As analysts predict increases and claims drain insurers, a reassessment of homeowners' policies looms.
By JEFF HARRINGTON
Published October 3, 2004
As owner of a beachfront home in Hernando County, Cheryl Labbe has gotten used to rising rates for her homeowners' insurance.
During Florida's four-hurricane barrage, letters came in the mail announcing sharp increases in her flood insurance premium and her wind-only policy with the state-run Citizens Property Insurance Co. And she didn't even have damage from the storms.
"I was like, "Holy mackerel,' " Labbe said.
The scariest thing for Labbe and fellow Floridians is that even in a state accustomed to skyrocketing insurance rates, the year ahead could be a shocker.
To keep insurance companies in town and writing policies, some analysts are predicting double-digit rate increases on homeowners' insurance next year. And that would be on top of a special assessment on all Florida property owners to help pay $1.8-billion in claims expected at Citizens Property, which insures property owners who cannot find coverage on the open market.
"It's not inconceivable that once the dust settles, the industry will look for 15 to 20 percent rate increases on top of what they would have taken in a normal year," said Christopher Winans, an insurance industry analyst for Lehman Brothers.
Others predict widespread rate increases of as much as 30 percent.
Inland counties and southwest Florida residents will likely see the biggest jump in rates as insurers reassess where they face risk of widespread wind damage.
Sam Miller of the Florida Insurance Council, which represents insurers doing business statewide, called a report that rates might rise up to 30 percent "pure idle speculation. There isn't anyone, anywhere who can know what is going to happen and can reasonably speculate on what is going to happen."
Yet, state regulators anticipate rate hike requests to come flooding into their office by year's end. And that's not the only problem.
As claims from the four storms push toward 2-million, insurers are confronting a major drain on their financial reserves and their manpower. One small insurer, American Superior Insurance Co., last week voluntarily consented to be placed under state control and may be liquidated. It blamed a deluge of claims primarily from Hurricane Ivan.
Most insurers, particularly larger ones, have insisted they won't desert Florida. But that doesn't mean carriers won't accelerate a pullback in writing policies in high-risk areas. State Farm, the largest private carrier in Florida, hasn't written homeowners policies in Pinellas County since 1995 and has no plans to start now.
Florida Chief Financial Officer Tom Gallagher, whose office regulates insurance, said Friday that one of his top priorities is to make sure homeowners have access to affordable insurance.
But to do that, he says, state legislators will have to address some troubling flaws in the system that were unveiled by Charley, Frances, Ivan and Jeanne.
Three main issues have surfaced:
Insurers want to change state law to let them tap into more of the money held in the Florida Hurricane Catastrophe Fund if they are again faced with claims from multiple hurricanes in a single season.
Homeowners want relief from paying out two or more deductibles of 2 percent to 5 percent in a multiple-storm season.
Builders who were lobbying to loosen building codes before Hurricane Charley have backed off. Now, insurers and politicians are talking about tightening codes statewide, possibly making inland counties impose some of the stricter codes used in South Florida. One lure could be lower insurance rates for sturdier properties.
Gallagher expects the issues will be tackled in a special legislative session in December. No one anticipates an insurance overhaul as thorough as the one after 1992's Hurricane Andrew, the most expensive hurricane in U.S. history. But it could be a packed, contentious agenda nonetheless.
"The agenda this time will be more of what I would call tweaks ... a fix of those things that were not anticipated," Gallagher said. "There has never been - ever - five named storms to hit a state, if you include (Tropical Storm) Bonnie," which made landfall near Panama City on Aug. 12.
Members of the Florida Insurance Council last week started talking about legislative changes and began to dissect what's gone right and wrong in reacting to the hurricane quartet.
Plenty went right.
For starters, the industry response was far better than the sluggish and disjointed reaction after Andrew 12 years ago.
This time, insurance adjusters descended into hard-hit areas within a couple of days with mobile units, cutting emergency checks and assessing damage. Federal aid came quickly. Insurance companies and state regulators added man power to react smoothly and shift mobile units with each storm.
But plenty went wrong, as well.
The sheer volume of storms caught nearly everyone off guard. About 35,000 adjusters flooded into Florida within six weeks, and it still wasn't enough. By the time Hurricane Jeanne arrived at the end of September, state insurance regulators were trying to lure adjusters from as far away as Canada.
A chief complaint among property owners has been lack of follow-through. Of 40,000 calls to the state's insurance consumer hotline the past two months, "the majority of them are, "When is my adjuster going to get here?' " Gallagher said.
To speed up service, Gallagher wants to resurrect an idea he had after Hurricane Andrew: assign adjusters to work a given neighborhood and then file claim information to a central location, where it would be parsed out to individual insurers. But the insurers balked at the idea in 1992 and they still don't like it.
Some homeowners also were shocked to learn that they had to pay a 2 percent to 5 percent hurricane deductible twice if their property was hit by successive storms. A small number in the paths of Hurricanes Charley, Frances and Jeanne may have to shell out three deductibles.
State Rep. Randy Johnson, R-Celebration, has proposed legislation that would prohibit insurers from charging a homeowner more than one hurricane deductible in a season.
Insurers have their own complaints.
They were counting on the Florida Hurricane Catastrophe Fund to bail them out, but it didn't work out that way.
The catastrophe fund (or CAT Fund as it's known) has about $6-billion in cash on hand. Under state law, the fund is triggered after insurers pay out $4.5-billion in claims from any one storm. At that point, the CAT Fund reimburses insurers for 90 percent of claims up to $15-billion. Additional money can be obtained under extraordinary circumstances.
The CAT Fund was built to help insurers handle a single hurricane costing tens of billions of dollars. It's of limited help to insurers paying claims from four separate storms costing less than $7-billion apiece. For two of the four storms, it's doubtful the CAT Fund will even be triggered.
"Do you really need to save that CAT Fund for the big one or are we at a new reality that instead of a massive storm we're going to have a bunch of semi-massive storms? That's an issue," said Miller of the Florida Insurance Council.
The solution may be a quid pro quo.
Homeowners may pay a smaller hurricane deductible for each successive storm in a season, perhaps 2 percent of their home's value for the first storm and 1 percent or 1.5 percent after the second storm. Or they may be given the choice of paying a smaller deductible and consenting to higher rates.
In return, insurance companies would pay a smaller amount in claims with each successive storm before the state's catastrophe fund kicks in. The threshold, for instance, may stay at $4.5-billion for the first storm, then drop to $4-billion with a second storm and $3.5-billion with a third.
Rates likely to rise
Arguably the most relevant change to most Floridians is what effect the storms will have on their rates.
Since Charley struck Aug. 13, Gallagher has warned there will be an "upward pressure" on insurance rates.
Insurers don't have the luxury of arguing for a rate increase just because their reserves have been depleted. That's not how the system works. Rather, in their rate filings to the state, they are supposed to base their request on a risk model projecting future losses.
But those calculations are expected to change significantly in light of two realities that have now become clear. One is that the frequency of major storms, once thought to be about two every 10 years, can be far higher. Second, the interior of the state is vulnerable to heavy wind damage.
New rate formulas won't materialize until insurers file rate requests with the Florida Office of Insurance Regulation starting later this year.
Bob Lotane, a spokesman with the state office, said he was "pretty confident" carriers will be able to demonstrate a need for higher rates.
"Some areas probably won't change at all," he said. "Look at Dade, Broward. Those areas have the highest (rates based on hurricane risk) and interestingly, none of the hurricanes hit those areas square on. It hit all these other places. Orlando, with really low rates, got hit three times."
At least one insurance cost is expected to hit property owners' bills.
Citizens Property Insurance, because of its unique status, is allowed to replenish its reserves through a special assessment on all Florida property owners if it runs out of cash. Citizens says discussing such a move is premature, but its high-risk account currently has about $1.4-billion in cash and has projected claims totaling $1.8-billion from the four storms.
After Florida's rates doubled, and in some cases tripled, after Andrew, some question whether rates aren't too high already. Lucy Peak, who owns investment properties in Pinellas County, said she'd like to see the bottom line for all the insurance companies "to see if they really are as poor as they say they are."
Winans of Lehman Brothers, however, contends some increase is justified: "If I'm a homeowner that just got wiped out along with one out of five of all my neighbors, and I got my claim paid fast, what kind of rate increase would I consider to be unfair or exploitative? That has to be part of the equation."
The hammer held by insurers, particularly larger ones, is the threat of leaving the state altogether, creating a situation similar to the crisis that followed Andrew. Insurers and regulators insist a mass exodus is unlikely.
More likely is that some insurers will pull back from writing policies in high-risk areas or trim their exposure in inland counties they now realize have greater risk, said Bob Hartwig, chief economist of the Insurance Information Institute.
After Hurricane Frances, state regulators set a moratorium against insurers dropping policyholders in Florida's 67 counties through Nov. 30. The fear is that more policyholders will be dropped and forced into the state's Citizen Property shortly after.
