Thursday, March 20, 2008

Florida Treats the Symptoms While the Disease Grows Worse

The problem with homeowner’s insurance in Florida is not greedy insurance companies. It is the lack of greedy insurance companies. The U.S. has over 3,000 property and casualty insurance companies. Most of these greed mongers choose not to operate in Florida. Hurricanes alone do not account for this phenomenon. Every state along the Gulf Coast and Eastern Seaboard contends with this threat to one degree or another. Only Florida has a completely dysfunctional insurance market. What makes this state so unique?

Insurance companies with their complicated contracts and shoddy public relations skills have long made themselves easy fodder for politicians. No politician has channeled the public’s anti-insurer sentiment to better effect than Florida Governor Charlie Crist. He’s turned insurance company bashing into an art form much to the pleasure of the public, which has rewarded him with record approval ratings. Meanwhile, he’s only made the problem worse.

Competitive markets tend to keep greedy insurance companies in check. Markets, however, sometimes take time to fully stabilize and wring-out excess. The Governor, like all politicians only has as much time as the next election. Therefore, rather than deferring to a market based solution; he has decided to dismantled the market all together. In its place he has introduced a very innovative system best described as heavy handed government control - a surreal approach for someone who bills himself more or less as a conservative. In Florida, the state dictates what insurance companies can charge; where they can write; how they can underwrite, who they can cancel and most significantly how much they can make. Think of all those dynamic communist economies during the heyday of the Iron Curtain and you begin to get the picture. If the Florida insurance market was an automobile it would be a Yugo. Even worse, by staking his reputation on delivering immediate voter gratification the Governor seems to take the matter personally. Companies such as Allstate, Nationwide and State Farm who won’t quite play ball have all felt the wrath of his anger. Do as I say, or pay the price. That in a nutshell is Charlie Crist’s solution to high homeowner’s insurance rates.

Of course the last thing Floridians need is for three relatively respectable and solvent insurance companies to pack up and leave. They’ve already scaled back enough as it is. In a national economy where insurance companies can pick and choose their markets, the Governor must realize that Florida needs the insurance industry a lot more than it needs Florida. Unfortunately, this state condones if not promotes a hostile and adversarial regulatory culture. And no one fuels the fire more than Governor Charlie Crist. Most insurance companies want no part of it.

Concurrent with the destruction of the insurance market the Governor has also sowed the seeds for bankrupting the state. If the Allstates, Nationwides and State Farms of the world have refused to swallow the Governor’s Kool-Aid, one can only admire Citizens Insurance Company for insisting on a second glass. Formed under Governor Jeb Bush as an amalgamation of various ill-conceived state sponsored insurance pools, Citizens originally served quietly as a homeowner’s insurer of last resorts. In fact the law that created Citizens mandated that the company charge the highest rates in the state to deliberately avoid undermining the private market and to discourage people from using it. Governor Crist has taken the exact opposite approach. He has deployed Citizens as a vehicle for fulfilling his campaign promise and for manipulating the market. If none of those other SOB’s will cooperate, I know of at least one insurance company that will. And so the Governor ordered Citizens to cut rates and expand coverage. Predictably, Citizens has become the homeowner's insurer of choice for most Floridians. Long live the Governor.

No doubt Governor Crist hoped that competition from Citizens would encourage private insurers to reduce premiums. That has not occurred as he failed to take into account that Citizens plays by different rules than private insurers. Specifically if Citizens runs into financial trouble private insurers and policyholders in Florida must bail it out. For private insurers the more premium you write in the state, the more you will have to pay towards the bailout. The potential liability is huge. That’s why we see so many private companies scaling back. In a twist on the normal correlation between market share and profits, private insurers in Florida actually want to shrink market share to grow profits. It's crazy, but the assessment liability represents that great of a threat. Of course as the private market contracts more policyholders turn to Citizens, which only makes the problem worse. It is a vicious cycle.

Policyholders (i.e. almost all Florida residents) get to join in the fun too. If (when) Citizens tanks they'll see special assessment charges (i.e. taxes) tacked on to their insurance policies. In essence Governor Crist has set the stage for turning private insurers into tax collectors. It's brilliant in that consumers will likely not comprehend the nuance. The Governor's bail out tax will take the form of a premium increase. Just another reason to hate your greedy insurance company. We’re not just talking about assessments on homeowner's insurance either. We’re talking automobile policies, travel policies, health insurance for your dog policies. You name it. Pity the poor guy who rents the one room efficiency in Ocala and buys a $90 renter’s policy to cover his prized flat panel TV. He’ll pay an extra $20 at renewal so Citizens can rebuild the fat cat's home on Casey Key.

So weird has the Florida insurance market become that contrary to Governor Crist’s hopes that Citizens would foster competition, it has actually had the opposite effect. Private insurers treat Citizens with kit gloves and pray that it grows rich and strong. That’s the only hope for avoiding a gigantic assessment bill. As with Florida’s regulatory culture the assessment risk presented by Citizens only adds to the state’s unattractiveness.

With one exception: "Take Out" speculators love Florida. The speculators who form these thinly capitalized insurance companies do little more than bet on hurricanes. Here’s how the scheme works. You capitalize an insurance company in this state for $5,000,000. Simultaneously you start a management company to operate the insurance company. You then offer to take over (take out) a chunk of policies from Citizens Insurance Company. It is not uncommon to see these small take-out companies write $50 to $200 million in premium. You then pay your management company a fee of 10 to 15% of the premium income. The management company quickly recoups the initial $5,000,000 investment. Everything after that represents pure profit. A few years without a storm and you’ve made a fortune. Best of all, if a hurricane ever causes you to go bust; the state insurance guarantee fund picks up all the claims. For obvious reasons most of us would not regard speculation as a permanent solution to the state's insurance difficulties.

So with the Florida insurance market seemingly in shambles can things ever improve? Actually they can. But only if both the Governor and the people accept a dose of bitter medicine.

First, the Governor has to acknowledge the true problem. It's not about rates. It's about the market.

Second, the Governor needs to attract real (not "take out") insurance companies to this state. In this regard, there’s something to be said of the old saying that you catch more flies with honey than vinegar. Bashing insurance companies makes for good stump speeches, but not good policy. The Florida Office of Insurance Regulation has a reputation for regulatory bullying and bureaucratic unresponsiveness. The state has to adopt a new tone, eliminate its onerous filing requirements and repeal its counter-productive excess profit laws. Name an industry that responds well to constant bureaucratic meddling and government mandated limits on profits?

Third, the Governor needs to scrutinize "Take Out" companies more closely. Insurers take money today for the promise of paying potential claims in the future. New influxes of insurance capital mean nothing without some reasonable assurances of long-term solvency. The state already has a history with the fly by night crowd.

Forth, and most importantly, the Governor needs to get out of the insurance business. Citizens Insurance Company should stop writing new business immediately, and it should phase out all existing policies over the next 24 months. That will give existing customers ample time to line up new coverage in the private market.

Fifth, cross your fingers for a few more quiet hurricance seasons.

If the former Eastern block countries can successfully transition from communism to capitalism you have to believe Florida can too. And so I say, Governor Crist, tear down this wall. Only a vibrant market can liberate us from the greedy insurance industry. And quite frankly, I'm sick of overpaying for my homeowner's insurance.

Thanks for checking in…

Ed, III


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A Blogger's Apology

To my loyal readers, (all three of them) I offer a sincere apology for failing to keep this blog current over the last several months. The demands of my real job occasionally limit my ability to knock out new material. Things have since settled down, and I anticipate postings will now resume with regularity - generally.

Ed, III