Insurance commissioner Kevin McCarty has seen the future of property insurance rates in Florida. And he's preparing for war.
"It's going to be an interesting summer,'' McCarty said late last week. "We are in for a confrontation.''
The state insists rates should come down because of legislation passed this year. The insurance companies claim they can't drop rates. And if forced, they say, they have no choice but to drop even more policyholders than they already have.
McCarty has fired two shots across the bow of the SS Florida Insurance Market. First, his office denied a 30 percent rate increase by Florida Farm Bureau. It was a key test case for the more than 130 other companies making rate requests before the Sept. 30 deadline, including State Farm, Allstate, Nationwide and Universal.
And last week he sent an editorial to media outlets saying he had seen what some other companies intended to do. In a trend he found "very troubling", McCarty noted that 35 out of 46 companies were asking for an average rate hike of 37.3 percent.
His message to those companies and the insurance industry in general: If you come to us like Farm Bureau did, be prepared to defend yourself.
"That's absolutely correct,'' McCarty said later. "We're saying to the industry, 'We're not going to take it.' "
What happened to Gov. Charlie Crist's pledge in March that "help is on the way"? What happened to the statewide average 24 percent rate decrease? What happened to the legislative fix?
When the Legislature expanded the state-run Florida Hurricane Catastrophe Fund by $12-billion in January, it was supposed to lead to lower rates. The Cat Fund sells backup insurance (known as reinsurance) at a cheaper rate than the private market; by allowing insurance companies to buy more reinsurance from the fund, the theory goes, the companies would save money.
The companies did buy more reinsurance from the Cat Fund. But instead of passing the savings on to policyholders, McCarty said, the companies are using it to buy more reinsurance in the private market. The companies are hedging their bets, concerned that the Cat Fund, which sells backup coverage to state-backed Citizens Property Insurance, may not have enough money to pay claims in the event of a megadisaster.
McCarty and others, including consumer advocates, think many of the bigger companies want to buy more private reinsurance because they often sell it to themselves. Farm Bureau buys its backup coverage "from a company that is 80 percent Farm Bureau,'' McCarty said.
In years when there aren't huge amounts of claims to pay and the companies don't tap into backup coverage, which is more often than not, the companies cash in because they bought the coverage from themselves. All the money stays at home.
Calling the issue "an enormous concern,'' Crist said last week he's looking into ways to prevent insurers from using reinsurance as a tool to seek higher rates.
"Not a day goes by when I don't devote some time to it,'' he said. "I can't remember in my lifetime when property insurance rates have come down, and that's happening this year. Not as much as I'd like, mind you.
"I want to continue to press on this industry. And my language will get stronger. I think the industry has been greedy, unfair and has mistreated our fellow Floridians.''
McCarty acknowledged that the latest hurricane models tell insurance companies that potential losses could be greater than ever. But he pointed out the cost of reinsurance is coming down, thanks mostly to a lack of storms for the past 18 months.
"The real issue,'' McCarty said, "is (the insurance companies) taking the savings and buying reinsurance at a higher level than in the past. That is completely inconsistent with the legislation.''
The insurance industry fired back last week with an editorial saying, among other things, that Florida must rein in Citizens, create more incentives for Floridians to strengthen their homes, restrict building in high-risk areas, create state grants to help storm victims and increase deductibles.
In other words, taxpayers and policyholders, not the insurance industry, must shoulder the burden.
Can Florida have it both ways? Insurance companies need higher rates to do business here, but the state is demanding rates come down. Something has to give. And further cutbacks in coverage appear to be the insurance companies' go-to option.
Allstate, Nationwide, Liberty Mutual and several other carriers have said they will stop writing new business or drop policies as they come up for renewal. This month, State Farm Florida, by far the state's largest private insurer, said it will drop 50,000 policies.
Spokesmen for State Farm said most of those policies will be within two miles of the coast. But in its official filing with regulators, the company appeared to give itself wiggle room for a broader pullout. The filing indicated:
"State Farm will not issue renewals for homeowners or condo unit owners on any properties located in areas with a high propensity for hurricanes losses based on factors such as distance to open water, wind risk, claim experience, and other factors.''
That could be almost anywhere. In response, McCarty has issued subpoenas for State Farm to appear at a hearing Aug. 14 to explain its policy decisions.
"I'm sure this will get very confrontational before it's all over,'' said Chris Neal of State Farm.
So the cat and mouse game between regulators and the insurance industry continues.
Experts on both sides often caution that insurance is a complicated subject, that even they don't understand some of the nuances of the business. People in the medical and legal profession sometimes make the same claim.
But that's a veil. It's true that explaining what the TICL level of the Cat Fund is (the highest level that companies can buy reinsurance from the state) can take a minute. But the basic premise is risk, and how much the private and public markets are willing to take on.
Some Gulf Coast lawmakers are pressing Congress to create an option within the National Flood Insurance Program to cover wind and flood risk in one policy. But the flood program is financially strapped and passage of such a law is far from certain.
In Florida, that leaves Citizens and the Cat Fund, which account for more than 60 percent of the wind storm risk in the state.
"And it will only be more as we move forward,'' McCarty said.
"The market will clear at some point, and I hope the companies will do the right thing. But right now, too many people can't pay their premiums. The state of Florida has to do something.''
Some companies seeking rate hikes
After filing for rate reductions this year, 35 homeowners insurance companies have amended their filings to ask for an average 37 percent rate increase. Most of the state's largest insurers, including State Farm, Allstate, Universal and Nationwide, have yet to make their final filings. These are some of the companies that have:
Company Proposed increase Florida policyholders
USAA 53.9 percent 290,000
Liberty Mutual 9.2 percent 109,000
Farm Bureau 26.8 percent 103,000
Hartford (Midwest) 46 percent 63,000
Auto-Owners 38.6 percent 22,000
Cincinnati 37.5 percent 15,000
Source: Florida Office of Insurance Regulation