They Say, Hearsay

“Let's see… I was induced to pay for a home mitigation inspection, then to pay to replace my windows with impact glass windows with the promise of mitigation credits that would reduce my windstorm insurance premiums, and now you're going to take those credits away?”

We Say

One person's inducement is another's incentive. Terminology aside, the motivation behind the rush of home mitigation inspections is twofold: To assess a home's vulnerability to hurricane damage, and to earn insurance discounts. Obviously, the latter is the more compelling.

Earning an insurance discount for mitigation has been primarily positive news since the state launched the My Safe Florida Home (MSFH) program in 2007. The popular program ended earlier this year when the Legislature was not able to continue funding it. (MSFH provided free wind mitigation inspections to help homeowners assess their vulnerability to hurricane damage, and it provided matching grants of up to $5,000 for qualified homeowners who took steps to strengthen their homes.) Some homeowners took advantage of the state's free inspections, while others paid for inspections on their own because they did not want their information in a statewide database, did not qualify for the free inspection, or missed the deadlines.

It is difficult to disagree with the MSFH program's original intent — to encourage Floridians to harden their homes against the forces of Mother Nature. But the program lost its initial focus. Rather than motivating people to take the necessary efforts to make their homes stronger, the program became a vehicle by which homeowners could earn insurance discounts without taking any action. In fact, the 2008 annual report for MSFH states that 55 percent of homeowners were eligible of insurance savings without making a single improvement. I fail to see how this moves us toward reducing risk, but it does provide an opportunity to point out another one of those disconnections between homeowners and those of us who work in the insurance industry.

To homeowners, getting discounts for doing nothing sent a misleading message — that they have been charged the incorrect premium for a number of years simply because they did not know enough about their homes' construction features to get the savings they deserved all along. Of course, they were happy to get the discount, but walked away wondering why we didn't help them get the right rate from the beginning. Few companies provide an on-site, comprehensive insurance inspection before underwriting a property. (Here's a marketing idea: If we let customers know about the option to contract for wind inspection services on their own, then we may gain a few points in our approval ratings.)

The much-ballyhooed mitigation discounts turned negative for many policyholders in July when State Farm sought approval from regulators to moderate discounts to support its claims-paying ability. The company was granted approval in August to eliminate or reduce some discounts, but not those associated with mitigation. The Florida Office of Insurance Regulation (OIR) said that mitigation credits must be supported by a “detailed study,” as stated in the rules in Section 69O-170.017.

For insurers, mitigation discounts turned negative even earlier. In December 2006, OIR ordered that the discounts be doubled (effective March 1, 2007) to provide some relief from escalating rates. Twice-as-nice on the discounts was popular, yet impractical — a decision made without solid actuarial data to back it up. In fact, the current mandate for mitigation discounts do not take into account where a property is located, which would seem to be a logical consideration since what is required to strengthen a property with a coastline view should not be identical to what would be needed inland. But today all mitigation measures and related discounts are created equal. While all of Florida is vulnerable to hurricane damage to some degree, the entire state is not vulnerable to the same degree. Mitigation discounts are currently an example of a one-size-fits-all strategy that does not fit.

Lynne McChristian is the Florida representative for the Insurance Information Institute. She may be contacted at 813-480-6446, lynnem@iii.org. Also, see www.Insuring Florida.org for her insurance blog, “Straight Talk.”

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