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What's the insurance truth?

By Tom Zucco
Published January 6, 2007

The $59-billion in profits the insurance industry raked in last year was something of a fluke and does not reflect the true overall health of what is a volatile industry.

And Florida is the property insurance industry's worst nightmare because rates are too low and the risk of losses from more storms is too high.

That was the sobering message Friday morning from Dr. Robert Hartwig, president and chief economist for the Insurance Information Institute, an industry trade group.

"Florida is the most dangerous, vulnerable place on the planet from an insurance standpoint," Hartwig said.

But hours later, the Consumer Federation of America's director of insurance blasted Hartwig's report, saying his numbers are distorted. Florida can solve its crisis without significantly burdening policyholders, and the insurance industry, because of selective policy-writing, makes huge profits regardless of catastrophes, said Bob Hunter, speaking in advance of his group's own report coming out next week which attacks insurance industry profits.

"Insurance is a lower risk than a mutual fund," Hunter said. "It's not a high risk business. They like to talk about terrorism and hurricanes and living on the edge, but it's a myth."

Although the insurance industry report was originally presented to Congress last month, Hartwig held a "briefing" with reporters less than two weeks before the Florida Legislature meets in special session to address the property insurance crisis.

Hartwig acknowledged that the insurance industry as a whole did well in 2006. But that was offset by $30-billion in insured losses in 2004-05 by Florida insurers, including the subsidiaries of major companies such as Allstate and State Farm. By law, insurance companies can't recoup losses in one state by charging higher rates in another.

Add to that, Hartwig said, the fact that Florida has more coastal exposure than any other state, rates have been suppressed, and the Atlantic basin is in an active hurricane cycle, and the stage is set for an economic disaster.

"The price of insurance,' Hartwig said, "must eventually reflect the risk of that property."

As of now, he said, it doesn't.

Like others in and out of the industry, Hartwig favors strengthening building codes, increased mitigation efforts, and more prudent land use policies.

As for profitability, Hartwig said the only way to accurately measure that is over time and across industries.

"All profits in 2004, 2005 and most in 2006," he said, "were earned in states unaffected by the hurricanes."

Insurers are leaving Florida, Hartwig said, because they can't get the rates they need to stay. Asked what those rates should be, Hartwig said the numbers vary.

But it's all smoke and mirrors, according to Hunter of the consumer federation, a former federal insurance administrator and Texas insurance commissioner.

He said the insurance industry is identifying where its greatest risks are and eliminating them, rather than spreading all the risk over a wide area.

All to keep shareholders happy.

Months ago, Hunter advocated solving Florida's insurance crisis by allowing state-run Citizens Property Insurance to either write all the wind policies in the state, or write the wind plus all other lines, such as the far more lucrative fire and theft policies.

Citizens currently writes policies only for those who can't find coverage in the private market. Nearly half of the company's 1.3-million policies are wind-only, and most are in high-risk, or coastal, areas.

Such a move would put Citizens in direct competition with the private insurers, something lawmakers and insurance industry lobbyists have resisted.

"But you're not going to solve the problem by giving the insurance companies more money," Hunter argued. "We've given them lots of money since Hurricane Andrew 15 years ago and it hasn't solved anything."

Tom Zucco can be reached at zucco@sptimes.com or 727893-8247.

POINT-COUNTERPOINT

Insurers: Good citizens or too greedy?

Their rates are justified. "Florida is the most dangerous, vulnerable place on the planet from an insurance standpoint," says Robert Hartwig, Insurance Information Institute president and chief economist.

They scalp consumers. "They like to talk about terrorism and hurricanes and living on the edge, but it's a myth. ... Insurance is a lower risk than a mutual fund," says Bob Hunter, Consumer Federation of America, director of insurance.

[Last modified January 5, 2007, 22:32:28]