Make Florida Homeowner's Insurance Affordable
Back in 2004, hurricanes ravaged Florida, and now we're all facing sky high insurance costs, the highest in the US. FCAN believes we must encourage sustainable development to hold insurance costs down, and make major changes in the way insurance is regulated. Floridians must unite against unfair rate increases.
FCAN supports an Independent Insurance Consumer Advocate, similar to the Public Counsel office for utility rates. FCAN also wants greater citizen participation in insurance rate cases which would give consumers the ability to challenge rates. "Black Box" models used to set rates should be banned because they are fundamentally flawed. Citizens, the insurer of last resort, should be operated for the benefit of its customers, not run like a piggy bank for private insurers.
How we got here
Hurricanes used to cause high insurance rates, but we haven't had any since 2004, so what's causing high rates? Maybe its low returns in the investment markets. For several years, returns weren't so good, but in 2012, returns hit record highs. Can't the insurance companies invest properly? Even if their investments lose money, they just charge higher rates ... uh, indirectly.
But, it's not that: insurers are making record profits. Without hurricanes, and with the application of sophisticated computer models allowing them to avoid risk, profits are looking good. So, why aren't rates going down?
Weak regulation could be a problem. Insurance is regulated by the states even though the companies are often national. Corporations can be awfully persuasive with state legislators and regulators. Regulators have given ground on the models and on things like credit scoring that insurers use to increase profits. Weak regulation is the reason FCAN pushes for an independent consumer advocate and the right for consumer groups, like FCAN or neighborhood associations, to intervene in rate cases.
Another factor that can cause higher rates is the cost of reinsurance. "Retail" insurers like State Farm or Allstate sell lots of policies directly to consumers. The look at the policies as a group, or "book of business" and determine the aggregate risk they are holding. They decide they have too much hurricane risk and then THEY buy insurance, which we call reinsurance. In Florida, we even subsidize reinsurance with something called the Catastrophe Fund (the Cat Fund) which sells them reinsurance at a discount.
The Cat Fund has the effect of lowering rates, but also concentrating hurrican risk within the borders of Florida, since the state government back the Cat Fund. However, if the Cat Fund buys its own reinsurance from another source, usually outside the US, that spreads risk. Citizens also can buy reinsurance either from the Cat Fund or from elsewhere.
Maybe rates are just high because insurers are greedy and executive get paid a lot. Ed Rust, owner of State Farm, only made $9.25 million in 2011, down from a high of $13.7 million in 2008. That's gotta hurt, right? And the CEO of Allstate made a measly $11.2 million. Well, maybe that is kind of a lot of money, and it has to come from somewhere.
When development began to boom in Florida, back in the 70's and 80's, we were in a time of low hurricane activity. Now, whether you believe it is a natural cycle or global warming, NOAA scientists are telling us to expect stronger and more numerous hurricanes for at least ten years, but no one is certain and we haven't had the storms, though Sandy was bracing, to be sure.'
Perhaps, we could work on new laws to prevent risky development in coastal areas like barrier islands. Dream on, consumers. Our legislature isn't about to restrict development in the most lucrative areas of the state, no matter if it causes higher rates or hurts the environment. But legislators will rail about how other people have to "subsidize" insurance for coastal resident, even though they encourage coastal development. That is a bit duplicitous.
How to Lower Insurance Rates
Insurance rates are based on risk. The higher the risk, the higher the cost of insurance, supposedly. We know this is manipulated, but let's accept the concept for the sake of argument. So, if we can lower risk, we can lower insurance rates. How do you lower your risk of having your home blown away in a hurricane?
We could all move to Polk County, but maybe a better, more pleasant answer would be to retrofit existing homes and build more sustainable communities. It sounds easy, but it's actually very hard. We don't know which homes are weak and which are strong, so we would have to do inspections - of every house in Florida. Then, we'd have to come in and retrofit the weak ones with roof tie downs, storm shutters, and similar measures. Expensive.
The last time we had any money for this was after the hurricanes in 2004 when rebuilding caused the state to have a windfall in sales tax which they put toward mitigation. But hoping for a hurricane is not something anyone does even though it has this benefit, and also rids us of some of the weaker homes.
The alternative is to require the insurance companies to offer discounts to those that spend the money to strengthen their homes. They should actually want to do it because they would save money if homes don't get blown away. But, for some reason, State Farm waged a huge battle to get out of mitigation discounts and they won, so too bad for us. We are back at square one.
Why would they do that? Unfortunately, insurers don't actually care whether you home gets destroyed or not. They just pass on the cost in the form of higher rates, and collect a profit as the funds pass through. If more funds pass through, more profits. Secondly, most of the hurricane risk is borne by either the government or reinsurance companies, so insurers wouldn't have to pay anyway. Great work if you can get it, right?
Our barrier islands offer important protection from hurricanes. We need to protect these natural hurricane barriers, not develop them. We should consider not rebuilding in coastal areas that are damaged by hurricanes. And we should immediately reconsider risky development that is already underway or planned. Its cheaper than the alternative.
These measures won't provide instant rate relief. Nothing will. However, insurance reform will give consumers new powers to fight for lower rates and force insurers to justify what they're charging. Some rate increases just aren't fair and can be challenged.
We face a situation where the state has too much risk and is not using the mechanism of reinsurance to spread risk. Citizens rates were frozen for several years, and are now limited to 10% annual increases. "Acturially sound"rates could lead to either higher or lower rates, but current rates may not longer reflect of actual risks.
Rates may go up, but FCAN supports giving consumers the tools to lower their insurance bills through My Safe Florida Homes, mitigation discounts, and strong regulation.
Write or Call
Governor Rick Scott
Tallahassee, FL 32399
Senator Tom Lee
(R - Brandon)
421 Lithia Pinecrest Road
Brandon, FL 33511
(850) 487-5024 Tallahassee
Representative Mike Fasano
New Port Richey)
8217 Massachusetts Avenue
New Port Richey, FL 34653-3111
(850) 717-5036 Tallahassee
Key points to include in your letter:
- No deregulation of homeowner insurance
- Create an Independent Insurance Consumer Advocate
- Consumer Participation in rate review
- Intervener funding for consumer groups
3 year insurer loyalty provision.
- Prior rate review -- no increases without proof
- No cancellations for no reason.
Stop "cherry picking" by insurance companies.
Insurer lobbying expenses are part of your premiums!
Other insurance sites
- Center for Economic Justice
- United Policyholders
- Fair Insurance Rates in Monroe
- Principles for State Insurance Regulation (pdf)
- Consumer Federation of America -- FCAN is affiliated
- Citizens for Ratepayer Rights
lower our rates!
Black Box Models Overstate Risk
A study by Karen Clark & Company, a modeling, risk and risk management firm which actually invented the models years ago, says current models "significantly overestimated” losses during the five-year period. Clark says, "Catastrophe modelers, through their near-term models, have overshot actual insured losses for 2006 through 2010 by as much as $53 billion. "
Clark says useing just five years of data is not a credible way of estimating the probability of hurricane landfall. After all, we've had no hurricanes in five years, so shouldn't the probability be zero?
The black box models have raised insurance company profits. They gave insurers a reason to dump some of their riskist customers, while increasing rates on the rest. Insurers have a history of using third parties to justify high rates. Historically, insurance companies used "rating services" which collected information on claims and other data, or companies "cooperated" to set rates. This became embarassing sometime in the nineties, and the models began. It's really the same game on a new board.
The Insurance Cycle
As the following graphic shows, the insurance cycle occurs every 8 to 10 years. We are currently entering what is known as a soft market, with low demand for policies and more competition between insurers. That should result in lower prices, but Floridians can tell you, that is a long time coming.
Insurers used new computer models, called "black boxes" to increase profits in the last several years. These use short term 5 year risk models instead of basing premiums on past claims, for which 50 years or more of data exists.
Consumer Agenda for Insurance Reform
FCAN Would Like To See:
Independent Insurance Consumer Advocate -- current the ICA works for the CFO, an elected official. That means the Consumer Advocate can be fired for taking a position contrary to the CFO, which has happened. It also opens the ICA office to politics.
Consumer Participation in rate reviews -- rate filings would be open to the public and consumer groups may participate in rate increase hearings.
Intervener compensation in rate reviews -- it is nearly impossible for citizen groups to participate in insurance rate cases. Groups that do participate meaningfully should recieve compensation for their work.
End Black Box models --insurer "black box" computer models are suspect, at minimum, and possible collusive. We call them black boxes because nobody can see inside. One of the companies that produces these models is actually owned by the insurance companies. All are paid by insurers. They tell their customers -- the insurers -- what they want to hear.
Citizens is the state-run "insurer of last resort" and is now the largest homeowner’s insurer.
Citizens should be run like a business to serve its customers - the policyholders. Unfortunately, Governor Scott is intent on closing Citizens and appoints board members who agree with his philosophy. Is that any way to run a company?
Just say no to "Top Twenty" pricing. This scheme would require Citizens to price insurance above that of the top twenty insurers in the market. That means those insurers would effectively control Citizens prices. If the top twenty raise prices, so must Citizens, and consumer would have to pay.
Encourage Citizens to buy more reinsurance, spreading the risk to international markets, and ending the claim that all Floridians might have to pay assessments.
Just for good measure
Repeal Insurance Anti Trust Exemption -- Insurance companies have been exempt from the Sherman Anti-trust act since 1948. That means insurance companies can legally fix prices and collude. No other business gets this kind of break. The NY Attorney General recently busted several large insurers on bid rigging and fraud charges. Many think this criminal behavior in the insurance industry is encouraged by anti-trust exemptions.
Restore the trust between insurance agents and their customers. Eliminate so-called contingent fees that encourage agents to sell poor policies to consumers to earn high fees.
Title Insurance --rates are currently set by law and no competition exists. Clean up title insurance and allow companies to compete, lowering prices for consumers.