became insolvent in the past year and were closed by regulators for being unable to pay claims. “That's a sign of something going awfully wrong,” Grady says in the press release.

Bill Gunter, a former state treasurer and insurance commissioner, is chairman of Rogers, Gunter, Vaughn Insurance in Tallahassee. And as chairman of FAIA, he recently wrote a guest editorial calling for support of the Consumer Choice bill, arguing that “ ... a failed system exposes consumers to very serious risks in the event of a natural disaster because so many property insurers are experiencing financial difficulty at a time when they should be building surplus to pay claims.”

That difficulty led State Farm to pursue dropping policies across the state as policyholders are finding out this week in letters coming in the mail. State Farm is not renewing 125,000 policies during the next 18 months after it stopped writing policies in Florida two years ago.

In an effort to remain financially sound, an agreement with OIR in December allows State Farm to increase rates up to 14.8% on home and condominium policies while reducing its liability in hurricane-prone Florida by dropping policies. State Farm covers roughly 714,000 homeowners in the state.

“Wiggle room”
As Proctor's and Bennett's bills work its way through to the governor's desk, several scenarios may come into play.

The governor, having already signaled that he has objections to the bill, might consider a cap on how much residential property insurance rates could increase in a year. That strategy was employed for Citizens' policies last year when a 10% annual increase limit was set in a so-called “glide path” to actuarial soundness.
Actuaries say Citizens' rates remain 40% to 60% below actuarially sound levels, according to Grady.

Reagan and Bennett say legislators will be looking at how other states have fared with less regulated rates, such as Oklahoma, which moved to market rate pricing in 1999, and eliminated its rate-making board in 2005.

Asked about Crist's leanings, Proctor says, “I think he left himself some wiggle room in that 'probably' part.”

But if the Legislature's leadership feels it has as strong support for last year's Consumer Choice Act, then the possibility of overriding a governor's veto is not out of the question.

Politics will surely play into the decision and may ride on the latest polling numbers this summer. If Rubio extends his slim lead over Crist and looks like a sure winner in their U.S. Senate race, then Republicans in the Legislature will have little to fear from Crist in pushing to override the veto.

If it's close, or Crist has regained the lead in the polls, an override would be much less likely for fear of embarrassing the governor and likely future U.S. Senator.

That leaves one more opportunity to pass Consumer Choice legislation. Proctor says if Republican Attorney General Bill McCollum becomes governor, McCollum would let it become law in 2011.

His chief opponent in the Republican primary, state Sen. Paula Dockery, R-Lakeland, also says she will support Bennett's bill.

Curiously, while CFO Sink, the Democrat's leading candidate for governor, has raised the most questions about McCarty's numbers in Cabinet meetings, she told reporters recently she opposes Consumer Choice legislation. “I don't think we're in a place where we can deregulate the insurance industry. They'll go hog wild. I think regulation is important.”

In the meantime, insurers find themselves in a place where losses are being felt across the Gulf Coast. In Sarasota alone, six of the 12 State Farm offices have closed as agents chose to retire rather than battle it out in a market that suppresses rates during an overall decline in property and casualty insurance demand.

Also with little choice, insurance offices are combining as occurred when BB&T Insurance Services purchased Fort Myers headquartered Oswald-Trippe and Co. last year. More mergers and acquisitions are anticipated, particularly where companies have been held down by debt or where a book of business relied heavily on sales and payroll or the beat-up construction industry. (See the Dec. 10, 2009 Business Review, “Going Bare.”)

Proctor says the state must take two actions he calls “imperative.”

First, Citizens must be required to charge rates reflective of risk, or its assessments will threaten economic recovery; and second, private market rates need to be market based, that is “regulated by consumers in a competitive environment, not by government,” he wrote last month.

That's a clear choice Milton Friedman would appreciate. The big question is will Crist let consumers be “Free to Choose”? Voters may ultimately decide for themselves.

To see Florida Insurance Companies by the numbers, download the report here. BYTHENUMBERS.pdf