State Farm Florida will not be permitted to reduce state mandated discounts given to policyholders for fortifying their homes against storm damage but the debate surrounding the discounts is alive and well.

According to the Florida Association of Insurance Agents, about 40% of the state's residential property insurers lost money last year, and the industry is beginning to make its long-standing doubts about Florida's mitigation discount laws known loud and clear.

"The bottom line is companies are losing money," said J. Scott Johnson, executive vice president of the FAIA. "We suspect artificial rate suppression and premium mitigation credits are major factors."

Florida insurers should get long-awaited answers soon. Their concerns about the wind-mitigation discounts as well as inspections under the My Safe Florida Home program will be studied by the Florida Commission on Hurricane Loss Projection Methodology and Department of Financial Services. Appropriations for the studies were part of a far-reaching insurance bill passed during the last session.

"Some of these discounts have not been evaluated in six years," said Sam Miller, executive vice president of the Florida Insurance Council. "Private insurers are also concerned that there has been outright fraud or inadequacies in the home inspections, resulting in inflated discounts or discounts that should never have been given."

The word "complicated" was used frequently in describing the various discounts, which started after a study in 2002, with various adjustments since. The interpretation of these credits caused them to be "inflated," Johnson said. "The way they are given is illogical."

"These discounts and the changes to them over the years are not an easy thing to comprehend," Miller said. 'We expect to get some answers about them -? how well they are serving their purpose and whether they are being given correctly -? with these studies."

State Farm spokesman Chris Neal said the insurer supported efforts to make homes stronger but the mitigation discounts strayed from accomplishing that goal.

"The credits were all supposed to be aimed at mitigating losses but it transformed into an insurance discount program," Neal said. "Homes are not being hardened, and that's not what it's supposed to be about; that's not why we supported it."

State Farm Florida's efforts to reduce the mitigation discounts it gave policyholders were aimed at saving money while it works with the Office of Insurance Regulation on the best way for it to leave the property insurance market. State Farm said it will be insolvent by the end of 2011 under the current rate and regulatory environment. It was denied a 47.1% rate increase last year.

The popularity of the discounts "compounded the problem for us," Neal said. About 50,000 policyholders got the credits in 2006 and now about 284,000 homes are being credited and the insurer hasn't been writing new business for 18 months.

"This affected us differently than some other carriers because of the way we set rates," Neal said. "We give all kinds of discounts and then these mandated discounts get overlaid. It just killed us. There is no way some of these discounts are appropriate." State Farm will stop giving discounts to policyholders who have been claims free and who also have auto insurance with the company.

Because its rates had been frozen for three years, the discounts would have meant negative premiums for the state-run Citizens Property Insurance Corp., said spokesman John Kuczwanski. "They would have been paying policyholders instead of asking for money," Johnson said. Nearly $146 million in wind mitigation credits are given to Citizens homeowners multiperil policyholders, an average of $683 per policy.

Kuczwanski said Citizens worked with the OIR to come up with a "fair implementation" of the discounts.

OIR spokesman Tom Zutell said 400,000 homeowners signed up with a state program for free inspections last year that "hopefully will result in mitigation features being installed which reduces risk." Zutell said the only problem with the program has been noncompliance by State Farm. The insurer was found to not have informed all policyholders of the discounts and was ordered to pay $120 million in credits or refunds (BestWire, Sept.10, 2008).