CEI Critiques FL. Commissioner McCarty’s Insurance Report

“The Same Misinformation in a New Package”

TALLAHASSEE, August 17, 2009 – Florida Office of Insurance Regulation Commissioner Kevin McCarty last week provided a report (http://www.floir.com/pdf/CabinetPresentation08112009.pdf) to back up a much-repeated claim that the 40 new property insurers have entered the Florida market since 2007.

“This is the same misinformation in a new package,” says CEI Florida Insurance Project Director Chrisitan Camara. “The claim of more than $4 billion in capital and 40 new companies is technically true, but that’s about it. The new capital just doesn’t benefit the typical homeowner.”

CEI finds that, for all intents and purposes, only 10 small companies with less than $500 million in capital between them have entered the state during a time when State Farm has withdrawn its $105 billion in capital and other well capitalized companies like Allstate, Nationwide, USAA, and the Hartford have essentially stopped writing new homeowners’ insurance in Florida.

CEI’s analysis of McCarty’s report shows the following:

•    Only $609 million in capital comes from 29 regulated insurers that provide some kind of property insurance. Over 80 percent of the total– $4.3 billion–comes from 18 surplus lines insurance carriers that are subject to only minimal regulation. Most serve only the very well-off.
•    Many of the companies claimed as “new entrants” are not: 9 companies of the 29, in fact, came in prior to Gov. Crist’s January 2007 reforms in the property insurance market.
•    Two companies do not appear to write new policies at all. They appear to do only takeouts of Citizens.
•    Eight additional companies strictly limit the types of coverage they write and do not write coverage on typical homes. For example, some write only commercial, commercial residential (i.e., condo associations), or unique residential (for mobile homes, properties worth over $1 million, or other “high value homes”).  One insurer, Star & Shield Insurance Exchange, writes policies exclusively for active and retired law enforcement, firefighters, and other uniformed public employees.  
•     Only 10 companies, in all, provide new capital to back typical homeowners’ insurance policies. Nine of these ten are Florida-only startup companies. Although some may have other sources of capital that are not easily documented, only one company, ASI, clearly runs a multi-state property insurance business and has diversified, multi-state capital.

“The problem is pretty simple,” explains CEI Center for Risk, Regulation, and Markets Director Eli Lehrer. “An insurer operating in Florida needs to diversify its risk somehow and, because all of Florida is so storm-prone, it probably can’t do that through simply diversifying its own portfolio. Thus, it has two choices: it can either go to the Florida Hurricane Catastrophe Fund—which provides cheap coverage but can’t pay its likely claims—or buy reinsurance which is likely to costs a lot more.”

Lehrer says that neither of these options is likely to prove beneficial to the average customer. “A company that relies only on the Hurricane Catastrophe Fund could very well prove unable to pay its claims when the bill comes due.  While a company that buys reinsurance from a well-capitalized reinsurer is going to be a lot more stable, such a company is very unlikely to charge an attractive price. After all, reinsurance is the most expensive form of capital a company can acquire. A good insurer needs a diversified portfolio.”

Camara blasts the impression that the report leaves. “The report gives the impression that all these companies and several billion in capital are flooding the state’s homeowners insurance market is inaccurate,” he said.  “It goes to show that Governor Crist’s insurance experiment of 2007 chased away the nation’s largest, most recognized and capitalized carriers in exchange for a handful of small, Florida only companies that concentrate risk inside Florida at the expense of taxpayers.  Unfortunately, it will take one hurricane hitting the right place for this experiment to blow up in our collective faces.”

>Read more insurance news and commentary at http://cei.org/issue/68.

>Attend CEI’s “Out of the Storm” insurance conference, Sept. 30-Oct. 2.