State Farm bluffed, the insurance commissioner caved and Florida is still better off. The deal announced this week granting State Farm a 14.8 percent rate increase and permission to drop about 125,000 policies will be painful to many homeowners, but it is a reasonable trade-off to keep the state's largest private insurer here. While it doesn't solve the property insurance mess, it buys some time to work on broader answers.
There is a line of thinking that State Farm never intended to pull out of the nation's fourth largest state, regardless of its complaints about losing money on property insurance and the rejection of a proposed 47 percent rate increase in January. The market is too big, and State Farm's more lucrative lines of insurance also would have suffered. Angry homeowners who lost their coverage would have been tempted to switch their car insurance and other lines of coverage to other insurers. Months of negotiations over the details of the pullout suggested both State Farm and the state were looking for a way to resolve the standoff, and another hurricane-free storm season certainly helped.
It is a bittersweet settlement. Many of those 125,000 residential policyholders who will be dropped by State Farm are likely to end up in the state-run Citizens Property Insurance Corp. That's not good, because it increases the chances that Citizens won't have enough money to pay claims after a major hurricane and that all insured Floridians will be assessed to make up the difference. The 14.8 percent rate increase also is deceptive, because regulators already have allowed State Farm to eliminate premium discounts for multiple policies, alarm systems and other items. For many policyholders, the loss of those discounts alone means an increase in premiums of up to 28 percent. State Farm and other large insurers also remain determined to win approval to cut discounts for storm shutters and other efforts to harden homes against storms, which would send exactly the wrong message.
Yet Florida is better off with State Farm under these terms than without it. Citizens, already the state's largest residential insurer, could not have responsibly absorbed all of State Farm's 810,000 policies. The small Florida insurers are untested by major storms and don't have the capacity, either. At least a major player with financial resources and a proven track record remains in the game.
Florida made modest progress this year in dealing with the insurance situation. The Legislature agreed to gradually reduce the capacity of the state hurricane catastrophe fund, which sells inexpensive reinsurance to insurers. It also agreed to allow Citizens to begin raising its actuarially unsound rates by up to 10 percent a year, giving policyholders some certainty and establishing a path to more responsible rates.
Of course, Florida remains one major hurricane away from an insurance disaster. The state should continue to push for a national or regional catastrophe fund to spread the insured risk. It should continue to help cultivate small in-state insurers and provide homeowners with incentives to harden their homes. It also should examine a proposal that would have the state set and collect all hurricane premiums in return for private insurers servicing all policies and insuring other liability. If that proved to be feasible, it could eliminate the need for Citizens.
For the moment, the State Farm deal prevents a bad situation from getting significantly worse. The ultimate solution to the property insurance crisis, though, remains elusive.