LETTERS TO THE EDITOR: HOT TOPIC–Where is money for claims under state’s ‘reforms’?

Mar 16, 2009

Palm Beach Post--March 15, 2009

Amid all the political rhetoric over State Farm’s decision to leave the Florida property insurance market, the basic math on Gov. Crist’s insurance reform “plan” seems to be unraveling and leading to higher costs than would have been the case had no reforms been implemented in 2007 and beyond.

Several Florida newspapers reported the following statement from the senior adviser to the Florida Hurricane Catastrophe Fund: “The state was potentially on the hook for $28”billion last hurricane season, but had access to only about $13 billion to reimburse insurers … The shortfall could be even bigger this year, as much as $18 billion.”

On Feb. 5, Gov. Crist took aim at a Wall Street Journal editorial that was critical of his unraveling “plan.” In the governor’s response he said: “Since beginning Florida’s insurance reform in 2007, the number of Citizens (Property Insurance Corp.) policyholders has dropped 18 percent, from more than 1.3”million to just over 1 million. This decline has been possible because 40 new companies have come to Florida, bringing more than $4 billion in new capital. This indicates reform is having the desired effect.”

However, careful examination of slides six through nine of Insurance Commissioner Kevin McCarty’s presentation to the governor and the Florida Cabinet in January reveals that the net new capital since 2006 is about $652.3”million. That’s quite a difference.

The fact is, when State Farm leaves Florida it will take about $4 billion in claims-paying ability, not the $4 billion-plus Gov. Crist brags about. With or without State Farm’s money on the line, think about the prospect that the hurricane fund couldn’t pay its obligations if there is a significant hurricane. Those who know the world of finance say that State Farm has the money to pay claims, at least for now. But having been denied a much-needed rate increase, State Farm can’t guarantee that will be the case much longer.

So, going into this hurricane season, are you betting on the governor or State Farm to be able to bring cash to the disaster? If you’re betting on the governor, good luck. You may need a lot of it.


DeFuniak Springs

Editor’s note: Donald Brown is an insurance agent and former state representative who was chairman of the House Insurance Committee.

Let big dogs’ ‘pups’ go; focus on bringing in single-line insurers

My wife and I moved to Florida from Connecticut in July 2005. In Connecticut, I worked for almost 30 years at the home office for one of the country’s largest multi-line insurance companies. During my years there, I learned two basic principles.

First, insurers love to collect premiums but hate paying claims – except maybe for life claims, because it was one and done. You will not be coming back for more of their money. Second, the larger the claim base, the lower the premium. The risk is spread out, and the probability of a claim is lower. Rates are then developed by actuaries based on the probabilities.

As I see it, this is our problem.

Insurance companies went merrily along for years collecting premiums and paying normal claims. Then came Hurricane Andrew in 1992. Insurance companies threatened to pull out of the homeowners market. Instead of telling these multi-line companies, “If you don’t write homeowners, then you don’t write auto, life, pension, health or annuity,” the state let them form “pups,” separate entities under the parent company that sold only homeowners insurance in Florida. Notice how State Farm or Nationwide is always suffixed by “of Florida.”

So, instead of potential hurricane victims in Florida being in the same risk pool with tornado victims in Kansas and Oklahoma, ice-storm victims in New York and Kentucky and forest fire victims in California and New Mexico, we were left alone to provide for ourselves. In this way, the Florida “pups” could show major losses to demand large premium increases and justify dropping policies while the parent company could show major profits.

It may be too late to do anything about the pups, but there are many single-line insurance companies out there that sell only auto, life, pension, health and/or annuity and homeowners. Perhaps state, county and local governments as well as individuals and businesses can move their policies to these companies and out of the multi-line parent campanies that own the pups that gouge us.




With market tanking, change capital loss deduction

One item of tax relief that seems to have been ignored is the net capital loss deduction – capital losses net of capital gains.

These net losses have been limited to $3,000 per annum for many, many years. Net capital gains are reportable in full in the year earned. The unused net losses can be carried forward to future years, subject to the $3,000 limitation. With the great overall decline in stock values, many taxpayers have been forced to sell their stocks at substantial losses. At $3,000 per year, it could take 20 years for a person losing $60,000 to recoup. At death, the unused loss deduction dies with the taxpayer.

The amount of this deduction is much too low, and the president and Congress should take immediate action to provide a substantial increase in the amount allowable. Alternately, the loss could be allowed in the amount selected by the taxpayer with the balance, if any, carried to future years with a similar option.