State Farm's decision affects all of us: State Farm, Florida insurance

Pembroke Pines resident Luis Lobo was surprised recently when his State Farm agent told him that his homeowner's insurance would cost 70 percent more because the insurer had eliminated certain discounts.

But Lobo knows there may be bigger headaches ahead, if the insurance giant decides to leave Florida as expected. He's also worried that State Farm's rates could rise higher even if it stays.

"I hope they do stick around," said Lobo, a seafood distributor and importer who also has State Farm coverage for two cars, a boat and several life insurance policies. "I've always felt more secure with them."

Lobo isn't the only one who should be anxious about State Farm's decision. Customers with other insurers could see rate hikes depending on whether the insurer stays or leaves.

Plus, the departure of the number one private insurer in the state could leave all Florida automobile and property insurance policyholders open to higher fees to support state insurance programs if a big hurricane hits.

"It's definitely a market signal when the largest private player decides to withdraw," said Bob Hartwig, president of the Insurance Information Institute.

State Farm announced in January that it planned to shed its 1.2 million property insurance policies -- including about 900,000 residential policies -- in Florida because the premiums it collects aren't keeping pace with claims and other expenses. The news came weeks after Insurance Commissioner Kevin McCarty and Division of Administrative Hearings Judge Daniel Manry rejected its proposed rate hike of 47 percent or 67 percent.

State regulators are negotiating to keep the insurer in Florida in a smaller form. State Farm Spokesman Justin Glover said the insurer is in "continued discussions" with state officials and hopes that policies will be enacted that "encourage more insurance companies, including well-capitalized companies, to do business in Florida."

State Farm's decision would affect its customers and others in several key ways:

Rates could rise. "If State Farm stays, there are questions about what it would take to keep them," said Brad Ashwell, a consumer advocate with the Florida Public Interest Research Firm.

Lawmakers are proposing to deregulate property insurance rates, which would boost premiums for most South Floridians. Despite opposition from consumer groups and Insurance Commissioner Kevin McCarty, the state House and Senate passed a version of the legislation this year in large part because of concerns about State Farm leaving. Gov. Charlie Crist vetoed it.

"Would he veto the deregulation bill again? That would put him in a difficult situation," said Florida Consumer Action Network Executive Director Bill Newton, noting Crist is running for U.S. Senate.

Even without the deregulation bill, Newton said State Farm probably won't stay without a rate hike. "What that will do is set the market for all the other companies...You'll see other rate increases follow that," Newton said.

Consumer advocates say they want to see State Farm stay in Florida -- but not at any cost. "There were no hurricanes so why should there be any rate increase?" Newton said.

"I was getting a lot of calls from consumers saying I would pay a little more to keep State Farm in Florida. Some people don't want to do that," said Florida Insurance Consumer Advocate Sean Shaw.

But there could be rate hikes even if the company leaves. That's because domestic insurers will need to raise capital to fill the gap, said Security First Insurance President Locke Burt. "That's where rates become important because investors are going to want to see a rate of return," said Burt, whose company has taken 3,689 former State Farm policies since February.

The market could get shaken up. As of June, State Farm still had about 815,253 residential insurance policies statewide, including 154,337 in Broward, Palm Beach and Miami-Dade counties. Many would have trouble finding a similar option, Hartwig said. "It's taking away choices from people," he said.

Ashwell agreed: "Consumers want to know they're going to be covered if a storm hits them. If it means paying more with State Farm, they'll probably do it unless they can't."

But Ashwell said that could be an opportunity for "smaller insurers to step up and bolster their reserves and be the next wave of dependable, affordable insurers."

The state's insurance risk could grow. Shaw said if State Farm leaves, some of its policies will undoubtedly go to state-backed Citizens Property Insurance. And since Citizens' deficits are offset by fees on all Florida automobile and property insurance policies, Shaw said, "When there's a bad storm, you and I will be reponsible."

If it stays, it would likely be in a smaller form. That means some policies will go to Citizens anyway.

State Farm offiicals have said they were losing about $20 million a month in Florida and expect to be insolvent by 2011 -- even without a major hurricane. The company had $469 million policyholder surplus as of Sept. 30.

McCarty's office recently allowed the insurer to eliminate discounts it voluntarily provides customers for having few to no claims, among other things, and that will boost the insurer's statewide rates by 28 percent on average.

But his office challenged State Farm's request for a major rate hike this year, arguing in court records that it was inappropriate for State Farm to boost advertising and marketing costs -- among other things -- when it hadn't sold new property insurance policies for years and was in fact, dropping policies.

There have also been questions about the $562 million State Farm Florida paid to its parent company for backup coverage. In his ruling rejecting the State Farm rate hike, Manry wrote that the two companies could arguably be considered one in economic and legal terms -- in which cases the purchases "would be sham transactions" that help the insurer justify higher rates.

He added that the parent company reported annual losses on the backup coverage it sold to State Farm Florida from 1998 to 2007 so the parent could "easily end the losses, as well as the costs to State Farm Florida, by liquidating State Farm Florida and doing business in Florida directly."

State Farm officials say it's safe and cost-effective to buy backup coverage from the parent company and the Florida subsidiary was created so customers in other states would be shielded from the higher risk of hurricanes in Florida.