By Julie Patel, Sun-Sentinel
August 11, 2010
Although it has been four years since Florida was directly hit with a hurricane, many Florida homeowners are still facing rising property insurance rates and finding few options when they shop around.
What are some of the biggest problems in the state's property insurance market and what can be done to solve them?
Insurance Commissioner Kevin McCarty fielded questions about that and other issues on Tuesday from the Sun Sentinel and its readers.
Why are rates rising again?
McCarty said sinkhole claims are growing exponentially and all policyholders – including those in South Florida where sinkholes weren’t a big problem in the past – are paying for them. His office will release a full report on the problem this month.
He said claims cost for non-hurricane problems such as water and fire damage are also increasing, partly due to consumer-oriented policies passed in recent years and the growth of public adjusters, who represent policyholders in claims disputes with insurers. "I am as flummexed as any consumer," he said. "We can’t do anything about hurricanes but we can certainly do something about [other] claims that are out of control…in the same way we’ve done it with workers comp where we’ve seen a 64 percent decrease in rates."
A 2003 workers compensation law that among other things, capped attorneys' fees, is credited for leading to lower rates.
What is the status of legislation expanding the federal government's role in providing catastrophe backup coverage and loan guarantees for state catastrophe insurance funds? Proponents say the legislation could essentially solve Florida's property insurance crisis.
The legislation, which cleared the House, is pretty much dead in the Senate. ”I’m afraid for this legislative period, we’re not going to see any national legislation," McCarty said.
Federal lawmakers passed some major and controversial legislation such as the health care bill and financial reform package. Why didn't the national catastrophe fund legislation make it?
The legislation is being framed as a bailout, similar to the assistance some car companies and banks received from the federal government to stay afloat. “There is a strong alliance in Washington against what they’re calling another bailout and it’s easy to demonize these – what I think are good public policy initiatives by Congressman [Ron] Klein and others – as bailouts and say it's because of Florida's 'inadequate rates,'" he said. Opponents "throw little buzzwords out there that have stock."
Why should less risky states subsidize hurricane-prone Florida?
McCarty said the legislation would create a plan for the federal government to back up loans and support states' efforts to plan for catastrophes such as hurricanes, floods, earthquakes, mudslides and tornadoes – disasters that strike nearly all states, not just Florida. He said it's more costly for the government to pay for relief efforts after a disaster strikes instead of planning for it beforehand.
But the attitude of many lawmakers is “when the house is burning, we’ll put it out," he said. "It’s a future problem that may happen. They’ve got real problems that are happening" like the financial meltdown and uninsured Americans.
He noted that Florida pays 40 percent of the premiums for the National Flood Insurance Program but receives a fraction of the claims payouts. So lawmakers in some other states are OK with having Floridians essentially "subsidize" that program, he said.
Why are so many homes in Florida still not fortified against hurricanes and what's the status of efforts to encourage homeowners to beef up their homes?
"You have a culture of amnesia as you move further and further away from the storm, the less and less you...put your shutters up," McCarty said. "And the pressure to build homes cheaply. That’s a real problem everywhere, not just Florida. They don’t want to build earthquake-resistant homes in California either...It costs three to five percent more to build them. It costs a whole lot more to replace them."
He said Florida spent $250 million to provide free home inspections and matching grants for home upgrades. "We certainly have taken the biggest step in the history of the world in terms of providing money for that. That money ran out," he said.
He said 60 percent of the homes in Florida were built before the new building codes and it would be too expensive to upgrade many of them; They will eventually just have to be rebuilt. But he said the only way to lower the huge, projected potential damage in Florida from major hurricanes is to make homes stronger.
"Florida is going to have to focus on those issues in order to ensure the economic viability of the state, not just the insurance viability," he said.
Do policyholders understand they're on the hook to help pay for deficits in state insurance funds if they're wiped out after a major hurricane?
Yes, McCarty said: "We’re a transparent state. We [list fees for each state program] on your deck sheet and you see it and people call when they see that number: ‘How come I’m paying this much money and I have a private sector policy?’"
What are the next key insurance issues for Florida?
In addition to the sinkhole issue, McCarty said his office may hold a hearing on personal injury protection fraud. Insurance Consumer Advocate held a roundtable on the issue last week. Floridians are required to have at least $10,000 of PIP coverage, which pays for the driver's medical expenses, a portion of lost wages and a death benefit after an auto accident.
Domestic insurers have pushed to have the state address the problem of staged accidents. Chief Financial Officer Alex Sink's office has worked with local police and the crime bureau to arrest about 30 people this year for alleged involvement in staged accidents.
"PIP is certianly going to be an issue this year. There certainly is an increase we're seeing in the cost of PIP claims," he said.
As the state's top insurance regulator, you faced considerable criticism in recent years from insurance industry representatives and some lawmakers for rejecting property insurance rate hikes in 2008, holding hearings to investigate insurers and opposing a bill to essentially deregulate rates. Has that feedback influenced your thinking in light of your office approving dozens of rate hikes recently and supporting an insurer-backed bill?
"You make decisions and you’re going to be criticized. I think the important thing is to focus on the responbilities and that is protecting consumers and ensuring solvency and I think the office has done a top job in doing those things," he said.
He said the implication that OIR suppresses rates is wrong. "What companies equate to supressing rates is they’re not free to set their own rates. What they want is they don’t want any infrastructure for reviewing rates," he said. "If a company puts together a competent rate filing that meet the statutory guidelines...it gets approved."
Should there be more restrictions on how state regulators and insurers can communicate similar to rules for utility regulators?
McCarty said utilities are different because they operate as regional monopolies. Some of OIR's work requires interaction with insurers, he said. "I think we have more transparency in insurance than the other sectors and we have more transparency in Florida than any other state," he said.
Why did your office flat-out reject State Farm's proposed 47 percent or 67 percent rate hike instead of recommending a smaller increase, as it has done for other insurers?
McCarty said State Farm's proposal was unique in that regulators couldn't use it to determine a correct rate. "It wasn't properly filed, it wasn't properly justified and it didn't sufficiently project a rate indication," he said.
Should Citizens Property Insurance consider competitively bidding more of its contracts and review its executive compensation costs? We reported in January that state-backed insurer trimmed more than 26 percent of its customers since late 2007 but increased its number of employees by 17 percent and the insurer did not shop around for the best deal on at least 33 current contracts worth more than $25,000 each and that added up to about $49 million. Citizens cited exemptions allowed for emergencies and other reasons that are included in a law requiring competitive bidding for contracts worth over $25,000.
McCarty said Citizens' executive pay compared to private insurers is "certainly within the range of reasonable" and that the insurer is probably the most examined insurer in the state because of the internal and external audits done on it, including audits periodically by his office.
"I don’t want to put myself in the management of the company. As a state agency, I have very stringent standards for when I have to contract and as frustrating as those may appear at the time – in terms of your business goals and objectives, in terms of getting something done – there’s a good public policy purpose for making sure that they’re appropriately [selected through competitive bidding] to ensure transpacrcy in the system. Although they’re operating as a business, they are in fact a quasi-governmental entity and should abide by those same processes and procedures," he said.
The make up of the Cabinet will change soon. Do you think the new Cabinet will consider keeping or replacing you?
McCarty said the Cabinet may very well review the offices they're in charge of filling. "I certainly would expect the new cabinet members to undergo that evaluation for my office or any of the other offices that report to the Cabinet," he said. "I think there are many challenges to Florida right now. I hope that I can continue to contribute to building a strong marketplace and protecting consumers."