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Nelson still dogged by '98 insurance decision

His foes zero in on the Florida-only subsidiaries.

By JONI JAMES and WES ALLISON
Published September 23, 2006


Ahead in the polls, flush with campaign money and blessed with a controversial challenger, Sen. Bill Nelson's bid for re-election seems all but assured.

But could a decision the Democrat made nearly a decade ago to address a growing insurance crisis in Florida after Hurricane Andrew come back to haunt him?

On the campaign trail, you'd certainly think so.

For weeks, in races from governor to state legislator, candidates from both parties have blamed Nelson's decision in 1998 to allow national insurance companies to create Florida-only subsidiaries for Florida's skyrocketing insurance rates.

Republican gubernatorial candidate Charlie Crist repeated the charge again this week. And Nelson's Republican challenger, U.S. Rep. Katherine Harris, has made it a central part of her campaign.

"We know that the insurance is based on risk pools and the more people that are in it, the more risk is averaged out and it lowers our cost," Harris told supporters in Orlando recently, echoing the theme of a TV ad she ran this month. "Do you know he allowed them to cut off Florida so that they don't have to assume Florida's risk, and Floridians have to assume our entire risk?

"Bill Nelson did that, and he needs to be held accountable."

But the rhetoric doesn't match the reality. And off the campaign trail, even some who have criticized Nelson's decision acknowledge a less sensational reality, which is also embraced by regulators and industry insiders:

Allowing Florida-only subsidiaries, known as "pup" companies, so far hasn't changed how Florida's property insurance market has performed for consumers - though someday it could. And most believe permitting the subsidiaries has kept more private insurance investments in Florida, providing more competition and lower rates.

Nine days after finishing a failed bid for the Republican gubernatorial nomination, Chief Financial Officer Tom Gallagher conceded as much, despite repeated criticism on the campaign trail of Nelson's decision. Gallagher was Florida's insurance commissioner before, and then again after, Nelson.

Have pup companies led to higher rates?

"Probably not," Gallagher said.

* * *

In the current climate, insurance issues make for an easy political target.

Floridians have seen double-digit percent increases in homeowners' rates in recent years. The news is full of reports about insurance industry profits, despite eight hurricanes in Florida in 2004 and 2005 and Hurricane Katrina's devastation of New Orleans and the Gulf Coast.

But in the complex world of insurance regulation, the profits that companies earn in some states don't affect the rates they charge in others.

Companies have always had to set state-specific rates, based on the risks in those states - tornados in the Great Plains, earthquakes and wildfires in California, hurricanes in Florida.

By law, homeowners in inland states don't subsidize coastal states. There is no national risk pool, as Nelson's critics suggest.

"Let me know the insurance regulator in Iowa who will let me charge higher rates in Iowa to pay for higher risk in Florida," said Mark Delegal, an insurance lobbyist in Tallahassee. "Even if I could do that, I suddenly become noncompetitive in Iowa."

Pup companies were born out of two needs: The need for insurance companies to protect themselves, and the need for an aspiring politician to keep insurance companies in a state that had endured one of the nation's most expensive disasters, Hurricane Andrew in 1992.

By the time Nelson took office in 1995, lawmakers and Gallagher already had moved to dramatically change Florida's insurance infrastructure.

Nonetheless, the market was still wobbly. Damage from the storm, which flattened much of southern Dade County, cost insurers $16-billion. AllState, which was heavily invested in Florida, lost $2-billion of its $6-billion companywide surplus.

Concerned another big hit in Florida could bankrupt their companies, the insurers sought permission to set up Florida-only subsidiaries, to limit their liability. Gallagher had resisted.

Nelson, however, agreed, as one of several reforms under his tenure.

"Everyone knew if you don't somehow isolate the liability, if everything you've got is on the hook from a single Florida storm, it's going to kill you," said Sam Miller of the Florida Insurance Council, an industry group.

Plus, the insurance companies were threatening to leave the state altogether if they couldn't set up the pups.

"Eleven or 12 companies had gone bust, scores of companies had fled the state of Florida on homeowners' policies, and the big ones like AllState were shedding ... policies," Nelson said. "We were needing to keep companies in Florida and restore the marketplace so they would write additional policies, and to make them responsible for covering claims."

Those allowed to set up pup companies were national underwriters: AllState Floridian, State Farm Florida, Nationwide of Florida and Travelers, which created First Floridian.

It was good for insurance companies. They could shield the parent company from having to show Florida risk on its books while also counting any payments into the pup as loans.

The biggest risk for consumers was that a major storm would sap all of a pup company's reserves, and the main company would let it go under. Nelson said he sought to reduce that risk by requiring the pups to keep significant reserves on hand.

Florida regulators also banked on the idea that major companies wouldn't want to risk their national reputation by letting a pup in Florida founder.

Robert Hunter, the director of insurance for the Consumer Federation of America, was the Texas insurance commissioner back then. He opposed pups in his state.

"The problem is if it got real, real bad, they might say to hell with it," Hunter said. "I thought the resources of the entire insurance company ought to be available. But so far ... when (the Florida pups) have run out of money, they've come through. My fear maybe was misplaced."

Current Florida Insurance Commissioner Kevin McCarty said Nelson had little choice but allow the subsidiaries, and there's been no impact yet on consumers. McCarty was appointed by Republican Gov. Jeb Bush and the Cabinet, including Gallagher and Attorney General Crist, the Republican nominee for governor.

Like Hunter, McCarty said the danger has always been that they'd go under, but he doubts insurers would let that happen: "Overall, it probably isn't the best deal for Florida. But I don't know how much could have been done to prevent it."

Some of those same experts, however, say Nelson isn't totally without fault for Florida's insurance crisis. In hindsight, they blame Nelson, along with Gallagher, for setting artificially low rates during those years of minimal hurricane activity to curry favor with voters. In 2003, the state Legislature turned insurance regulation over to an unelected official.

Higher rates in the years before the 2004 and 2005 storms would have created more reserves to pay claims, the critics argue. And it likely would have made for a more robust and competitive private market, reducing the demand for Citizens, the state-backed insurer of last resort. Citizens now insures one out of four homes.

Now, Florida leaders are pushing a national catastrophic insurance fund, to help cover costs after a major disaster. While attempts to create such a fund have died in the past, the costs of Hurricane Katrina have made some members of Congress reconsider.

Harris and Nelson both support the same bill to create one. A key House subcommittee held its first hearing on property insurance last month, and the Senate is planning hearings as well.

"The question now is, going forward when the mega-hurricane hits, a $50-billion loss, how do you spread the risk?" Nelson said. "It's going to be very difficult for one state or one company to sustain that kind of hit."

Times Staff Writer Anita Kumar contributed to this report.