Property Insurance: General

Property insurance rates on the rise in Florida
Consumer advocate calls it 'plain and simple price gouging'
TCPalm, November 12, 2010
By JEFF HARRINGTON St. Petersburg Times

Florida hasn’t faced a major hurricane in five years.

Reinsurance, the added layer of coverage that property insurers buy to protect themselves from catastrophes, is both more widely available and cheaper, with brokers reporting price drops of 10 percent to 25 percent for Florida business as of June 1.

Both the Florida Hurricane Catastrophe Fund and state-run insurer of last resort, Citizens Property Insurance, “are in the strongest financial position since their creation,” Florida Insurance Commissioner Kevin McCarty wrote recently.

Still, property insurance rates are on the rise.

During the first eight months of 2010, Florida regulators have approved 45 property insurance rate increases with the average hike at nearly 13 percent, based on a St. Petersburg Times review of “all-peril” policies, the most common type of homeowners policy.

At first glance, rising rates appear counterintuitive. Bob Hunter, director of insurance for the Consumer Federation of America, prefers another description.

“It’s plain and simple price gouging,” said Hunter, a former Texas insurance commissioner. “The Cat Fund has got a pretty healthy amount of money now, and with reinsurance prices dropping, they can afford a fairly major hurricane without having to do assessments. Yet the insurance companies are still running around yelling about big hurricanes and that the state is going to collapse.”

So why, despite a 70 percent raise in premiums since 2003, are Florida homeowners paying double-digit rate increases? Why are two-thirds of property insurers in Florida reportedly losing money, forcing several to go out of business or leave the state?

Florida insurers and regulators blame rising rates on two things: The state is still paying a price for being hurricane-prone and hurricanes are no longer its only problem.

Total nonhurricane losses have risen 65 percent for Florida insurers over the past three years, according to Kevin Stokes, head of the Florida unit for reinsurer Guy Carpenter & Co.

Bottom line: Florida’s homeowners insurance market is still badly in need of a fix with or without a storm.

“We’re probably in the same boat if not worse than we were four years ago,” Bob Ricker, an industry consultant and former executive director of Citizens Property Insurance, said during a property insurance symposium in Orlando last month.

Here’s a closer look at what the insurance industry, regulators and watchdogs have identified as the main cost drivers plaguing the Florida market:

Playing catch-up

After the 2005 hurricane season triggered a huge spike in rates, Florida legislators responded by imposing a rate freeze on Citizens Property Insurance that stayed in place for three years. Insurers had to resubmit their rate requests. The idea was to push insurers to secure cheaper reinsurance through the state (instead of using offshore reinsurers) and roll back their rates to reflect the cost savings. McCarty and Gov. Charlie Crist were, at the time, firmly opposed to large rate hikes.

Once the freeze ended in 2009, Citizens was allowed to began raising rates again to get to what actuaries deemed “sound” rates based on its exposure to hurricane damage. Under the “glide path” plan, it cannot raise the overall average rates more than 10 percent annually.


Even if reinsurance rates are going down, it’s costing insurers more money simply because they’re buying much more coverage.

Insurers used to feel more comfortable shouldering a greater percentage of risk in-house. That was before Hurricane Andrew (1992), and before four major storms struck Florida in a single year (2004).

Some critics think insurers have overreacted by buying too much reinsurance, protecting themselves from an unlikely scenario of damage payouts. Insurers defend their risk decisions.

Regardless, it’s clear the formula has changed and billions of additional dollars are being sent to largely offshore (and unregulated) reinsurers.

A state report from 2003 estimated that insurers State Farm, Allstate, Universal Property and American Strategic spent only 7 percent of their premium on reinsurance.

Today, Florida property insurers are sending 54 percent of their premium dollars to reinsurance companies, according to a recent Sarasota Herald-Tribune investigation.

In the past four years, Florida insurers have paid out $15 billion for private reinsurance.

“A large part of Florida’s marketplace problems are due to its overreliance on reinsurance,” Jeff Grady, president of the Florida Association of Insurance Agents, told the paper. “Yet we are a crack addict. We have to have it.”


Not long ago, insurers thought the risk of hefty sinkhole claims was restricted to a handful of geographic patches in the state — “sinkhole alley” in Pasco and Hernando counties, in particular. That’s changed dramatically.

Riddled with complaints from insurers, McCarty’s office this summer began investigating a surge in sinkhole claims statewide, including in South Florida, a territory not known for such claims in years past.

One frequently touted figure showing the balance out of whack: Citizens collected $19.6 million in premiums for sinkhole coverage last year but wound up paying out $97 million in losses. “The non-Cat losses are absolutely adversely affecting Citizens,” said Sharon Binnun, the insurer’s chief financial officer.

Old hurricane claims

Hurricane Wilma crossed the southern tip of Florida five years ago this month, and insurers are still paying out claims.

Consumers typically have five years after a major storm to file a claim and, according to insurers, the looming deadline has prompted a flurry of claims.

Another round of Hurricane Wilma claims filed with Citizens Property triggered the Florida Hurricane Catastrophe Fund to recently request an additional $700 million in bonds.

Insurers have lobbied unsuccessfully so far to restrict the timetable to two or three years. They’ve accused public adjusters — who represent consumers instead of insurance companies — of encouraging homeowners to file dubious claims.

However, consumer advocates say a longer time period is warranted because some storm damage problems may be hidden. Moreover, homeowners may be victims of faulty repairs, like a leaky roof allegedly fixed by their carrier only to surface as a worse problem a couple of years later.

Higher costs of doing business

Atlanta-based Cotton States Insurance lasted 50 years in the Florida property insurance market. When it threw in the towel in the summer, it wasn’t because of a hurricane. A spokeswoman explained the pullout this way: “The cost of maintaining our current business is not proportional to the amount of premiums earned in Florida.”

Among pricing changes that have affected insurers’ books:

• Premiums have fallen because of a mandate to give discounts to property owners who have taken steps to mitigate their homes against storm damage.

• Insurers have traditionally paid off the cash value of property, which is depreciated. But residents are now allowed to pay an extra premium for “replacement cost” coverage and be paid the estimated cost for replacing damaged property.

Insurers say the system is ripe for fraud, forcing them to pay full replacement costs regardless of any evidence that repair work is or ever will be completed. An insurance bill that was vetoed by Gov. Crist last year would have allowed insurers to withhold paying full replacement costs until work was completed.

Some of the biggest hikes

Here’s a sampling of some of the steepest property insurance rate increases that Florida regulators have approved so far this year:

Company........................................Average rate increase
ACA Home Insurance............................16 percent
Capital Preferred Insurance....................17.2 percent
Florida Peninsula Insurance.....................19.8 percent
Tower Hill Preferred Insurance.................21.3 percent
Homewise Insurance Co..........................28.8 percent
Northern Capital Insurance Co..................29 percent
Hartford Insurance...................................24 percent
Castle Key Insurance................................18.7 percent
Castle Key Indemnity................................17.8 percent
American Mercury Insurance.......................24.8 percent
Source: Florida Office of Insurance Regulation

Sinkholes – Florida Insurers’ Most Expensive Non-Hurricane Claims

Florida Insurance Council White Paper
Updated on September 1, 2010

Contact; Sam Miller, FIC Executive Vice President
(850) 386-6668, ext. 223
This email address is being protected from spambots. You need JavaScript enabled to view it.

Commissioner Kevin McCarty has identified major “cost drivers” behind the failure of property insurers to build substantial new surplus during the years when Florida does not suffer a hurricane and questionable sinkhole claims may be the single most serious one. Most sinkhole claims involve minor cracks in a garage wall or other areas of the home and do not involve the traditional sinkhole which swallows up a home or vehicle in the front yard.  Sinkhole claims are the most costly of all claims filed in the current property insurance arena, except for devastation from hurricanes.

Citizens Property Insurance Corporation is the largest property insurer in Pasco and Hernando Counties, the center of the sinkhole insurance crisis. Many private insurers have left the region because of questionable sinkhole claims and this is the only area of Florida where Citizens has a significant presence for a factor other than hurricane exposure. Citizens reported that in 2009 it earned $19.6 million of homeowner’s premium dedicated to sinkhole risk, but incurred an estimated $97 million in sinkhole losses.  Sinkhole losses were a major factor in its recent rate increase filing and it has begun a program to inspect homes before issuing new coverage.

The ineffectiveness and inherent fraud surrounding the current sinkhole claims process is underscored by a recent review that indicates only 27 percent of policyholders with moneys paid as a result of sinkhole claims actually had repairs done to their property. This study was conducted by a private insurer with significant sinkhole exposure in Pasco and Hernando. The company examined 110 sinkhole claims where it had made payments covering the period of July 2008 through July 2009 and claims that had been closed at least six months. The homeowner must pull a building permit to make repairs. A permit for repairs had been pulled on property involved in only 31 claims out of the 110, or 27 percent. Other insurers are conducting similar studies as the insurance community prepares to confront this crisis during the 2011 legislative session.

OIR Data Call on Sinkhole Claims

The Office of Insurance Regulation earlier this fall issued a data call to commercial and residential property insurance writers to collect claims data related to sinkholes. Companies were to submit their information by September 21.

The data call encompasses sinkhole claims opened in Florida between 2006 and 2010 and will help the Office more clearly define the types of claims being filed, testing procedures to determine the legitimacy of claims, costs of inspections and geographic location of claims.  OIR also wants to gather information regarding legal fees and public adjuster fees associated with sinkhole claims as well as data dealing with the amount of structural loss. The OIR then plans to compile a report based on the results to help regulators determine potential regulatory actions, and whether additional authority is needed through legislative action.

Senate Banking and Insurance Committee Sinkhole Study

The Senate Banking & Insurance Committee is conducting a study due December 1, 2010 that will delve into the sinkhole insurance claims crisis.

“Insurance claims from Florida homeowners for damages resulting from sinkholes have increased dramatically both in number and costs over the past 10 years,” Banking & Insurance notes in a summary of the study on the Florida Senate Internet site. “Under current law, insurers must make available to policyholders, for an appropriate additional premium, sinkhole coverage for losses on any structure, including personal property contents. Property insurers must also provide coverage for a catastrophic ground cover collapse.

“The costs associated with insuring against sinkhole-related losses and the increasing costs to remedy damage caused to insured property have escalated. Sinkhole insurance claims have increased in recent years by 200 to 300 percent for some property insurers who in turn have paid millions of dollars annually to settle such claims. For example, the number of sinkhole claims made against Citizens Property Insurance Corporation has more than doubled between 2005 and 2009.

The Legislature has made multiple changes to the laws governing sinkhole insurance coverage in 2005, 2006, and 2007, but further issues need to be examined, including but not limited to, sinkhole investigations and reports; the burden of proof in sinkhole claim disputes; fraudulent practices pertaining to sinkhole claims; the procedures and time parameters for the stabilization and repair of damaged buildings and structures, including the payment by insurers of sinkhole claims; the accountability and liability of engineers and geologists involved in sinkhole claims; the neutral evaluation process, including the selection and qualifications of the sinkhole neutral evaluator; and the purpose and effectiveness of the sinkhole database which is the responsibility of the Department of Financial Services.”

"Sinkhole Alley" Counties

The majority of sinkhole related claims are generated in Pasco, Hernando, Pinellas, and Hillsborough counties near Tampa, often referred to as "Sinkhole Alley.”   However, sinkhole claims are being filed as recently as the first quarter of 2010 in Dade, Broward and Palm Beach counties.

Successfully Tackling Sinkhole Insurance Crisis is Essential

Under current law, when a claim is made for sinkhole loss, the insurer must inspect the premises in question and make a determination whether there has been physical damage to a structure that may be the result of sinkhole activity.  In almost every case, when a claim for “sinkhole” is filed with an insurer, the insurer MUST pay for the geologist or engineer’s inspection which ranges from $8,000 to $15,000; the most expensive initial claims cost among every other claim that is filed with an insurance company. Insurers are faced with an immediate multi-thousand dollar cost just because a sinkhole claim is filed. 

Florida Insurance Council members report that for every 10 sinkhole claims they experience, it affects their bottom line costs ranging from $1.5 million to $2 million, which is significant to many Florida insurers who have, on average, $25 to $50 million in the bank to pay all claims.

The insurance community negotiated with the trial bar and public adjusters and other parties during the 2010 session on balanced reforms which eliminate fraud but guarantee coverage when real sinkholes occur. The negotiations broke down. It is absolutely essential that the sinkhole insurance statutes be effectively reformed. One of the most important challenges is to establish a true definition of structural damage from a sinkhole that would constitute a sinkhole loss. The insurance community proposes that the definition be based on authoritative principles of professional engineering and that resultant damage to a building be tied to shifting in the foundation caused by sinkhole activity.

A complete sinkhole insurance crisis solution may require creation of a public facility to handle sinkhole loss claims. This has been recommended in two studies over the years by Florida State University.


Click here: pdf QUASRng Market Share as of March 31, 2010