For the fifth year in a row, Florida — considered a major segment of "hurricane alley" — has avoided the devastating damages that come with the vicious storms. This has been a welcome respite from the back-to-back seasons of 2004 and 2005 that resulted in deaths and billions in claims.
Although the reprieve has meant that the cost of reinsurance in the private market has begun to slide downward, Florida's property insurance market remains as volatile as ever. The latest analysis put together by the Office of Insurance Regulation (OIR) says that a majority of companies operating in the Sunshine State continued to post underwriting losses this year.
While there has been some controversy about how some carriers have structured their business operations — including whether they are purchasing too much reinsurance — those in the industry say a variety of factors, including wind mitigation discounts credits, replacement costs, and the growing number of sinkhole claims continue to make it hard to regain ground during years without storms.
Despite Hikes, Property Market Remains Fragile
That financial reality prompted state regulators to grant more than 75 rate hikes for residential property insurance during 2010. Regulators also signed off on the second consecutive year of rate hikes for Citizens Property Insurance Corp.
"We have been blessed to have another year without a hurricane and we absolutely have to take advantage of this situation," said Sam Miller, executive vice president of the Florida Insurance Council. "The cost drivers are killing the industry."
Jeff Grady, president and CEO of the Florida Association of Insurance Agents, noted that insurance regulators have been more receptive to granting rate hikes in the last two years.
However, he said the political animus toward the industry — and the problems with other types of losses — has left insurers scrambling before an inevitable hurricane hits Florida again.
"In the absence of hurricanes, you have seen considerable non-catastrophic losses," Grady said. "Now it's a race…a race to earn surplus back."
Other signs that Florida's insurance market remains fragile: The state-created Citizens remains far and away the largest carrier in the state with more than 1.2 million policies and roughly 20 percent of the homeowners' market. That is a situation that Insurance Commissioner Kevin McCarty doesn't envision can change without revamping how Citizens operates.
"We have capital in Florida that's not being utilized and totally deployed because of Citizens' rates," McCarty said. "Depopulation efforts have come to a standstill."
This past year Atlanta-based Cotton States Insurance announced it was pulling out of the state despite having few policies in coastal areas. Coconut Grove-based Magnolia Insurance, which initially was absorbing policies from Citizens, was liquidated in late April.
The tab from past hurricanes continues to linger. In May, the Florida Hurricane Catastrophe Fund was forced to issue nearly $700 million in bonds to pay off claims from 2005′s Hurricane Wilma. Those bonds will be paid back with charges that will start showing up on insurance bills in the coming year.
Last Showdown With Crist
2010 marked the final year with Gov. Charlie Crist as head of state. Crist, who has clashed loudly and often with the insurance industry since taking over four years ago, decided to forgo a second term and instead mounted an unsuccessful campaign for U.S. Senate.
Crist had been instrumental in pushing changes to Citizens and expanding the size and exposure of the state's reinsurance fund. However, heading into 2010 those in the industry had hoped to reach some sort of truce with Crist.
During the 2010 legislative session, a drive for nearly complete rate deregulation — which Crist had vetoed in 2009 — was abandoned. Instead a compromise measure of sorts, SB 2044, was pushed through the Florida Legislature.
While the bill did not contain everything the industry wanted, it did have measures that could help lower costs for insurers. Instead of straight rate deregulation, the bill allowed companies to get quick approval for rate hikes of up to 10 percent to cover either the costs of inflation or reinsurance. A push to change how much insurers had to pay in replacement costs for lost contents was also dropped from SB 2044 in an attempt to avoid controversy.
McCarty — saying the bill included much-needed changes for insurers — urged Crist to sign it. However, McCarty's endorsement was not enough to sway Crist and he vetoed it, calling it anti-consumer. (Crist did sign into law SB 2176, a measure that exempted a long list of commercial lines of insurance from rate review. The measure also contained the so-called "Safeguard Our Seniors Act," which includes new penalties for unscrupulous agents who sell annuities to senior citizens.)
The veto of SB 2044 left the marketplace basically in the same place it had been at the start of the year. Today, there are even more worrisome trends taking place, especially in the growing number of sinkhole claims.
A report released by McCarty's office this fall found that the number of sinkhole claims have tripled since 2006. Even more troubling, McCarty says, is that claims have begun to increase outside of the counties around Tampa Bay, the traditional epicenter; claims have jumped in both Broward and Miami-Dade counties.
The report found that overall sinkhole costs rose from $209 million in 2006 to $406 million last year. The total reported claims rose from 2,360 in 2006 to 6,694 in 2010 and could wind up as high as 9,000 or 10,000 by the end of the year, McCarty said.
Most of these sinkhole claims have nothing to do with a catastrophic ground collapse, but instead usually result in cracks in walls and driveways of homes.
"If this goes on unchecked this will jeopardize the affordability and availability of coverage," McCarty said. "My concern is that companies will manage the risk by reducing their writing. This complicates an already stressed market."
Florida at Center of Health Overhaul Battle
The other major insurance issue of 2010 was the battle over the federal health-care overhaul.
Florida became one of the main players in the effort to oppose the overhaul. Attorney General Bill McCollum filed a lawsuit minutes after President Barack Obama signed the Patient Protection and Affordable Care Act into law, questioning the constitutionality of the reform; eventually 19 other states and the National Federation of Independent Business joined the initiative.
While the litigation moves ahead, McCarty plans to seek a three-year waiver from one of the more contentious requirements — that insurers spend at least 80 percent of premium on health care services. McCarty held hearings this past year where industry representatives contended that the medical loss ratios requirement would be harmful and could destabilize the market in Florida.
State lawmakers also tried to put a constitutional amendment on the 2010 ballot that would have made it illegal to have an individual health insurance mandate. Opponents to the amendment filed a lawsuit contending that the wording of the "health-care freedom" amendment was misleading. The Florida Supreme Court agreed in a 5-2 ruling and struck the measure from the ballot.
The controversial federal health-care measure is also being blamed for the demise of Cover Florida. Crist pushed the health-care program through the 2008 legislative session in an effort to make low-cost coverage available to uninsured Floridians.
The two largest carriers in the program — Blue Cross and Blue Shield of Florida and United Healthcare — have now said they will withdraw from the program and no longer accept new enrollees. The Crist administration said that the withdrawals were due to new federal requirements that prevented companies from placing lifetime dollar limits on plans and prohibiting cost-sharing requirements for preventive services.
"The reason those plans are affordable is because they have limited benefits," McCarty said. "If you remove the cap, they simply were not affordable."
What to Watch in 2011
Crist's exit from Tallahassee allows for another push for property insurance legislation similar to the measure he vetoed in 2010. However, this time it is likely to have elements that were dropped in an effort to win his support.
There also will be a push to make substantive changes to Citizens, including the possibility of making it harder for customers to choose the state-created carrier over private companies.
"If you are going to talk about reforming the private market, you cannot have that discussion without talking about Citizens' rates," Grady said.
One wildcard in the brewing discussions is the position of Gov.-elect Rick Scott. While Scott is known as a champion of the free market, he has made it clear that he does not support a complete deregulation of rates. (Scott has said that he supports letting Citizens raise rates above its current 10 percent policyholder cap.)
Scott has his own ambitious agenda when it comes to other lines of insurance as well, including a still undefined plan to ratchet down workers' compensation rates by 35 percent.
He also has said he wants to eventually eliminate the assessments that can be used by both Citizens and the Florida Hurricane Catastrophe Fund to help cover any shortfalls resulting from major hurricane losses. Currently, the two state-created entities can place a surcharge on nearly every insurance policy, including auto insurance policies.
McCarty predicted there could be a push in 2011 to delve into the contentious issue of the state's no-fault insurance system commonly referred to as PIP, or personal injury protection. PIP, often cited as a major contributor to auto insurance fraud, was briefly repealed several years ago, but state lawmakers changed course and re-enacted the law in 2010.
Prompted by Florida's growing auto insurance fraud problem, in November the state's insurance consumer advocate released a report that advocated a number of recommendations designed to fight the situation. Those recommendations included the licensure for all health-care clinics offering care outside the owner's practice area, and authorizing the state to suspend for 12 months the license of any physician or other health-care provider found guilty of insurance fraud involving PIP.
Opportunities in 2011
With new faces in all four of the executive offices and at many legislators' offices, the insurance industry has the opportunity to present its agenda to a fresh group of decision-makers. However, hand-in-hand with that opportunity is the challenge of educating these officials in the complex world of insurance.
That challenge is eased slightly with the make-up of the Senate Banking and Insurance Committee. The committee leadership is unchanged from the last two sessions: Sen. Garrett Richter, R-Naples, continues as chair and Sen. Chris Smith, D-Fort Lauderdale, continues as vice chair. Other members are: J.D. Alexander, R-Lake Wales; Mike Bennett, R-Bradenton; Ellyn Bogdanoff, R-Fort Lauderdale; Mike Fasano, R-New Port Richey; Alan Hays, R-Utamilla; Joe Negron, R-Palm City; and Steve Oelrich, R-Gainesville. Alexander, Bennett, Negron and Fasano are carryover members of the committee. New members include Oelrich and newly elected Sens. Bogdanoff and Hays, both former House members where they were active in insurance issues.
In the House, Rep. Dorothy Hukill, R-Port Orange, was named chair of the Economic Affairs Committee, which will include the new House Banking & Insurance Subcommittee. Members of that subcommittee had not been announced at press time.
Also, Jeff Atwater, who earned the endorsement of major industry groups, easily won election to the CFO office.
The 2011 legislative session begins Tuesday, March 8.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.