Florida has been hurricane free, but still the insurance rates go up
Reinsurance is insurance for insurance companies, paying out when the largest disasters strike. It accounts for a significant portion of every premium dollar homeowners pay for their coverage, especially in disaster-prone places like Florida.
Florida’s good fortune should have translated into falling property insurance rates for consumers. However, inaction by the Legislature has kept premiums unnecessarily inflated. Despite mounting evidence that “assignment of benefits” abuse is the primary cost driver pushing insurance rates higher, state lawmakers for several sessions have refused to consider bills to address this issue.
The past few years has seen almost exponential growth in water claims, usually involving damages from broken pipes. This spike is not the result of any natural phenomena, but can be attributed to the growth of a cottage industry that exploits a state law allowing policyholders to “assign” their benefits to a third party, such as a repairman, contractor or other vendor. This enables those third parties to collect insurance payments directly from the insurance company.
While reasonable in theory, in practice the set-up serves as an incentive for unscrupulous vendors to submit inflated bills and charge for unnecessary or unrelated repairs once the policyholder surrenders control of the policy. Many vendors will partner with trial lawyers to file lawsuits against insurers who hesitate to pay for these questionable claims immediately. In 2013 and 2014 alone, there were more than 92,000 of these lawsuits, which were rare just a decade ago.
Floridians bear the cost of these fraudulent claims and related lawsuits through higher insurance rates. Last year, the state-backed Citizens Property Insurance Corp. had to raise rates in Miami-Dade County by an average of 7.6 percent. Had its water claims been consistent with those in other parts of the state, Miami-Dade policyholders actually would have seen an average rate decrease of 8.5 percent.
Lawmakers could have acted when the problem was largely confined to South Florida. Alas, more recent data show it has spread. Earlier this year, Citizens imposed a 6.8 percent statewide increase. Many private carriers also have had to raise rates in response to the continued surge in water claims.
It is not a stretch to say the main reason Florida isn’t experiencing lower insurance rates is how easily state law allows third-party vendors to assume total control of a consumer’s policy benefits, without any accountability. But there are also other reforms the Legislature must put on the table to bring much-needed rate relief, including shrinking the state-run reinsurer.
Like private reinsurers, the Florida Hurricane Catastrophe Fund, generally known as the “Cat Fund,” provides insurance to insurance companies operating in Florida. State law prescribes that the Cat Fund sell $17 billion of coverage, and that all property insurers writing hurricane risk in Florida must purchase it.
For most of its existence, the Cat Fund was able to charge less for its coverage because, unlike private reinsurers, it does not need to keep on hand the funds needed to pay the claims it might receive. Instead, if it runs short on money, it has authority to sell bonds, which it then pays off by imposing assessments (or “hurricane taxes”) on virtually every property and casualty insurance policy issued in Florida.
With reinsurance rates roughly 38 percent lower today than they were in 2012, there are certain levels of Cat Fund coverage that insurance companies in Florida can get for less in the private market. Instead of purchasing the Cat Fund’s highest coverage option — the 90 percent coverage level — some insurers are opting to purchase the 75 and 45 percent levels, since many have found better deals for the remaining coverage.
Unfortunately, current law requires every property insurer in the state to purchase at least the 45 percent coverage option from the Cat Fund, even if it is able to negotiate a better deal for equivalent coverage in the private market. Given the falling reinsurance rates, lawmakers should consider reducing the fund’s $17 billion capacity, as well as creating an optional 20 percent level, which would allow private insurers that negotiate better deals to pass those savings along to their consumers.
Lawmakers also should require the Cat Fund to purchase reinsurance of its own, so that funds are set aside to cover a subsequent hurricane season in the event of another year like 2004 or 2005. Currently, just one significantly active hurricane season would wipe out a decade’s worth of cash the Cat Fund has amassed. The fund’s unprecedented financial strength, coupled with the current buyers’ market in global reinsurance, gives lawmakers the opportunity to ensure the Cat Fund will always be able to deliver on its obligations.
The inexplicable harmony between Mother Nature and the global reinsurance market will not last forever. State lawmakers should not continue to squander this unprecedented opportunity to safeguard Florida’s property insurance system, while simultaneously reducing rates for consumers.