A Must Read For Anyone In Florida - The Florida Insurance Market

The State of Florida’s Smoke and Mirrors. Got to love the Florida Governor, he is trying the impossible; that is make every homeowner happy with what they are paying for their insurance premium. “The Gov” and his merry band of legislators concocted a plan that was nothing more than a pacifier to the citizens of Florida. It is a dangerous plan a house of cards that literally will be destroyed by the winds. In this plan instead of encouraging companies to write insurance using actuarially “sound” rates and build large reserves, the citizens will pay for losses by being charged “Assessments”.

The citizenry of Florida have been fed this load of crap because it makes them feel good. No one has really explained what an assessment really is and will happen if the Governor’s “BET” goes bad and we have more than one cataclysmic hurricane.

If this were to happen “EVERY” property policyholder (renter, homeowner or commercial policy holder ) will have to pay a huge assessment, which will be added on to next years premium. In other words if this was to occur you would not get your insurance for the next year until you paid THAT YEAR’S premium PLUS assessment.

HOW MUCH?

How bad? The assessment will be based on the amount of money that will be paid out from the hurricanes. One study conducted by Towers Perrin estimates the assessment to pay off bonds to bail out the state could range from $1,700 to $14,000 per policy. Floridians in return get an average saving of $265 on their 2007 property insurance rates, again only a feel good post election pacifier.

THE EVIL INSURANCE EMPIRE

The press and hapless radio talk show hosts who have no clue on what the industry is all about have demonized the insurance companies. The industry has suddenly been characterized as racketeers and thugs. Agents have become uncaring moneygrubbers who are making excess profits on the backs of the citizenry.

Since my experience in the industry is now spanning 4 decades as I remember this rhetoric is nothing new. In the late 70’s and through out the 1980’s the regulators were beating their drums and legislating limit on how much money a carrier could make and had even mandated a repayment of premium that was “over charged”.

It seems that companies were fortifying their reserve requirement and investing profits in such evil endeavors such as building, office complexes, hospitals, to build the value of there entity. In addition many of theses stock and mutual companies were “giving” back in the forms of dividends. I even remember hearing the same talk show hosts complain about the insurance rates then. Yea we are old.

HISTORY – AUGUST 24, 1992

At this time I was working for a property/casualty company who had a net value of $6,000,000,000. It was a very calm hurricane season and yes, Florida insurance companies were defending their rates that, incidentally, at that time were among the lowest in the United States. We got word that “Andrew” was coming. “Andrew” starts with an “A” our first storm of the season in August? The rest as they say was history. I was extremely proud of the company I worked for, they fulfilled their promise and paid out well over $4,000,000,000 rumor was the company was selling building to pay claims. And why were they able to do that because they were allowed to charge an actuarially “sound” rate and fulfilled their promise. For those who don’t remember here is a short excerpt from Wikipedia:

Andrew produced a 17 ft (5.2 m) storm surge near the landfall point in Florida.

Andrew was responsible for 23 deaths in the United States and three more in the Bahamas. The hurricane caused $26.5 billion (1992 USD) in damage in the United States, of which $1 billion occurred in Louisiana and the rest in south Florida. Unlike most hurricanes, the vast majority of the damage in Florida was due to the winds. The agricultural loss in Florida was $1.04 billion alone. Damage in the Bahamas was estimated at $250 million.[15][9]

In Dade County 90% of homes had major roof damage. 117,000 were destroyed or had major damage.

THE FUTURE

In a word “Bleak”. The Governor of Florida has taken an enormous bet, one I hope he wins but also believe it is doubtful he will. His plan is nothing more that a casino bet. The real solution would be painful now but in the long run would prevent devastating financial consequences for the state of Florida. Invite all qualified insurers into the state and charge without regulation the premium that reflects a rate that is actuarially “sound” based on losses of the last 30 years. At first the rates will be astronomically high and folks would have to get use to high deductibles but in a few years Adam Smith’s “invisible hand” will move the rates to a true level and companies on a collective bases take the risk not the citizens of Florida. But before I leave I leave you with another note from Wikipedia, the cost in 2005 dollars hurricane losses.

Rank Hurricane Season Cost (2005 USD)

1 Katrina 2005 $81.2 billion

2 Andrew 1992 $44.9 billion

3 Wilma 2005 $20.6 billion

4 Charley 2004 $15.4 billion

5 Ivan 2004 $14.6 billion

Citizens of the State of Florida Welcome to the insurance industry.