Florida hasn't faced a major hurricane in five years.
Reinsurance, the added layer of coverage that property insurers buy to protect themselves from catastrophes, is both more widely available and cheaper, with brokers reporting price drops of 10 percent to 25 percent for Florida business as of June 1.
Both the Florida Hurricane Catastrophe Fund and state-run insurer of last resort, Citizens Property Insurance, "are in the strongest financial position since their creation," Florida Insurance Commissioner Kevin McCarty wrote recently.
Still, property insurance rates are on the rise.
During the first eight months of 2010, Florida regulators have approved 45 property insurance rate increases with the average hike at nearly 13 percent, based on a St. Petersburg Times review of "all-peril" policies, the most common type of homeowners policy.
At first glance, rising rates appear counterintuitive. Bob Hunter, director of insurance for the Consumer Federation of America, prefers another description.
"It's plain and simple price gouging," said Hunter, a former Texas insurance commissioner. "The Cat Fund has got a pretty healthy amount of money now, and with reinsurance prices dropping, they can afford a fairly major hurricane without having to do assessments. … Yet the insurance companies are still running around yelling about big hurricanes and that the state is going to collapse."
So why, despite a 70 percent raise in premiums since 2003, are Florida homeowners paying double-digit rate increases? Why are two-thirds of property insurers in Florida reportedly losing money, forcing several to go out of business or leave the state?
Florida insurers and regulators blame rising rates on two things: The state is still paying a price for being hurricane-prone and hurricanes are no longer its only problem.
Total nonhurricane losses have risen 65 percent for Florida insurers over the past three years, according to Kevin Stokes, head of the Florida unit for reinsurer Guy Carpenter & Co.
Bottom line: Florida's homeowners insurance market is still badly in need of a fix with or without a storm.
"We're probably in the same boat if not worse than we were four years ago," Bob Ricker, an industry consultant and former executive director of Citizens Property Insurance, said during a property insurance symposium in Orlando earlier this month.
Here's a closer look at what the insurance industry, regulators and watchdogs have identified as the main cost drivers plaguing the Florida market:
After the 2005 hurricane season triggered a huge spike in rates, Florida legislators responded by imposing a rate freeze on Citizens Property Insurance that stayed in place for three years. Insurers had to resubmit their rate requests. The idea was to push insurers to secure cheaper reinsurance through the state (instead of using offshore reinsurers) and roll back their rates to reflect the cost savings. McCarty and Gov. Charlie Crist were, at the time, firmly opposed to large rate hikes.
Once the freeze ended in 2009, Citizens was allowed to began raising rates again to get to what actuaries deemed "sound" rates based on its exposure to hurricane damage. Under the "glide path" plan, it cannot raise the overall average rates more than 10 percent annually.
Even if reinsurance rates are going down, it's costing insurers more money simply because they're buying much more coverage.
Insurers used to feel more comfortable shouldering a greater percentage of risk in-house. That was before Hurricane Andrew (1992), and before four major storms struck Florida in a single year (2004).
Some critics think insurers have overreacted by buying too much reinsurance, protecting themselves from an unlikely scenario of damage payouts. Insurers defend their risk decisions.
Regardless, it's clear the formula has changed and billions of additional dollars are being sent to largely offshore (and unregulated) reinsurers.
A state report from 2003 estimated that insurers State Farm, Allstate, Universal Property and American Strategic spent only 7 percent of their premium on reinsurance.
Today, Florida property insurers are sending 54 percent of their premium dollars to reinsurance companies, according to a recent Sarasota Herald-Tribune investigation.
In the past four years, Florida insurers have paid out $15 billion for private reinsurance.
"A large part of Florida's marketplace problems are due to its overreliance on reinsurance," Jeff Grady, president of the Florida Association of Insurance Agents, told the paper. "Yet we are a crack addict. We have to have it."
Not long ago, insurers thought the risk of hefty sinkhole claims was restricted to a handful of geographic patches in the state — "sinkhole alley" in Pasco and Hernando counties, in particular. That's changed dramatically.
Riddled with complaints from insurers, McCarty's office this summer began investigating a surge in sinkhole claims statewide, including in South Florida, a territory not known for such claims in years past.
One frequently touted figure showing the balance out of whack: Citizens collected $19.6 million in premiums for sinkhole coverage last year but wound up paying out $97 million in losses. "The non-Cat losses are absolutely adversely affecting Citizens," said Sharon Binnun, the insurer's chief financial officer.
Old hurricane claims
Hurricane Wilma crossed the southern tip of Florida five years ago this month, and insurers are still paying out claims.
Consumers typically have five years after a major storm to file a claim and, according to insurers, the looming deadline has prompted a flurry of claims.
Another round of Hurricane Wilma claims filed with Citizens Property triggered the Florida Hurricane Catastrophe Fund to recently request an additional $700 million in bonds.
Insurers have lobbied unsuccessfully so far to restrict the timetable to two or three years. They've accused public adjusters — who represent consumers instead of insurance companies — of encouraging homeowners to file dubious claims.
However, consumer advocates say a longer time period is warranted because some storm damage problems may be hidden. Moreover, homeowners may be victims of faulty repairs, like a leaky roof allegedly fixed by their carrier only to surface as a worse problem a couple of years later.
Higher costs of doing business
Atlanta-based Cotton States Insurance lasted 50 years in the Florida property insurance market. When it threw in the towel in the summer, it wasn't because of a hurricane. A spokeswoman explained the pullout this way: "The cost of maintaining our current business is not proportional to the amount of premiums earned in Florida."
Among pricing changes that have affected insurers' books:
• Premiums have fallen because of a mandate to give discounts to property owners who have taken steps to mitigate their homes against storm damage.
• Insurers have traditionally paid off the cash value of property, which is depreciated. But residents are now allowed to pay an extra premium for "replacement cost" coverage and be paid the estimated cost for replacing damaged property.
Insurers say the system is ripe for fraud, forcing them to pay full replacement costs regardless of any evidence that repair work is or ever will be completed. An insurance bill that was vetoed by Gov. Crist last year would have allowed insurers to withhold paying full replacement costs until work was completed.
Jeff Harrington can be reached at firstname.lastname@example.org.