Ruminations on Florida (Part I)

By now everyone is aware of State Farm's recent 47.1 percent rate increase for Florida Homeowners insurance.  I received a number of e-mails about it including one from State Farm which pointed me to two items.  The first is their background information about the rate increase (here).  The second is a link to a Time Magazine article on Florida which I will discuss in a separate post. 

First things first.... Florida requires insurers to offer mitigation discounts.  The idea was provide incentives to make one's home more wind resistant.  These include shutters and roof straps which are supposed to reduce the loss to a home from wind.  One of the rationales for the increase in SF's premiums was because the mitigation rebate program has become too successful in the sense that many people are now qualifying for it.  According to the SF backgrounder..

A vastly larger number of properties are receiving the discount than could have been anticipated when the "My Safe Florida Home" program began. To date, more than 260,000 properties have qualified for the discount and we expect the number to grow to more than 300,000. In some cases, the discount exceeds 90 percent of the windstorm portion of the premium. These developments have triggered a significant and unanticipated decrease in State Farm Florida's projected revenue for 2008, 2009, and beyond. (my emphasis added).

I wonder if anyone is able to accurately price the mitigation credit?  Probably not as the sum of the credits seem to haven eaten into the total wind premium.  This would not be a problem if the remaining wind premium was able to cover the actuarial costs of a storm.  This 90 percent ratio is an amazing fact and I wonder how much of it has to do with the (in)ability of SF to price these mitigation credits properly or whether state regulatory mandates exist which reduce the ability of pricing them effectively.  Are other companies are having the same problem?

People tend to forget that the national State Farm company is a mutual (which means that the policyholders are the owners of the company)*.  So, if SF asks for an ordinary rate increase, it is not "raking profits" off its customers as the owners are the customers.  In addition, when it asks for an extraordinary increase (in terms of percentage), it is still not ripping off its customers as any residual profit is returned as a premium rebate.  No one really seems to understand this as people are saying that the rate request is outrageous.  However, it will be interesting to see how this is played out. 

SF also puts in a nice dig at the state's expense by saying it (SF) has to be the responsible company since it does not have the ability to coerce people to pay later...

Unlike a state-run insurer (Citizens) or re-insurer (Florida Hurricane Catastrophe Fund) that can issue bonds, levy assessments, and impose taxes to fund losses after an event, State Farm Florida cannot charge customers after the fact. It needs adequate capital up front to have the resources necessary to pay claims in a timely manner.

*NB.  I have an insurance policy with SF.

Comments

[West]

Great blog and right on the money.

[Westlander]

I have real problems with State Farm asking for this kind of an increase at this time. I'm not against profit - Florida insurance companies aren't lining up to write homeowners insurance. And I can say for certain that State Farm does provide much better service than many of these start-up companies that won't be around to answer their phone after the next Florida hurricane. However, no matter which area you try to take cost out of the equation it never seems to work. Last year it was reinsurance and State Farm Florida reminded us not to expect much because they were buying the reinsurance from their parent. OK - Let's go to the next cost lever - the strength of the home. Here's a story about how a Florida homeowner spent $5000 to harden his home - only to get a $121 discount from State Farm:

http://www.sptimes.com/2006/08/16/State/For_storm_upgrade__on.shtml

In addition, when you check State of Florida websites, State Farm Florida usually always has the highest premiums of any company in a given county.

So the truth seems to be that they want it both ways: High gross premiums, don't give the homeowners meaningful discounts when they qualify for them, and then overestimate the impact of hurricane losses. Let's not forget - these homes received the discounts because they are less susceptible to losses - that's the whole idea of doing this in the first place!

Finally, I'm totally lost as to why people in Florida hold onto their Florida home insurance policy with State Farm when there are good companies out there that can replace them. Here is a website that can help:

http://www.homeinsurancebuyers.org/

There are good companies out there if you know how to find them. Do some legwork and vote with your feet on the State Farm increase.

[Robert]

Underpriced Insurance?

One of my favorite blogs RiskProf reviewed property insurance pricing in Florida last month. This conclusion got me thinking about the cost of insurance – particularly in disaster prone areas. Is insurance world wide under priced? Does the drive for regulated “affordability” or the push for corporate profits drive under pricing? Are there other factors that contribute to under pricing?

http://betterriskmanagement.blogspot.com/2008/08/one-of-my-favorite-blogs-httpwww.html