The Palm Beach Post
by John W. Rollins
August 22, 2011
The 430 percent rate increases proposed by Citizens Property Insurance Corp. for optional sinkhole activity coverage, while eye-popping in a few regions, are not surprising to actuaries. We have observed the alarming trend in claims costs since the last big round of changes to Florida property insurance law, and noticed the explosion of billboards and TV ads encouraging new claims.
Legislation enacted this spring did not generate these claims, nor the need for the rate hike. It simply authorized Citizens to spotlight the problem draining hundreds of millions of dollars annually from the insurance safety net relied upon by 1.4 million Florida policyholders. By filing actuarially sound rates for this coverage separately, Citizens for the first time quantified the subsidy going to abusive claimants pursuing large payouts for often minimal damage, sometimes with the help of public adjusters and plaintiffs’ attorneys. Nearly all Floridians pay for Citizens deficits with assessments on home, auto and business policies.
Regulators demanded detailed claims totals from all Florida insurers while studying this problem in late 2010. Citizens’ response shows that it has incurred more than 6,500 sinkhole activity claims and paid nearly $500 million in losses since 2006. Almost none of these claims were for “catastrophic ground cover collapse,” where a hole actually swallowed part of a dwelling.
Citizens began charging separately for sinkhole activity coverage in 2007, and recently reported that it incurred $245 million in losses and collected just $32 million in premium in 2010. Sinkhole claims are nearly doubling annually. Actuarially, the need for a sinkhole rate increase is a slam-dunk, not speculation based on simulation models or vague costs.
Some legislators who criticize private insurers as unreliable are now working to starve Citizens of the premiums needed to support its promises to their constituents. A better effort would be to attack the factors driving costs, such as laws that enable abusive claimants to pocket six-figure settlements with dubious evidence of loss and no responsibility to repair damage, and solicitation practices that help inject an attorney or public adjuster as a middleman into a claims procedure dictated by Florida law and insurance contracts. Instead, these legislators fought to kill reforms that addressed these cost drivers.
Critics also say that private insurers may ask for higher sinkhole activity rates mirroring Citizens. With the hard data coming to light, is it any wonder private insurance companies are wary of writing policies with sinkhole activity coverage at almost any price, even for otherwise attractive risks?
It’s easy to forget, but prior to the sinkhole claims explosion, insurance companies competed aggressively for business, except in areas along the coast. Regulatory data shows that Citizens’ market share has rocketed in Palm Beach County only in the past few years. And all policies must cover collapse as part of the base premium; there is no danger of being uninsured for a true sinkhole or getting a rate hike for just that coverage.
It’s reasonable to examine whether the recent claims law reforms may stabilize or even reduce actuarially projected claims costs, and to consider restraint in immediately applying the full effect of rate increases recommended last month. But rates send a signal to consumers about the risk. A move to suppress yet another facet of Citizens rates while enabling the “sinkhole lottery” to continue is bad for all Floridians, whether Citizens policyholders or not.
John W. Rollins is an independent consulting actuary focusing on Florida property insurance and based in the Gainesville area. He was senior actuary at Citizens Property Insurance Corp.
