McCarty Claims State Farm Trying to Work Out Deal and Expects Property Insurance Rates to Go Up
I would pay to be a fly on the wall during the discussions the Florida Office of Insurance Regulation is having with State Farm regarding its withdrawal from the Florida property insurance market. As I noted in State Farm Must Love the Clash, many of us suspect that State Farm’s bullying and threatening tactics demonstrate that it does not want to leave Florida, but uses such tactics to get what it wants from Florida’s politicians and regulators.
An article in today’s Insurance Journal, Florida Insurance Chief: Homeowners Rates Might Rise; State Farm Might Stay, suggests that State Farm is trying to reach an agreement with the Office of Insurance Regulation so that it will stay in Florida.
McCarty said the state is still negotiating with big insurer State Farm over its proposed withdrawal from the property market. The insurer wants to drop some 770,000 policies but the state and the insurer have not yet agreed upon a plan to do this. Until they do, State Farm is blocked from dropping its customers.
McCarty raised the possibility of State Farm remaining in the state but with a scaled down company.
"We would be better served if State Farm stayed to some degree," McCarty said. He suggested that the insurer's recent move, which the insurance department approved, to discontinue certain policyholder discounts is a step towards the insurer reducing its exposure in the state that could help its bottom line.
However, if State Farm does finally exit, he said the marketplace appears poised to absorb most of the policies it leaves behind. About 30 insurers -- with what McCarty said "appears to be enough capital" -- have expressed interest in taking on some of State Farm's business. Most of these carriers are established players with "superior ability to negotiate reinsurance contracts" and not the newer entries into the market, he stressed.
I agree that Florida is better served if State Farm remains in Florida. It would be fantastic if a deal could be reached. I do not agree that State Farm should get special political treatment. I do not agree that it should be able to charge whatever it wants. I do not agree that we should not investigate how it can claim that it is losing money in Florida when there have been no hurricanes.
Why does State Farm get such special political treatment? Many would suggest that one very powerful and persuasive politician, Florida State Senator J.D. Alexander, is a major reason. Senator Alexander does a tremendous job representing his biggest corporate client, State Farm, whose regional office is in Senator Alexander’s district. The News Service of Florida ran a story yesterday, ALEXANDER: TRUE MEASURE OF FLA FINANCES INCLUDES STORM SCENARIO demonstrating in part how Senator Alexander continually helps State Farm:
Senate budget chief J.D. Alexander cast a deeper shade of red ink over Florida's recession-battered finances Tuesday, with a stark assessment of what major hurricanes could do to the state treasury.
Alexander got the Legislative Budget Commission to embrace his demand that potential multi-billion dollar shortfalls in both the Florida Hurricane Catastrophe Fund and state-backed Citizens Property Insurance, Corp., be included in a long-range financial outlook adopted by the panel.
The financial outlook, which is required by law, shows the state faces at least a $1 billion shortfall next year to cover a stripped-down base budget, with the deficit potentially climbing to $2.6 billion when modest increases and traditionally funded state programs are included.
But the four-paragraphs added to the 117-page outlook by Alexander caused the biggest stir. The addition may also prove a swipe at Gov. Charlie Crist, who vetoed legislation in June that Alexander and other supporters said would have reduced the risk of hurricanes on the state treasury.
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State Farm's planned exit has been challenged by state regulators, with an administrative hearing scheduled to begin next month. State Farm and some lawmakers have clamored to have the legislation retooled and added to a likely special session this fall - or at least be ready for next spring's session."State Farm's headquarters is in my district and I support that legislation," Alexander said. "There's lots of folks I represent as well as others that would like to have that as an option. If you don't, you can certainly go somewhere else, even Citizens. But I think we proposed good policy for the state."
Actually, State Farm’s headquarters are in Bloomington, Illinois. Nobody would suggest that State Farm Florida makes public policy without significant input from Bloomington.
Senator Alexander’s strong position as the Budget Chairperson cannot be overstated. Other Senators need his help to get matters through his committee. He is part of the Republican Leadership in the Florida Senate. When you happen to have a powerful and strategic politician in your favor, the way State Farm does with Senator Alexander, it is a significant political position. It is amazing that Florida, the fourth largest state in the Union, can have its public policy regarding insurance dictated to it by a company from the small city of Bloomington, Illinois. I suppose in Senator Alexander’s view and many of other politicians in Florida, what is good for the pockets of State Farm is good for Florida.
Often, even those who profess they are 'in the know' seem to forget: "he who controls the gold, controls the game."
That "Golden Rule" is so very true in many aspects of life.
Will more State Farm agents start diverging from the company line a la United Farmers Agents Association?
Here's an item from the National Association of State Farm Agents' website:
http://www.nasfa.com/publications/nasflash/2009/nasflash82.pdf
Chip,
This article was also the front page story of the Sun Sentinal this morning. In the article it explains that less than half of the insurance companies in the State had underwriting gains....and this is in a NON-CATASTROPHE period! What's going to happen when the next hurricane comes by? We all know....can you say FIGA, Citizens, and maybe a request for a Federal bailout...what the heck everyone else asks for one!
Readng between the lines of this article and my observations, it appears that the Governor, since making a decision to become a Senator, has lowered the rough-tough chest pumping to "hell with State Farm" talk.
It appears that the Gov. and McCarty have decided to try a more pragmatic approach after "noticing" that Florida NEEDS State Farm, as much or more than State Farm needs Florida.
Bruce,
Great to hear from you. I enjoy your lively comments and I am certain everybody else does as well. Write more often.
Part of the report is posted on the Florida Office of Insurance Regulation Web. It stated the following:
"The 29 newly admitted writers now report 747,714 policies in force in Florida as of June 30, 2009 and report an increase in policyholder surplus from the initial $607 million to $625.8 million. However, of the 21 companies with policies in force, only six experienced underwriting
gains during the first six months of the year, while 15 companies have experienced underwriting losses. This is generally consistent with the financial performance of other residential property insurance writers in Florida, and around the nation.
Of the 210 writers with a significant presence in the residential markets in Florida, 150 have shown increases in their policyholder surplus, while 60 companies have reported declines during the first six months of the year. Of these companies, 84 posted underwriting gains, while 102 posted underwriting losses based on second quarter financial filings. It should be noted there are 24 companies that have pooling arrangements with reinsurers and do not directly report underwriting gains or losses. Although this analysis features 210 writers in Florida, the results
are national results as financial statements are consolidated for all operations in the United
States. A list of these 210 companies and their financial results was provided to the Financial Services Commission yesterday.
As with all types of businesses in general, new insurance writers in Florida frequently experience initial losses, which are evident in the financial statements of our 29 newly admitted writers. These losses may be due to start-up costs, organization of an agent workforce, and other
overhead costs including marketing expenses. We have met or corresponded with each domestic company that has reported significant reductions in policyholder surplus. These companies are experiencing problems endemic to the overall property insurance marketplace. Most notably, company representatives have informed us their companies have experienced an increase in losses due to:
1) Premium reductions from the full implementation of mitigation discounts
2) Fraud
3) Increased reinsurance costs
4) Replacement cost methodology
5) Reported sinkhole claims
The companies have indicated the majority of these problems have been exacerbated by the
weakening economy...."
The issue with State Farm was its rediculous (fraudulent?) claim that it was losing money while paying itself over $500,000,000 as an expense. As a pretty sharp accountant, you can certainly appreciate anybody can show an underwriting loss by making up expenses that total over a half billion.
I have no idea if other insurers are now playing that game as well and "poor mouthing" their way to higher rates.
And, I am certain that you noted that most companies are still having postive income because their policyholder surplus is increasing.
But I agree, if companies are truly (and not with phoney baloney accounting like State Farm's accounting) losing money, rates will go up and quite a bit.
And, I think State Farm never thought things would get so out of hand. They do not want to leave this market. They just want Floridians to let State Farm play by State Farm's own rules.
Thanks for the compliment. I would be interested in analyzing the $500,000,000 expense that you explained below State Farm "paid to itself." Could you provide the source or a link to a site where I could check this out for myself? Maybe after doing a little research, I could give you my thoughts.
"The issue with State Farm was its rediculous (fraudulent?) claim that it was losing money while paying itself over $500,000,000 as an expense. As a pretty sharp accountant, you can certainly appreciate anybody can show an underwriting loss by making up expenses that total over a half billion."
Chip, now, now..............
The issue with State Farm was its rediculous (fraudulent?)...
R I D I C U L O U S. (ha, ha). :)
SHIRLEY