Florida Agents, Consumer Advocate: Low Insurance Rates Hurt Claims Ability

With the start of the hurricane season just a few weeks away, a leading Florida consumer advocate joined independent agents at a press conference today to warn that property insurance rates need to be raised if insurers are going to be able to pay claims on time or at all in the event a major hurricane hits.

Florida homeowners can “pay now or pay later,” said Walter Dartland, executive director of the Consumer Federation of the Southeast, suggesting that if insurance companies are not allowed to adjust their prices upward as needed to cover potential losses from a major storm now, then insurers might not be able to pay their claims and taxpayers could end up footing the unpaid bills.

“We can’t turn our backs on the reality of the market,” Dartland said.

The state’s “artificially low” rates for state-backed Citizens Property Insurance, strict rate regulation on private insurers, an underfunded state hurricane fund and an unfriendly regulatory climate have created a “fragile system” that is not sustainable, said Jeff Grady, president and CEO, Florida Association of Independent Agents (FAIA), at a joint conference with the consumer organization.

Grady said that despite being asked, Congress has not embraced the idea of bailing out Florida should its insurance system fall short of what’s needed after a hurricane.

Dartland said he thinks Insurance Commissioner Kevin McCarty should take another look at some of his rate decisions. “Rates have to go up,” he said.

According to Grady, the need for pricing freedom is critical given that, based on his group’s research, 40 percent of the property insurers writing in Florida reported net losses in 2008, a year in which no major storms hit.

He called for pricing deregulation for all property insurers and not just for State Farm and a select group of large carriers, which would happen if Gov. Charlie Crist signs legislation passed by lawmakers in the recently-ended session. Grady stopped short of endorsing that legislation even though it deregulates pricing because he said it continues the subsidies for Citizens and it helps larger insurers but not the many smaller domestic insurers that may need the pricing flexibility more.

State Farm’s Florida subsidiary is leaving the state because it has not been granted home insurance rate increases it says it needs. State regulators and the insurer are still negotiating the exact terms of the withdrawal, which affects nearly one million policyholders.

Grady noted that a major part of the problem is that private insurers must compete with Citizens, whose premiums are below what they should be and subsidized. “Citizens can get into every taxpayer’s wallet…private carriers can’t do that,” said Grady.

Citizens’ rates are as much as 40 to 50 percent under what they should be, according to actuaries.

Citizens’ rates are slated to rise somewhat over the next year as a result of new legislation allowing the insurer to raise prices up to 10 percent on individual policies. But Grady said that while this is “a good start” in the right direction, it is not enough to attract more private carriers or solve the underfunding problems. He said it might prompt some property owners to migrate to the private market but not many.

At the same time that they were sounding an alarm about an immediate crisis, the agents found room for hope in the longer term. The fact that both the House and Senate passed the measure to deregulate rates for State Farm and large insurance companies could be a sign that there is “a turning of the tide” in sentiment among lawmakers, according to Scott Johnson, vice president and chief lobbyist for FAIA. “There are good and bad points to this bill but at least it elevates the debate to whether the system is sustainable,” he said.