Insurance Rate Increase Divides Florida Lawmakers

The Tampa Tribune–July 24, 2008

By RUSSELL RAY

TAMPA – After 24 years with State Farm, Brenda Harding is being dropped by the company she’s come to trust like an old friend.

"They’ve always been there for me, like the commercial," Harding said. "I’m just devastated. I’m like, ‘Why?’ "

Harding’s South Tampa home is too close to Florida’s coastline and vulnerable to being damaged by a hurricane, a risk the state’s largest private insurer is no longer willing to take. Harding is one of 50,000 policyholders State Farm is shedding near Florida’s coasts.

But State Farm’s recent request to increase homeowner rates an average of 47.1 percent statewide may be a prelude to State Farm dropping thousands more policyholders. No matter what the outcome, the scenario for homeowners isn’t good. Premiums will either rise or more policies will be canceled as State Farm looks to reduce its exposure to hurricane damage.

Insurer Says It’s Losing Money

State officials and consumer advocates say State Farm’s proposal has little chance of winning approval and may be a guise to mask the insurer’s true intent.

"It’s possible that that’s their goal in the first place, … to dump a lot of policies," Bill Newton, executive director of the Florida Consumer Action Network, said of State Farm’s rate hike proposal.

Although State Farm says it has no plans to drop more policyholders, the insurance giant says it is losing money and needs to charge higher rates to pay claims should a major hurricane strike the state next year. Under State Farm’s proposal, premiums in Pinellas County would rise between 56 percent and 91 percent. In Hillsborough County, the range is 23 percent to 25 percent.

"Unlike some, we have tried everything we can do to stay in the market," said State Farm spokeswoman Michal Connolly. "At this time, there are no additional nonrenewals beyond those previously announced. The main, compelling need that we have is for the rate filing."

Since 2000, State Farm said its nonauto property-and-casualty line in Florida has paid $1.20 in claims for every $1 collected in premiums. In papers filed last week with the state Office of Insurance Regulation, State Farm said it won’t be long before its cash surplus falls below the level it needs to cover the risk it has taken on in Florida.

"Rates will need to rise, and/or risk will need to further decrease," State Farm stated in its filing.

State Farm lowered rates 9 percent this year after the state provided the industry an additional $12 billion in reinsurance at a reduced price.

But the biggest factor behind State Farm’s request for higher rates is a state-mandated discount for homeowners who strengthen their homes against hurricanes. The discounts have been greater than expected and have led to deep cuts in revenue, State Farm said. The extent of those revenue losses has not been disclosed by State Farm.

‘I Don’t Think They Get It’

State Sen. Mike Fasano, R-New Port Richey, said now is not the time to be imposing huge rate increases on homeowners who are struggling to pay the bills in a faltering economy squeezed by skyrocketing energy costs.

"I don’t think they get it," said Fasano, a member of the Senate Select Committee on Insurance Reform. "There’s no way that I could ever accept any rate increase from any insurance company any time soon."

But State Farm understands that the odds of state regulators approving a plan that imposes a big rate increase on more than 20 percent of Florida’s homeowner policies are slim, Fasano said. If State Farm’s request for higher rates is denied, the company will likely use the denial to justify dropping more policyholders, he said.

"Either it’s a threat or they are totally out of touch with what’s going on here in the state," he said.

With more than 1 million homeowner policies statewide, State Farm – the largest private insurer in the state – could deepen Florida’s insurance crisis through a massive cancellation of policies. Such a move is sure to increase the policy count at state-run Citizens Property Insurance Corp., Florida’s largest property insurer.

Newton, the consumer advocate, doubts that State Farm would drop a meaningful number of policyholders, and he questions the company’s need for a large rate increase.

"They are saying that their claims are higher than their premiums," Newton said. "But if you look at their claims over the last few years, it’s changed very little. It certainly hasn’t gone up 47 percent."

Convincing regulators that State Farm needs to impose a large rate hike will be difficult, especially after two consecutive years with no major storm, Newton said.

"The insurance industry pocketed $62 billion in profits last year. They’re not hurting," he said. "They are dadgum well going to have to prove they got a really good reason."

What’s more, the Legislature and Gov. Charlie Crist expanded the state’s Hurricane Catastrophe Fund, which provides insurers low-cost reinsurance, by $12 billion. The measure requires insurers to buy the cheaper coverage over the next two years and pass the savings on to customers in the form of lower rates.

A Sympathetic Lawmaker

But Rep. Dennis Ross, R-Lakeland, said the state should grant State Farm a higher rate because homeowner rates in Florida are too low, a condition that discourages competition and deters private insurers from shouldering more of the state’s hurricane risk.

"I think OIR is going to decline it entirely," said Ross, a member of the House Committee on Insurance. "It’s so counterproductive. We’re chasing every one of them out of the state."

Regulators will consider State Farm’s proposal during a hearing scheduled for Aug. 12 in Tallahassee. If approved, the new rates would take effect in March.

Florida premiums have been held down by political interests and aren’t based on actuarial science, Ross said. As a result, many insurers have stopped writing new policies and are exiting the state, forcing state-run Citizens to take on more risk.

"Insurance is a necessary evil," Ross said. "We’ve got to have insurance, and insurance should be backed by private capital, not taxpayer debt."