The Daytona Beach News Journal
by Steve Hall
August 17, 2011
The recently passed property insurance reform law (Senate Bill 408) promises to lower homeowner insurance rates.
Eventually.
That’s not exactly true either. It really doesn’t promise to lower rates. Only politicians can do that. As an insurance agent and risk manager, I don’t get to set the homeowners insurance rates our companies charge. I just get to explain them — not an easy thing to do these days.
SB 408 is a good first step in fixing some things that were causing companies to raise rates or restrict writing new policies. Those fixes include no longer forcing companies to pay for repairs to homes when no repairs were made, and changes to the sinkhole part of your policy.
Prior to 2005, when you had damage to your home, the company paid you 80 percent of your damages, so you could get started on repairs or rebuilding. You then got the other 20 percent (called the holdback) when the repair was completed. The Legislature decided in 2005 that your company should pay all of the money up front. As often happens when laws are passed, unintended consequences show up. Since 2005, company losses increased 80 percent, due primarily to this change.
The other major change delivered by SB 408 is on sinkholes. Who thought we would be talking about sinkholes instead of hurricanes? The cost of sinkholes from 2006 through 2010 was $2 billion! Fifty percent of Florida insurance companies lost money in 2010. Fifty percent with no hurricanes. Sinkholes are the culprit. When did sinkholes become so prevalent?
Public adjusters began marketing to homeowners that they may be entitled to money for sinkhole damages. Florida law was not well-written regarding what a sinkhole was. I always thought it was when your house was in a hole, but apparently public adjusters believe a crack in your driveway, or a hairline crack in your wall, qualifies. Claims started coming out of the woodwork. The new law defines “sinkhole.”
The changes regarding sinkholes require claims to be paid for repairs actually made, instead of when a sinkhole claim is proven. If the company deems that there is not a sinkhole loss, the homeowner will also have to share half the cost of additional sinkhole testing, up to $2,500. Both requirements should reduce frivolous claims.
What about the thing that didn’t get fixed — and still poses a huge danger for you? It’s called Citizens.
Citizens is the largest property insurer in Florida with over 1.4 million policies. Why should you care? Because Citizens has $443 billion in exposure, with $6 billion in surplus. If Citizens were a real insurance company, it would be deemed unsound and closed by the regulators.
So what happens if Citizens has claims and not enough money to pay them? Well, just look at your auto insurance bill (yes, I said auto). Down toward the bottom of the premium, you will see one or more entries with charges to you. Some are assessments by Citizens to you — on your auto insurance — because Citizens did not have the money to pay the claims from past hurricanes. These charges are on almost every policy you have, including your business policy if you own a business. So Citizens can tax almost every policyholder when it needs extra money.
Why would Citizens need extra money? Because its rates are not financially sound. Remember the politicians? They can just make this stuff up as they go along. So even though Citizens’ own math guys warned that Citizens’ rates are 40 percent to 50 percent below where they should be, the politicians said, “Let’s allow the rates to rise, but only after freezing them for three years and then allow them to rise 10 percent each year.”
Oh, I forgot to tell you. If you are a Citizens policyholder, you have an assessable policy. That means that if Citizens needs money, you will also be assessed up to 45 percent of your premium to help Citizens pay the shortage.
Citizens is supposed to be the company of last resort. Too often, it is the market of choice because of its price advantage. Yet every policy is an added burden to you and me, because we take on more risk when the wind blows. And it inevitably will.
I wish I could tell you that homeowners insurance prices will stabilize. For the next three to four years, I expect they will rise. If you look at the commercial insurance market for direction, you can see companies will aggressively compete for business where they believe they have a reasonable chance of profit. Give homeowners insurance companies a level playing field, and they will come back. Remember when the national companies used to write homeowner policies in Florida?
The legislature and governor should be commended for taking an important first step in stabilizing our homeowners insurance market. To make it truly healthy, they must make Citizens the market of last resort.
