Florida Insurance Commissioner: Mitigation Credits Underestimated but Sound

Chad Hemenway
TALLAHASSEE, Fla., Nov 10, 2009 (A. M. Best via COMTEX) --

Florida Insurance Commissioner Kevin McCarty said he thinks mandated mitigation credits given by insurers to homeowners are actuarially sound, but he acknowledged the state may have underestimated the impact the credits would have on insurers' income.

McCarty told BestWire the credits are "not having the effect of hardening homes" as they had been intended when the credits were developed in 2002. Lately, the industry has "found out many credits are being applied without anyone putting in the first nail" as a number of policyholders have fraudulently represented their homes, McCarty said. Still, the problem is not the credits so much as it is "a matter of how they are going to be applied," he added. A review of the credits is under way, with a report expected this upcoming legislative session, he said.

The Florida property insurance industry has called into question the validity of the mitigation discounts -- a reason insurance companies in Florida say they are reporting underwriting losses. McCarty recently told Cabinet members that 102 of 210 insurers in the residential market reported underwriting losses in the second quarter (BestWire, Sept. 28, 2009).

McCarty said the hurt some companies are feeling from the credits is "self-inflicted." Many companies are "struggling with the implementation" of the discounts -- sometimes unnecessarily duplicating the credits given. He said companies are doling out credits to policyholders as part of a new home discount and then again for meeting the building code, for instance.

Insurers told McCarty their difficulties in the marketplace are also due to fraud and inflated claims, replacement cost methodology, sinkhole claims and reinsurance. Florida has seen reinsurance costs increase 15% on average, McCarty said.

"Reinsurance is the variable that is going to continue to be a factor in rates in the future," McCarty said. "They've had a couple years of a fairly stable marketplace; nevertheless, we've seen increases in Florida. Those costs are such a critical piece of the Florida marketplace that those are going to have to be passed on to the policyholders in order to ensure that reinsurance is available in the future."

The Sunshine State was "in a situation where it would be very challenging, at best" to cover the cost of the state's reinsurance provider, the Florida Hurricane Catastrophe Fund, McCarty said. The cat fund is reliant on the sale of post-event bonds and when the market dried, the fund faced a potentially enormous shortfall. This put all insurers at risk, because each was required to purchase reinsurance from the fund. However, the state was the beneficiary of another quiet hurricane season.

"Fortunately, we had a mild hurricane season and we were able to build capital in the cat fund and companies were able to build additional capital, and hopefully Citizens rates are on the way to rate adequacy," McCarty said of the state's insurer of last resort. "It's going to take several years but we've set that in the right path."

As part of a sweeping insurance bill adopted last legislative session, Citizens Property insurance Corp. is permitted to apply to raise rates as much as 10% in an effort to get to an actuarially sound level after several years of frozen rates that made Citizens one of the largest homeowners insurers in Florida.

Still unsettled is State Farm Florida's intent to leave the Florida property insurance market. The company submitted a petition at the start of the year, which was approved by McCarty, but with conditions the insurer has not been eager to meet. McCarty said the Office of Insurance Regulation and State Farm have "stepped up negotiations" as an appointment with the state Division of Administrative Hearings on Dec. 17 nears.

"I believe we should do what we can to maximize the capital in Florida," McCarty said. "The $500 million in capital State Farm Mutual has added to Florida throughout its subsidiary is an important contribution to capital and we'd like to maintain that capital, or as much of that capital as possible."

The top five writers of homeowners multiperil in Florida in 2008, according to BestLink, based on direct premiums written, were: State Farm Group, with a 17.7% market share; Citizens Property Insurance Corp., with 16.2%; Universal P&C Insurance Co., with 7.2%; USAA Group, with 5.1%; and Tower Hill Group, with 4.5%.