Overhaul State's Mitigation-Discount System

Overhaul State's Mitigation-Discount System

August 08, 2009
Originally published in The Miami Herald

State Farm's decision to reduce government-mandated mitigation discounts seems severe. But it's unlikely the company would have made it -- and dealt with the bad PR -- if its executives didn't really feel it was necessary to protect its finances and policyholders.

Although well intentioned, Florida's mandatory mitigation discounts are poorly designed. By specifying minimum discounts with almost no regard to property location, the state has made it impossible for insurers to take these real differences into account.

An insurer that is allowed to set its prices in response to supply and demand will almost always include mitigation discounts: a well-mitigated property is cheaper to insure than a poorly built one, and a company that doesn't take that into account will give up business to competitors that do. Unless it offers some type of mitigation discounts, State Farm will lose business as a result of its decision. And it should.

But it should also be able to set its rates freely and without political interference. The Consumer Choice Insurance bill, which Gov. Crist vetoed despite overwhelming legislative support, could have improved things and brought new capital to the state, and might have kept State Farm in Florida.

The state can best promote mitigation by discouraging building in places where it shouldn't take place, providing incentives for people of modest means to reinforce their homes, and allowing insurance companies to charge rates based on risk.

The state-mandated mitigation discount system needs an overhaul.