Last week I participated in a panel discussion sponsored by the Sarasota/Bradenton local agents association(s) and attended by nearly 200 insurance-philes, vendors and clients. It was a free for all discussion on what’s wrong with Florida’s property market and how to fix it.
On the panel with me were: Republican freshman representative from Manatee County, Jim Boyd, who sponsored the house version of last session’s Citizens reform package; Christine Turner, Citizens legislative affairs director, and; Paige St. John, recent Pulitzer Prize winner for her expose’ on Florida’s home insurance market. The Panel and questions from the audience were ably moderated by local real estate attorney Cliff Walters.
First, for those hungry for blood, there weren’t any “gotcha’s” during the program. It was a respectful fact based discussion of what Florida’s situation has become and how best to solve it. Yes, there was wide divergence when it came to interpreting those facts and applying them to solutions; just as there was divergence on culpability for Florida’s disastrous circumstances. I, for example, had a tendency to blame laws, lawmakers, (including and especially Charlie Crist) and government generally. Paige St. John pointed more to reinsurers and what she believes is a hide-the-profit MGA system.
Noteworthy was the wide avenue of agreement on Citizens reform. It’s growth, acknowledged even by Christine Turner, is monumental. During a recent Cabinet presentation, Citizens representatives testified that during April Citizens received 40,000 new applications. Questions from the Governor and cabinet showed profound concern over such growth and the impact it would have on assessments. At one point last year new applications were at 45,000 every 30 days. During the FAIA convention Commissioner Kevin McCarty referred to Citizens as the 800 pound gorilla and said it has a “perverse impact on the private market” and “capital cannot be deployed as long as Citizens remains so competitive”.
Under normal circumstances such figures would be alarming. But, in the wake of the new RMS-11 computer model dramatically increasing probabilities for inland territories and thus the rate need for carriers so configured, it throws kerosene on the fire. It’s statewide impact may not be monumental, but…for some carriers, those with the better book of inland policies, it means double digit rate increases and in a few cases, triple digits. And this means Citizens, which is already about 30% too low by comparison, would dramatically increase its competitive edge.
SPEED BUMPS
Nothing we can do to repair Florida’s home insurance market will have the desired result as long as Citizens remains open to all comers and competitive with private carriers. We can completely deregulate the market, or, we can do as Charlie Crist did and completely oppress it, neither will diminish the problem as long as Citizens always wins the business. It was mentioned during the Sarasota panel that Citizens isn’t “really” open to all applicants because you can’t get in “if” you have a quote less than 15% higher from a private carrier.
Let’s put that in perspective. There are two types of entry barriers: one is an absolute barrier for certain applicants; i.e. a higher price or less coverage and a prohibition against entry whenever any private carrier is willing to write the risk. Then, there are speed bumps to entry that merely slow applicants and agents down without keeping them out. The 15% requirement is a speed bump.
Why? First, if the private market quote is 14.9% higher any creative agent and cost conscious consumer (is there any other kind?) can find a way to increase the quote by 1% in order to pierce the 15% threshold. Second, knowing whether there was a private quote and whether it was comparable coverage is almost impossible to verify and enforce. And finally, and most compelling; agents with no private alternative don’t even have the 15% speed bump. For them Citizens is a wide open competitive alternative with good, often better coverage, a lower price and, in the midst of a solvency crisis, a guarantee of claim payment. Who can compete with that?
Who can compete with over 700 State Farm agents (they have no private market and unfettered access to Citizens) who can offer significant discounts on auto policies to those who purchase a Citizens homeowners policy; one whose price is often lower even without the auto discount?
One analysis of Citizens new applications revealed that 20% of the HO-3’s were coming from State Farm agents. That’s 20% of 40,000 new applications every month. This is one reason the 125,000 non-renewing State Farm policyholders are finding their way into Citizens instead of one of the 16 carriers with which State Farm had service agreements.
SOLUTION
At the panel discussion I was asked what the solution was. My answer…”pain”!
Everyone, including insurance agents will have to face a little pain at some point. Consumers in Citizens will have to pay more, receive less in coverage or both, or…seek a private market alternative. If there is a private market alternative consumers will have to take it. Agents without a private alternative will lose business. State Farm agents will have to lose business. State Farm will forfeit writing so much auto business.
Independent agents in coastal areas may no longer have an admitted market for builders risk coverage or million dollar coastal mansions. Wealthy coastal homeowners will have to increase deductibles, spend money to mitigate, buy E&S coverage or all of the above. Citizens highest valued homeowner, with a $26 million coastal mansion may have to fend for himself.
Those who truly deserve to be in Citizens may no longer be able to enjoy coverage above that necessary to meet the terms of their mortgage. Banks may have to forego sinkhole activity coverage. Subsidies for those in coastal areas will diminish. Coastal businesses will no longer receive wind coverage paid, in part, by assessments on retired people and single moms.
The point is that when a patient is unwilling to accept the discomfort of the cure, recuperation is impossible. For things to get better, things must change. Continued accommodation of “every” constituency only guarantee’s the problems associated with such accommodation will continue.
Maybe it’s time for a little pain.
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