Florida Insurance Commissioner McCarty is Wrong In His Analysis of HB 1171

Washington, D.C., May 22, 2009—Analysts at the Competitive
Enterprise Institute, a free market think tank with offices in Washington, D.C.
and Tallahassee, today criticized Florida insurance commissioner Kevin
McCarty’s recent letter urging the veto of HB 1171. The text of McCarty’s
letter is available here. 

HB 1171—the “consumer choice” law—would reduce regulation on
the rates that well-capitalized insurers are allowed to charge. This would
encourage some companies that have threatened to leave the state to continue
offering policies and remain in business in Florida. 

“He doesn’t have it right,” says CEI senior fellow Eli Lehrer. “This law would help
consumers.” 

Christian
Cámara, the director of the CEI insurance project’s Florida office, agrees.  “Commissioner
McCarty’s arguments against HB 1171 imply that consumers will be forced to pay
unregulated rates for their homeowners insurance, which is simply not
true.  This bill does not force anyone to do anything,” said Camara. 
“On the contrary, it would give consumers additional choices for their
homeowners insurance, and if companies operating under this proposal charge too
much, consumers will have the choice to reject them. It goes to show that
even ‘unregulated rates’ are regulated—by the free market.” 

CEI’s analysis of McCarty’s letter follows. 

McCarty: “HB 1A [which became law] in January 2007
yielded rate decreases on the average 15.9% statewide. Since that time, rates
have remained relatively stable for most of our residents HB 1171 will reverse
the trend begun by HB 1A.” 

Analysis: HB 1A “reduced rates” only because Florida
Citizens and the Florida Hurricane Catastrophe Fund—neither of them capable of
paying the claims they could potentially receive—wrote enormous amounts of
insurance and reinsurance coverage at lower-than-market rates. Major,
established private companies like State Farm, Allstate, Nationwide, The Hartford,
and USAA either filed for rate increases or significantly cut back on new
coverage writing in the wake of HB 1A’s passage. Most Floridians receiving
insurance from private companies paid more for insurance in 2007 than they did
in 2006. Inland county residents, who tend to be poorer than those who live on
the coast, actually saw their premiums rise on average. The “savings” resulting
from the bill were a result of a transfer of risk from private companies and
their owners to the state’s taxpayers. Quite simply, HB 1A wasn’t a good deal
for anybody. 

McCarty: “Florida
has added 40 new property insurance writers with more than $4 billion in
capital since 2006.” 

Analysis: The important question that needs to be
answered, however, is how many of the companies actually write typical
“homeowners insurance” policies, or HO-3s, which is what most banks require
before they will write a mortgage.  Most of the new companies that
Commissioner McCarty invokes as proof of a healthy insurance market do not sell
HO-3 policies for typical homes.  Two, for example, are subsidiaries of a
company already operating in the state and another focuses on writing insurance
for high-end automobiles.  In fact, only six new companies write new HO-3
policies, and only one of those—ASI Preferred Insurance Corporation—operates
anywhere outside of Florida.  The other five companies are Florida-only
insurers that do not bring any outside capital into the state. 

McCarty: “State Farm and other companies may actually
use excessive rates to effectively non-renew policyholders under the ruse of
consumer choice.” 

Analysis: McCarty’s statement makes no sense. Under
almost all circumstances, a rate offered under the mechanisms established in HB
1171 will be higher than a rate a consumer can find somewhere else and
consumers will know that. Consumers who avail themselves of the mechanisms
established in HB 1171 will be paying a premium price to stick with a company
they know and trust. Nearly anyone who purchases a policy under these terms will
be able to get a lower-cost policy through Florida Citizens or, perhaps, a
competing private insurance company. The bill simply provides choice for
consumers who want it.

CEI is a non-profit, non-partisan
public policy group dedicated to the principles of free enterprise and limited
government.  For more information about
CEI, please visit our website at www.cei.org.