Doug Wiles on Property Insurance Reform
This week, former State Representative and House Minority Leader Doug Wiles explains the real impact of the property insurance reform package passed during January's special session.
1. What did the Legislature do?
The new law, combined with emergency action taken by the Florida Cabinet, will impact homeowners insurance in Florida in several ways:
The legislation made significant changes to Citizens Property Insurance Corporation, the state-run insurance company:
- Citizens must return to 2006 rates and cannot increase them for the remainder of 2007.
- The law requiring Citizens to charge more than private insurance companies was repealed, allowing Citizens to compete directly with private insurance companies.
- Citizens is no longer required to charge "actuarially sound" rates, providing further opportunities for lowering insurance premiums.
You will also see a number of changes in your insurance options. Policy owners will be able to select from a broader range of deductibles and to choose whether they want to eliminate coverage of their home's contents from their policy. With the agreement of their mortgage company, homeowners can even choose to eliminate hurricane coverage entirely.
The new law increases the use of the Florida Hurricane Catastrophe Fund ("CAT Fund") to help provide financial security to insurance companies. They will be allowed to buy twice the amount of reinsurance -- back-up coverage -- at lower prices than they would pay on the private market. The companies are required to pass this savings on to homeowners.
For years, national insurance companies have been able to create Florida-only subsidiaries that can charge higher premiums because the profits from the parent company are not considered when they request a rate increase. The new law prohibits the creation of any new Florida-only subsidiaries.
The new law contained a "cherry-picking provision." Now, insurance companies who sell auto insurance in Florida and homeowners insurance in other states must also sell homeowners insurance in Florida.
Finally, the changes strengthen building codes for new structures built near the coast, particularly in the Panhandle area.
2. What kind of impact can consumers expect?
The changes were very complicated and there are still a number of issues that the Office of Insurance Regulation will need to address through administrative rules. However, one thing is certain: Homeowners insured by Citizens can expect relief from soaring insurance premiums by an average of 25 percent.
All other companies are required to file for rate reductions soon. Some may do so as early as March 1. While it is uncertain how much rates will go down as a result of the less expensive reinsurance provided by the state, estimates are that the immediate reductions will range from 10 to 25%.
Although the new law places restrictions on when private insurance companies may non-renew policies, there is no requirement that these companies issue new homeowners policies. In fact, at least four private insurance companies have announced that they are either withdrawing from Florida or are placing additional restrictions on the sale of new homeowners insurance policies. Given the insurance industry response to date, it does not appear that the bill or emergency rule will encourage additional private insurance companies to enter Florida's insurance market.
3. Is this a long-term solution?
The honest answer is that we don't know. Clearly, Florida's consumers will be pleased that their insurance rates will be going down and that they are less likely to face cancellations during the upcoming hurricane season. However, the long-term prognosis for a healthy, competitive homeowners insurance market remains cloudy.
There are two major risks with the legislature's plan.
First, the CAT Fund has insufficient funds to weather a bad storm season, and that could put Florida property owners at risk for a major bailout. After the 2004-05 seasons when 8 hurricanes crossed the state, Citizens lost more than $1.5 billion, and required a $750 million taxpayer bailout. The new law means the state could be responsible for up to $32 billion in losses, and there is currently only $2 billion available in the catastrophic trust fund. Another active hurricane season with numerous storms crossing Florida or a single Category 4 or 5 Hurricane that makes landfall near one of the state's most populated areas could spell disaster for our state budget, leading to huge assessments for current and future policy holders.
Second, A.M. Best, the company that rates the financial stability of insurance companies (much like a consumer credit score for an individual) has said they will be forced to lower the rating of any company that buys their reinsurance from the CAT Fund because it is so under-capitalized. In addition to making reinsurance more costly to purchase (and therefore leading to higher premiums in the long run), a lower Best Rating makes it more difficult for an insurance company to get additional capital it needs to pay out claims in case of a major hurricane. Companies may leave the state rather than facing a lower rating, and those that stay risk being destabilized or unable to pay claims if Florida faces a bad hurricane season.
4. What are the next steps?
We must continue to work on solutions that will reduce the potential for loss during hurricanes and when they occur, provide safety nets for homeowners, businesses and the citizens of Florida.
As a start, we need to continue to strengthen our building codes and provide education and assistance for Floridians to "harden" their homes against damage due to high winds. There is money available to help homeowners with certain types of home improvements, but we need to increase the fund, make it easier to access, and have a widespread information campaign to make sure citizens are aware of it.
Finally, the creation of a National Catastrophe Fund to back up insurance companies after significant disasters is needed to broaden the financial support for the financial impact of hurricanes, floods, earthquakes, tsunamis and tornados.
Solving Florida's insurance crisis is not just a task for Tallahassee and insurance companies. We must recognize that this is an issue that requires attention and help at all levels of government and business, with the support of our citizens.
About the author: Doug Wiles served in the Florida House from 1996 to 2004 and was Minority Leader during his last term. He served on the House Insurance Committee. He has been a licensed Florida insurance agent for more than 27 years, owns an independent insurance agency in St. Augustine and has earned the national insurance designation of Chartered Property and Casualty Underwriter (CPCU).
During his service in the House, Wiles earned a reputation for bipartisanship, fairness, and his willingness to listen to ideas from all sides of an issue.