State Farm's Departure is Problematic--What it Wants is Unclear
The Tampa Tribune ran a story, State Farm’s Exit From Florida Proving to Be a Problem for Some, which demonstrates problems consumers will have obtaining new coverage. The on-line edition of the story is somewhat entertaining because the comments show the disparate results of consumers who are shopping for insurance and confusion about underwriting. What is still unclear and troubling is exactly what State Farm hopes to gain from its announcement that it is leaving Florida. Certainly, it is losing revenue and access to a very large insurance market.
In a reply to State Farm Has Agents Spread Propaganda and Bullies North Carolina, I wrote in part:
“State Farm has many bright and dedicated managers running its operation. It is reflected in the extensive training and operations of the organization. It hires very effective outside consultants, lobbyists, and attorneys.
So, it comes as no surprise to me that they have set up a "decision tree" with alternatives which generally end up as a win-win for State Farm.
It can play the game of business as a "bully" or provide the appearance of being a long time supporter of Obama and a Good Corporate Citizen like it did with a full page ad in BusinessWeek just before the inauguration. It is now trying to show that it can be friends and supporters of the new federal government which it is lobbying.
State Farm is very, very good at getting what it wants in the long term. Just ask its competitors.”
State Farm executives certainly knew their announcement of its intent to leave Florida could have several different results. It would be hard to imagine that such bright business games players would not try to time the departure announcement for maximum effect and gain. Certainly, these executives contemplated the current scenario where Florida officials would not stop it from leaving. Whether they thought that Commissioner Kevin McCarty would prevent them from allowing their policies to be dumped into Citizens and having other restrictions mandated in the public interest is debatable. It will be interesting to see how this battle will play out over the coming weeks and months.
Nevertheless, shopping for homeowners insurance in Florida is not as easy as shopping for automobile insurance. State Farm may be hoping its spurned policyholders listen to its version of reality and complain to their elected officials. State Farm may be using its large customer base as leverage to cut a better deal.
State Farm's management may applaud and support articles similar to the Tampa Tribune’s. They can use such stories to show regulators in other states what happens when State Farm’s demands are not met. The hysteria and media exposure can help promote an alleged need for federal legislation and regulation that will be more favorable towards State Farm.
State Farm’s stated reason for leaving is a “sham,” according to the administrative law judge who presided over the rate request case. Its decision to leave is problematic only because it still carries so many policies. Possibly, State Farm knew that the timing of the announcement would carry more weight and cause more hysteria while it still held a large market share. If it left slowly and over a longer period of time, the impact of the announcement would not have caused as much of an uproar.
Exactly what the executives at State Farm want to achieve from all this and how they want the insurance market to operate is known by those at State Farm headquarters in Bloomington, Illinois. Floridians can only deal with the reality of State Farm’s hardball tactics and learn that they should never be vulnerable to this type of breach of the public trust.
In the long term, if we can encourage competitors to gain sufficient capacity, many of these problems will go away. The crisis State Farm is causing is one of timing---what are we going to do in the short term? So long as McCarty can mandate that State Farm disposes of its customers’ policies over several years and not force them to Citizens, Florida will get by this current crisis. However, if a massive hurricane or several moderate ones strike while this current financial crisis continues, an insurance crisis caused by an unfunded Catastrophe Fund will be upon us. Possibly, that is why State Farm executives decided to leave Florida---they do not want to be stuck holding the bag in the event the big one hits and the Catastrophe Fund has no money to reimburse it and other carriers. If the "big one" hits this hurricane season, Governor Crist will have many, including State Farm, in Washington asking for the Catastrophe Fund to access the Stimulus monies.
As we are getting closer to the summer months, I feel Floridians are on a runaway train and nobody has a plan to safely stop it. The only thing left to do is pray for a very long and clear track.
Why is no one seeing the point that State Farm must raise its rate to cover its losses? SO WHAT...since when does business not get to raise rates to cover their losses when (NOT IF) a hurricane comes! I am a State Farm policy holder and why do I not get a choice if I want to pay STATE FARM's rates? If I go get another AMBEST rated A insurance company I will pay MORE than the STATE FARM rate with the 47% increase! (and I'm not going to tell you the rate for Citizens...then when we have a hurricane...I will not be covered because they are broke!!!) THAT IS MY CHOICE NOT CHARLIE'S! What is this man's next step... no one can buy a car over a certain amount? Why don't you people see that STATE FARM is saying we have to cover our costs...so you actually think these fly by night insurance companies will pay? No they won't ...they'll declare bankruptcy and then all these homeowners won't have their homes rebuilt or repaired...this will lead to NO homes being able to be insured and then this will lead to homes in FL not being able to be bought and sold! WAKE UP FLORIDA CITIZENS! STATE FARM LEAVING IS NOT THE ANSWER! CHARLIE CHRIST IS DAMAGING our home values by letting the most stable insurance company leave the state! He should be on his knees begging them to stay in a state that has the most risk of claims!! WAKE UP!!!!!!!!!!!!!!!!!!!!!
Victoria,
I'm awake.
I appreciate your comment because some have suggested that rate regulation should only exist to insure that carriers are charging enough to keep themselves solvent.
I also appreciate being called "you people." Never had that happen before.
Governor Crist ran on a platform to keep rates affordable and is holding true to his campaign promise--even if that makes him take on the largest personal lines carrier in the Country. Sometimes, politicians get accused of not keeping promises, but Charlie is not one of those types.
You raise another good concern about the ability of the other new carriers to pay. The Office of Insurance Regulation thinks so, but people are a little concerned about regulators saying everything is fine.
Call Chubb. Since you do not mind paying, they charge high rates, but pay claims. They ran an advertisement which I posted in this blog.
Good luck and thank you for your points of view.
Chip (AKA "You People" haha)- I know you understand the complexity and the multi-faceted nature of the insurance market here in Florida, and I have enjoyed reading your comments on the dire state of the market, the risk of small insurers dependence upon the Cat Fund and eventual dependence upon FIGA, and the evils of State Farm and the mystery of their desire to leave Florida. However, you already solved the mystery and nailed the real reason right on the head in the tail end of your note - they don't want to be left holding the bag when the big one hits.
I also find it amazing that you applaud Charlie Crist for standing on his campaign promise to lower insurance prices, when you have a very clear understanding of the fact that the smaller companies coming into the state are undercapitalized and overdependent upon the Cat Fund, which is woefully short on cash to pay claims when a storm hits. In the event of a storm, this promise will cost all Floridians increased taxes and massive interest payments on bonds we may or may not be able to sell.
I appreciate that you are trying to raise awareness of a possible massive corporate conspiracy, replete with campaigns of misinformation and insurance propoganda. But is it possible that State Farm would just like to operate a business in which it can collect premiums, pay claims, meet costs, and see a profit, without possibly bankrupting the company because Florida's governor made a promise to control insurance prices?
I can't imagine that you find State Farm to be that sophisticated of an opponent. In fact, I would guess that they roll over and play dead more often than not when you send over your first letter on your firm's letterhead. Their trial to settlement ratio can't be more than 5 percent, no?
The Florida insurance market is a good old-fashioned mess. State Farm, regardless of their secret or underhanded motives, is fleeing a sinking ship, and smartly and rightfully so. Does this leave the citizens of Florida in a lurch? I truly think so, but it's not State Farm's job to fix the market.
I believe Charlie made a campaign promise he couldn't keep and is picking a fight with State Farm that he can't win. And now, in order to "keep" his promise, he is rolling the dice on the State's future finances, and pushing out one of the few companies that has proven itself over the long term to be capable of handling both the fiscal and logistical challenges following a major storm.