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Florida Looking for NFIP Alternatives

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Last week, Florida Insurance Commissioner Kevin McCarty announced that his office is in the process of developing guidelines for insurance companies to request approval to write primary flood insurance in the state. This announcement came just one day after Rebecca Matthews, McCarty’s deputy chief of staff, told the Florida Senate Banking and Insurance Committee that the Florida Office of Insurance Regulation (FLOIR) was in talks with various insurance companies regarding writing primary flood coverage in the state. These developments are in response to continuing concerns about escalating flood insurance rates due to the Bigger-Waters Act of 2012.

The Biggert-Waters Act of 2012 extended the National Flood Insurance Program by several years while also putting in place several reforms meant to make the program more solvent. One of those reforms was a phasing in of actuarial flood insurance rates over time.

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For many the increased premium will be significant, if not severe. In Florida, the biggest hit will be to homes built prior to 1974 in high risk flood zones. At last week’s hearing it was reported that some of those homes could see rates rise from 0 to ,000.

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Current owners of those properties will continue to receive subsidized rates, but those subsidies will discontinue once the property is sold thus hindering the Florida real estate market.

Florida officials hope that the private primary flood coverage can serve as a viable alternative to the NFIP by providing lower premium rates, but there are significant hurdles to overcome. Private insurers will likely be hesitant to cover properties that the federal government has deemed high risk and there are legitimate concerns about the lack of available data and information to properly underwrite the risk.

“The private sector has not written flood insurance because when you start a company you have to have a ‘me, too’ filing of something that already exists,” said Locke Burt, an owner of Security First Insurance. No such company currently exists in Florida.

Florida Rep. Bryan Nelson added that “the big problem we have is we don’t have enough information to base a decision on, and until we have expected-loss ratios, I don’t think the private sector is going to be ready to jump in.”

Another NFIP alternative being considered would be the creation of a Florida flood insurance pool. Sen. David Simmons, chairman of the Florida Senate Banking and Insurance Committee, signaled that this could be an option if the private market is unable to respond fast enough. The hope is that the pool could provide lower rates than the NFIP.

Florida officials also continue to push for delays in NFIP rate hikes.

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Gov. Rick Scott called on President Obama to halt the hikes. “The president signed the bill. He can have an impact by stopping this.”

Florida Sinkhole Claims Skyrocket

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It seems the entire state of Florida is slowly caving in as more and more sinkholes appear throughout the sunshine state, resulting in a tripling of insurance claims in five years. According to a new state report, for the years 2006 through 2010, sinkhole claims have cost Florida property insurers $1.4 billion — a number that could reach $2 billion by the end of this year.

The report, authored by the state’s Office of Insurance Regulation, says sinkhole costs increased from $209 million in 2006 to $409 million in 2009, with the largest share of the total expense coming from structured loss (54%) and land loss (27%). In 2006, open claims totaled more than $3.3 million for expenses paid and $13.6 million for indemnity. By 2009, these numbers increased drastically to $29.5 million and $114.6 million respectively.

“There is no question that the tripling of frequency of claims will have a significant expense associated with adjusting these claims in Florida and will continue to put upward pressure on rates,” [state Insurance Commissioner Kevin McCarty] said Tuesday.

The bulk of the claims come from an area known as the Sinkhole belt — Hernando, Pasco, Hillsborough and Pinellas counties. McCarty has cited sinkholes as one of the major cost drivers of insurance premiums in the state. As a solution to the problem, McCarty is looking into changing policy language regarding the definition of structural damages or possibly creating a sinkhole insurance fund. Though McCarty and his team are brainstorming ways to deal with sinkholes without raising insurance rates, an increase is likely unavoidable. The state’s largest property insurer, Citizens Property Insurance, cited the cost of sinkhole claims in requesting a rate increase for next year. The insurer said it took in $19.6 million in premiums for sinkhole coverage in 2009 but has paid out $97 million in claims cost.

Here’s a well-crafted news clip from a Central Florida station about the growing number of sinkholes and the importance of insurance coverage.

No Storms But More Losses for Florida Insurers

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Central and South Florida have seen four straight hurricane-free years. With that in mind, you would think insurance companies would be operating deep in the black — raking in premiums during these storm-free times.

According to insurers’ 2009 annual reports, however, “50 out of 70 Florida-based companies posted losses on their insurance business for the year; 31 of the companies reported a drop in reserves — the money insurers set aside to pay claims.”

hese Florida-based companies, many of them small, write about 52 percent of the residential homeowners insurance in the state. The rest is written by Citizens Property Insurance, the state-run company; State Farm Florida Insurance, the largest private carrier; and several dozen companies based outside of Florida.
The dreary financial reports coincide with a push in Tallahassee to pass legislation that would free up insurance companies to raise their rates at will — as much as 5 percent initially and as much as 15 percent in the future. Right now, any rate increase requires state approval.

These Florida-based companies, many of them small, write about 52 percent of the residential homeowners insurance in the state. The rest is written by Citizens Property Insurance, the state-run company; State Farm Florida Insurance, the largest private carrier; and several dozen companies based outside of Florida.

The dreary financial reports coincide with a push in Tallahassee to pass legislation that would free up insurance companies to raise their rates at will — as much as 5 percent initially and as much as 15 percent in the future. Right now, any rate increase requires state approval.

It’s obviously a bit puzzling when you try to make sense of so many insurance companies losing money when they’re only bringing in premiums and not paying out claims. Alex Sink, the state’s chief financial officer is asking for answers from Insurance Commissioner Kevin McCarty. The status report is due Wednesday.

Florida insurers say they have been left vulnerable by a number of factors, including:

  • The state’s determination to hit the brakes on rate increases. Numerous rate hike requests have been whittled down or rejected.
  • The rise in the cost of “reinsurance” — backup insurance that companies buy to limit their exposure in the event of a disaster.
  • The state’s schedule of wind mitigation discounts, which grants major rate cuts to homeowners who buy shutters and pay for other improvements to make their homes more hurricane-ready. Companies complain the discounts are overly generous.
  • The reopening of Hurricane Wilma claims as policyholders put in for additional losses — often at the insistence of public adjusters, who represent homeowners.
  • As in the case of Southern Oak, the payment of overly generous commissions to affiliated companies that drain revenue from the insurer and leave it with little income or sometimes even losses.

As we approach the start of the 2010 hurricane season, it’s scary to think what would happen if a hurricane does in fact strike Central or South Florida. How would these insurers pay out claims?

Moves are being made in Tallahassee to remedy this problem. One such remedy is a proposed bill that would require each property insurer operating in the sunshine state to boost its reserves to $15 million — a sizable hike from the current requirement of just $4 million.

This, along with other proposed changes, will hopefully change the current state of affairs for Florida insurers. If not, the next hurricane to strike the area could leave many property owners in the dust, literally and figuratively.