Buck Passed

REVIEW SUMMARY
What. Property insurance legislation vetoed by governor again.
Issue. Did bad politics trump good policy?
Impact. New capital gets scarce, more companies unable to pay claims and Citizens takes on more policies.

In the wake of Gov. Charlie Crist's June 1 veto of another widely supported property insurance reform bill, Florida's struggling property insurance carriers now face tough choices entering hurricane season.

Those choices likely mean fewer private carriers and more policies falling in the lap of the state-run Citizens Property Insurance Corporation when Citizens attempts to reduce its numbers.

Property and casualty insurers reeling from fraudulent claims, increased reinsurance costs, costly sinkhole claims, reduced investment yields and a soft market, now must wait for any relief until next year. That's when a new resident occupies the governor's mansion and legislators could move to override the veto.

Lisa Miller, a former deputy state insurance commissioner in 2004 and 2005, and now CEO of a lobbying firm bearing her name, says, “The trend would appear that Citizens' growth would be exponential in the next six to eight months.”

Miller backs that up noting that at the May 27 Citizens' board meeting it was reported that Citizens received 45,000 new applications in a recent 30-day period; some of that, no doubt, coming from former policyholders of Northern Capital Insurance Co. and Magnolia Insurance Co., two recently failed carriers.

The state's insurer, supposed to be “last resort,” now has roughly 1.1 million policies after working that number down over the last few years. The policy count is up about 80,000 for the first four months of 2010 giving Citizens ownership now approaching one in five property insurance policies in the state, making it by far the largest insurer in the state.

“I think what you'll see is a playing field that is even smaller,” says Bob Ritchie, president and CEO of Tampa-based American Integrity Insurance Company of Florida. That means less competition and claims-paying capacity, not exactly the formula for a vibrant, competitive market to push rates down.

McCarty told the Cabinet in March that three to four failures a year would be typical in good economic times, suggesting there's more failures coming.

Crist's election-year decision to make it the next governor's problem with his veto adds fuel to the fire of legislative leaders' and insurance executives' angst over other vetoes.

Last year, with Insurance Commissioner Kevin McCarty's support, Crist vetoed the “Consumer Choice Act,” raising the ire of many. That measure would have allowed carriers to raise rates within limits, led to more competition and given consumers greater assurance that their insurer would be able to pay claims.

This past session, a revised version further limiting rate increases was withdrawn after Crist made clear it was dead on arrival. “The most meaningful reform would be the consumer choice bill,” says Michael Grimes, State Farm's public affairs spokesperson. “Overregulation is killing the private market.”

Ironically, Crist's latest insurance bill veto may lead to further rate increases that Crist sought to avoid by it.

“Populism politics”
Senate Bill 2044, sponsored by Sen. Garrett Richter, R-Naples, aimed at reducing costs that carriers pass on to policyholders. These so-called cost-drivers include reinsurance costs, fraud, expensive to process sinkhole claims, and required premium discounts when homeowners reinforce their homes less than required but have received big discounts tied to unskilled inspectors or fraud.

A provision to change the replacement cost method to assure that homeowners were actually replacing damaged property, rather than pocketing the cash, would also have helped control rates. The bill puts limitations on re-opening hurricane claims after three years instead of five, and reduces incentives for public adjusters to re-open settled claims.

A survey by the Office of Insurance Regulation “showed that a considerable number of re-opened claims were re-opened three, four or even five years after the storm,” according to McCarty in a March 23 Cabinet presentation.

Those late claims caused the Florida Hurricane Catastrophe Fund to issue $715 million in additional bonds to pay them. In April, McCarty ordered an additional 1.3% assessment on most insurance policies to cover the debt.

“Mischaracterized”
The list of potential students for anger management classes who supported the reform package could include the rest of the Cabinet — Attorney General Bill McCollum, Chief Financial Officer Alex Sink, and Agriculture Commissioner Charles Bronson — plus insurance industry executives, 75% of legislators, McCarty, Insurance Consumer Advocate Sean Shaw, lobbyists and insurance association leaders.

But the list could just as easily include consumer groups and the many homeowners they represent because the cost-drivers remain ungoverned.

“You'd think between the consumer group and the consumer advocate that would be enough,” says Don Cronin, CEO of United Property and Casualty Insurance Company, a publicly traded company based in St. Petersburg.

Cronin refers to the Consumer Federation of the Southeast. Walter Dartland, the group's executive director wrote in support of the bill, “ ... there is nothing more important than ensuring appropriate insurance reforms are in place to give property owners peace of mind during what could be an extremely active season. To do nothing in light of the current situation increases risk to consumers and insurers.”

Cronin calls the veto “perplexing” because drafting the bill was a collaborative effort involving the governor's staff. “These were changes that I believe were steps in the right direction to encourage more capital and encourage more growth and expansion.”

At the March Cabinet meeting, Crist said he would sign a bill that included language adding controls on carriers' affiliated companies.The bill did that.

Richter, and Senate President Jeff Atwater, a candidate for the state's chief financial officer Cabinet slot, both say Crist “mischaracterized” the bill, a politically correct term suggesting the governor either didn't clearly understand the measure or just made up excuses to veto it to gain populist political points.

Crist's veto message includes his concern “ ... about the expansion of the current expedited rate filing procedure ....” But as McCarty explains in a four-page letter to Crist supporting the bill, “While there is a provision that allows for insurers to recoup costs for reinsurance and inflation in an expedited fashion, any company seeking to take advantage of this provision must file these changes with the Office and is subject to a review of these rate changes.”

“I'm very disappointed,” says Richter about Crist's veto. “He said he was doing it because of the expedited rate insurance companies could get. He mischaracterized it. Those rate requests would have to be reviewed by the [Office of Insurance Regulation].”

Richter also adds, “The veto is politically motivated. The governor is a political opportunist. The bill was good for the state of Florida.”

American Integrity's Ritchie puts it this way: “It's clear populism politics at its absolute worst.”

Already, property insurance companies have been seeking, and getting, rate increases to cover rising costs in a fairly soft market. Jeff Grady, executive director of the Florida Association of Insurance Agents, says first quarter numbers show insurers' surpluses — assets available to pay claims — continuing to decline, and that McCarty's office is allowing hundreds of rate increases “to give these companies a chance.”

The irony is that in Crist's veto message he writes, “During these difficult economic times, Florida's consumers should not have to be concerned with an additional premium increase in their policy.”

Richter explains that the bill would have continued until 2012 the prohibition on insurance companies being able to increase rates and then file for approval later, what's known as the “use and file” system.

Today, under “file and use,” companies file for a rate increase and can only charge new rates after state approval. Crist's veto allows companies to revert to the use and file system beginning in January.

“So with his veto there's a likelihood policyholders throughout Florida will receive a notification of an increase in their premiums,” says Richter, a banker who chairs the banking and insurance committee.

Veto override?
The consequences of the veto should be become more apparent by early next year, but sooner if one or more hurricanes hit heavily populated areas.

An already weakened, and now weaker residential property insurance industry is not exactly an ideal recipe going into what's expected to be a much more intense hurricane season than recent years.

A revised set of hurricane predictions for the Caribbean issued by Colorado State University forecasters June 4, increases the probability of a major hurricane — meaning category 3, 4 or 5 — to 65%. That's up from 58% previously predicted in April. Normal probability is 42%.

Now, too, 18 hurricanes are predicted this year, nearly twice the average, and five are predicted to be major ones.

“The governor, I guess, feels he can get lucky through another storm season and then it will be on someone else's watch,” says Ritchie.

The Legislature may not need to wait until next year's regular session to see if the next governor will sign the bill. With 71% support in the House and 80% voting for it in the Senate, the Legislature has the necessary two-thirds for an override.

It's unlikely that the measure would be taken up in a special session if one were called for other issues. But Richter, who says, “I would vote to override,” sees the first day of the 2011 session in March as a good time to undo the veto.

Vetoed bill

Here are some key provisions of vetoed Senate Bill 2044:

• Changes replacement cost methods so that homeowners will make repairs and insurers will make rapid claims payments.

• Limits a claim or re-filed claim to within three years of a hurricane instead of five years.

• Increases the capital requirements for new property insurers from $5 million to $15 million, and time for existing insurers to reach this goal.

• Allows cancellation of policies if a property insurer is financially troubled.

• Limits on public adjuster solicitations and disclosure of public adjuster fee arrangements.

• Upgrades a state agency Web site giving consumers a way to compare rates and complaints.