Q&A with Insurance Commissioner Kevin McCarty

Oct 21, 2007

Q&A with Insurance Commissioner Kevin McCarty

By Kathy Bushouse, Sun-Sentinel.com

October 21, 2007


Recently Sun-Sentinel staff writer Kathy Bushouse sat down with state insurance commisioner Kevin McCarty, who has put pressure on property insurers over rates. Here is the full transcript from that interview.

Q: What is the state of Florida’s insurance market? Where do you see it going in the next year?

A: We’re at a crossroad in Florida. I think we’ve seen over the last several months, I think there was an expectation that policies in Citizens would skyrocket and they haven’t. It only has about 100,000 more policies than it did six months ago. I think you’ve seen stabilization in insurance rates, you have new companies coming in, I think you’ve seen new capital. We’ve had $3 billion in new capital. So we’re seeing kind of a shift from traditional, national companies to Florida-based companies.

I think we’re at a position where we can be cautiously optimistic. That’s all, I think, because of the fact of the Legislature enacting the reforms that they did, but not just in House Bill 1A (the legislation passed in January’s special session) but before that by doing the capital build-up program (passed in 2006, which provides loans to insurance companies). I think that has done a lot to bring new capital in. And I think improving building codes and providing incentives for consumers to mitigate, and pushing My Safe Florida Home, which is a long-term solution, I think that is really been positive for investors coming to Florida.

But this is been in a backdrop of the fact that we’ve had two back-to-back hurricane seasons without a hurricane. So we’re still a fragile market. I think you can see evidence in insurance companies and what they’re doing in other states.

Florida is a bellwether state with regard to, I think, the actions of the insurance industry – which is significant withdrawals from areas where they’re at risk of any catastrophic loss. We’ve seen in New York state, for instance, one company that is not writing within 12 miles of the seacoast. This is going from Maine through the Atlantic states down to the Gulf of Mexico.

I think all eyes are watching Florida in terms of its great experiment, which is to provide a substantial state commitment to the financial security of its domestic markets through creation and expansion of the [Florida Hurricane Catastrophe Fund]. It’s demanding that insurance companies pass those savings onto consumers, so that Florida can begin to stabilize and have some economic security.

We’re seeing for the first time in our history, in our public schools is evidence of this, of a net migration. We have the first decrease in the last 30, 40 years, where we have a decrease in the population of our school systems, which is an indication that families can’t afford to move to Florida or stay in Florida. Clearly the construction business and the tourism business and the growth are the backbone of Florida’s economy, and we just need to do what we can to stabilize it.

Q: What happened to those savings and what is the state doing about it?

A: First of all, I think it’s important, that there wasn’t really one presumed factor (which is the figure the state used to determine how much homeowners would save on their policies as a result of the Legislature’s action in January). There were 300 presumed factors. It really depended on how much reinsurance [companies] bought.

What we did, and probably if we had to do it over again we probably would not do it, is to try and come up with what people like to know, what would that savings mean to the average policyholder. And that became the benchmark on how we measured the success of that program.

What we’ve seen is, most Florida domestic companies or start-up companies or Florida takeout companies, or a combination of those, performed very well. They either met or exceeded the presumed factor savings. When State Farm did theirs, they anticipated the savings from House Bill 1A to be 4.8 percent. We were able to negotiate them up to over 9 percent. So in that way it’s a savings.

And as you know, Citizens froze their rates until 2009, which [otherwise] would have a very significant, over 50 percent rate increase. So, some of our major market has been stabilized.

But having said that, separate out those companies that we talked about, then look at those who really kind of stuck their finger in the eye of the Legislature and the governor, saying, ‘We don’t really care about this program.’ They don’t want to see it succeed. I think they’re taking those savings and they’ve added profit margins to their reinsurance brokers and to their reinsurance – sometimes [buying] their own reinsurance within their own group – and then buy reinsurance far in excess of what’s required by the state or from rating organizations.

What we’re saying to them is the No Kidding Rule is in effect. You are required by law to pass on those savings, and you will be held in violation of Florida law, and we’ll take whatever action is necessary to ensure that those cost savings are passed on.

Q: That’s why you have the subpoenas going out.

A: The subpoenas, I think, are multi purposes. First of all, we want to look at the rates. But I think there’s an ongoing concern that there are a number of events that are occurring in our marketplace, and if in fact those things are occurring independent of one another, it’s just one major coincidence, that’s one thing. But we are deeply concerned that the fact that House Bill 1A passes, we have expansion of the Cat Fund, we have a commitment by the people of Florida to expand the Cat Fund and the Legislature to back it, and then we have the rating organizations and the reinsurers and the brokers using new modeling techniques, that are using five years instead of 30 years, where they come up with much higher losses. We have brokers that are estimating higher losses. We have rating agencies requiring people to have enormous amounts of new capital that would be crippling to any other financial marketplace. And so all of these things are happening after House Bill 1A passes.

We want to make sure that not only are the cost savings passed on, but that there are no violations of other parts of the Florida insurance code, including violations of anti-trust – that none of these actions are done with the intent to collude, to fix prices or to frustrate the goals and objectives of House Bill 1A.

Quite frankly, Florida is a beacon for the rest of the country. When Florida passed the Florida Cat Fund, Louisiana passed it. When Florida passed building codes and building code enforcement, other states passed it. When Florida passed the My Safe Florida (Home) program, other states passed it.

From back in the early 1990s when Hurricane Andrew struck, right through this hurricane season, Florida has been viewed as… what’s going on in Florida to be a predictor of how to build your marketplace in the future. I think in large measure many insurance people, people in the insurance industry and their affiliated companies, want to see House Bill 1A fail. Because if we succeed in Florida at providing a state partnership where we’re partnering with the private sector and using that partnership to keep rates affordable, that frustrates the objectives of some people in the industry. They’re deeply concerned about that, and like I said, we’re going to search and subpoena and we’re going to look at the records and we’re going to ferret through everything and we’re just going to make sure that Florida law has not been violated.

Q: As far as rates, what you’re saying, as far as the national carriers go that have a large segment of the market, are those rates going down at all?

A: State Farm rates have gone down, as I mentioned, 9.1 percent. But they got a 50-percent (average statewide) rate increase the year before. On balance, people are still going to be seeing fairly significant increases.

I think a lot of that can be offset by the new mitigation discounts. We have doubled the mitigation discounts. In some places, you can get 60 to 70 percent off your premium. That’s very substantial savings, particularly for homes and structures in South Florida where they have greater wind exposure and a greater portion of the premium is for wind.

We still want to look at this. There’s no silver bullet. The insurance companies have taken on more risk. The state, through the backing of bonds, has required the policyholders of the state to take on more risk. We want to look at ways of making this work in the long term, and that’s going to be mitigation, and encouraging mitigation.

We’re hearing many positive stories about people who, when they shopped around and used shopandcomparerates.com (the state’s insurance rate comparison web site, www.shopandcomparerates.com), where they were successful in lowering their rates. And also, when they were out shopping, they determined, ‘Wait a minute, I wasn’t getting credit for things I had in my house in the past,’ that now they’re getting credit for. So we want to really encourage consumers not only to shop around, but to make sure that their agents are aware of what and where they may be eligible for discounts.

But I think the industry, some of the national carriers, have had very significant rate increases, and some of them are not passing their savings on, and they will be dealt with appropriately. Gone are the days where they can simply just raise rates and walk away and leave consumers to the vagaries of the marketplace. We now have a regulatory framework where those rates cannot go into effect until they’re approved by the office.

Q: As far as the subpoenas go… [companies said] we’re being bullied into this, essentially. This is the department trying to get back at us for not lowering our rates, when we think this is the rate we need to do business in Florida.

A: There’s absolutely no evidence to support that. State Farm is still under subpoena for all of their books and records, even though they have come to an agreement with the state with regard to their negative true-up filing and their presumed factor filing. They’re still under investigation. They’re still required to answer, and to cooperate with us, with regard to the issues concerning marketplace abuses or potential collusion.

That still is out there, so to suggest that the only reason we’re doing this is to bully a company [into lowering rates] then our investigation with State Farm would be over. It’s simply not the case. We really want to get to the bottom.

Again, I’m not accusing any of these companies of doing anything wrong, but I’m going to tell you, there’s a constellation of issues that are out there, that makes a prudent person very suspicious why these rates haven’t come down. Like I said, we’ve seen a pattern of practice with regard to certain companies that is very disturbing, where they’re not passing those down, where they’re using some of the same techniques in their rate filings and using some of the same strategies to keep those rates up. Is that strategy by design or is that just by happenstance? And that’s what we’re going to get to the bottom of.

Q: And the strategies are?

A: Like increasing the amount of reinsurance. Increasing the amount of profitability. Propping up, using models that are not approved. It’s a strategy to keep the rates up and to frustrate the underpinnings of House Bill 1A. And again, we’re looking at increased rates of return, increased rates of return for their reinsurance, increased return for their brokers. We’re seeing these recur.

And look at the public hearings that we have. We keep asking the companies these questions. They’re insuring to a much higher level in reinsurance than they have in the past. We know that reinsurance in Florida has gone down. They have not passed on those savings, nor the savings [that resulted from] House Bill 1A. They have instead opted to take the interest of the stockholders and disregard the interest of the policyholders.

Q: The state’s taken a beating lately in the Wall Street Journal for some of the things that have gone on in the past 10 months. Have you got anything to say about their criticisms?

A: As you probably know, the governor has responded in the Wall Street Journal. What I can say is what I’ve been saying in the past. I’m a believer in the free market system, and as soon as we have a free market system, I think it will work.

But as long as you’re going to hold the people of Florida hostage and require them to have high levels of hurricane coverage as a term and condition of home ownership… I mean, people came to Florida when land was cheap and taxes were cheap and when insurance was cheap. And we get here and then the next thing we know is that we’re prisoners in our own homes.

The frustration is I know from my own experience, speaking to people in Lloyd’s [of London], that there’s a finite amount of reinsurance. I also found out in confidential conversations that the rates are going to continue to go up because [reinsurers] are going to maximize the profits that they put in Florida and take advantage of a distressed marketplace. Now that’s how you bring new capital in, but it’s also how you break the backs of people, working people in Florida.

That’s why the Legislature, very cautiously, and in a fiscally responsible manner, extended the Cat Fund in order to provide some cushion for this disruption and dis-equilibrium in the marketplace.

I think Gov. Crist was exactly correct by making Citizens more competitive. A, it has not grown to the proportions people had predicted, and B, it has served as a ceiling for prices so that people are now shopping and able to buy policies on a voluntary basis. It’s keeping prices down, yet these people are still making money. I know this because I’ve spoken to their CEOs and I’ve spoken to their chief financial officers, and they are continuing to make money in Florida.

So you can make money, and you can make money at fair prices and without profiteering off the backs of Floridians.

Copyright © 2007, South Florida Sun-Sentinel