It is hard to imagine any Florida property insurers not making a killing in 2009. With no hurricanes or significant tropical storms, the most financially devastating peril was eliminated. Yet, over 100 Florida residential property insurers reported losses.

My impression is that a major reason for the loss is wind mitigation credits. I noticed the severe impact such credits had on net premiums when serving on the Citizens Property Insurance Mission Review Task Force. I could never figure out any actuarial or scientific basis for such credits in return for mitigation expenses. While there should be some break in premiums for a building "hardened" against wind loss, it seemed like the premium breaks were very high.

I may give the insurance industry criticism for a number of activities, but my impression is that it may have a point on this topic. Florida needs profitable insurers. If they are not making underwriting profits now, something is amiss or the books are being distorted, as in the case of State Farm charging itself for re-insurance expense.

The October 19 issue of BestWeek had a couple of articles on this point. It noted:

Mitigation credits in Florida have been widely criticized by the industry. Insurers say the credits are not calculated correctly, and there have also been allegations of fraud involving building inspectors who dole out the credits. In the end, insurers say they are unable to get the premium they need. The credits can ‘take as much as 90% of the wind premium away…..

The bottom line to policyholders is that everybody is predicting that rates are going up. Assuming the books are being accurately reported, there is simply no way so many carriers can be reporting underwriting losses unless the actuarial expectancy is wrong or the net rate after mitigation credits is not actuarially sound. My impression is the mitigation credits, with little scientific basis to support such premium reductions, have caused many carriers to report more severe losses than expected. I do not think the Florida insurance industry is making an inappropriate objection. This needs to get corrected.

From a social standpoint, tax reductions to rich and poor who spend money solely on targeted building improvements to mitigate from wind damage in coastal areas is something we should encourage. Everybody benefits when a loss is prevented or mitigated.

  • John P.

    Let’s see. I pay my Florida Homeowner Premium of $3,000.00 this year and every year for the next 10 years. If I kept the money in the back with average interest I might have $40,000.00. Hurricane Whoop-ass severely damages my $500,0000.00 home and the insurance company pays me $350,000.00 to fix it.

    Now who made the killing!!!!!!!!!! That’s why we pay for insurance.

  • Paul Billardello

    Confirmed mitigation criteria was, and is, a great source of information for carriers to make determination of their risk exposure. It’s a great data base…if it’s accurate.

    Of course, the information (in many instances) the carriers and homeowners received may not be worth the paper it was written on…fraud and abuse took their toll as many carriers will attest to…only evidenced by carriers having to double dip (contracting with qualified, knowledgeable and honest inspectors to re-evaluate their information) into their coffers to substantiate the allocated preimium reduction that was passed onto the homeowner.

    Together with the Federal Alliance for Safe Homes (FLASH.org) and the My Safe Florida Home program, much information was brought to the attention of homeowners and insurers on how each could benefit from the educational flow of information.

    Now that everyone has taken the course, the question is…How many will pass that first test?

  • My view is slightly different. Rates are high in Florida because risk is high. We need to lower risk. One effective way to lower risk is mitigation but someone has to pay for it. The state put some money into My Safe Florida Homes after 2004, but that is all gone. The State has no more money. Consumers have no money. How do we pay for mitigation?

    Insurers must invest in mitigation through discounts and other programs to harden homes. Yes, it might be a little painful, but there will be long term gain because losses will be lower. Insurers need to share those profits with consumers through paying up front for mitigation.

    The alternatives are grim. Hurricanes will inevitably come along and wipe out the unmitigated homes. That means fewer customers and premiums. No fun.

    Why are insurers currently losing money after three years with no hurricanes? Certainly investment losses are huge. But even leaving those out, some insurers are having a hard time. Anti-fraud programs are a joke. Insurers don’t want to trouble their customers with fraud investigations and find it easier to just pass along the cost. That normally just raises rates, but Gov Crist and Commissioner McCarty are being a bit stingy on the rate increases.

    Besides fraud, people are just in difficult circumstances. They can’t afford as much insurance, and they’re more likely to make a claim because they don’t have funds. At the same time, the cost to run an insurance company hasn’t changed in spite of tough times. Executives still need bonuses and most of the staff are still in place.

    Many insurance companies just aren’t managed well. They got years of no hurricanes, tort reform, new computer models, and a lax regulatory environment. How can you still lose money?

    In my view, insurers and the state need to take a longer view in looking for the payback from mitigation. The current five year models are already grossly inaccurate, and certainly don’t take mitigation into account. Another look might show short term losses turning into long term gains.

  • If a home has upgrades, such as a newer roof that meets the new building code, it should receive insurance credits due to the lower risk. If a homeowner submits a mitigation form requesting credits that are significant the insurance company should make sure those credits are accurate.

    We have provided thousands of wind mitigation inspections but only to report the truth. We do not provide a money-back guarantee. All of our inspectors must submit their work along with photographs to our Quality Assurance department before we validate the inspection.

    Time will tell how accurate wind mitigation inspections have been. We will continue to do them properly. Quality is not an accident.

  • Kerry

    I am a commerical insurance producer, and I disagree with your assessment that the credits are too much.

    For years these homeowners and unit owners have been gauged with ridiculious premiums and high deductibles. They are finally seeing some relief with wind mit credits.
    Yes, it is more money in my pocket if the credits are not there, but I would rather maintain a long term relationship with my client and that cannott be done if they can’t afford to live and run a business in Florida.

  • Chip Merlin

    Kerry,

    Thanks for your view. Everybody would like to have rates low as possible except for the insurance carriers. And, many of them would like rates “affordable” because they do not want businesses leaving the state.

    It is easy for agents to say that “rates” are too high. It is like saying that taxes are too high–everybody agrees.

    The issue is how you balance lower premiums with the ability of insurers to make a profit and enough of a profit to stay in the business ofinsurance rather than some other financial business.

    Everybody wants insurance carreirs strong enough to withstand a major catastrophe and not go broke. Policyholders want “afforable” insurance from a company that will not go broke.

    However, when a significant number of insurance companies lose money in a year when no storms happen must raise concerns of what would happen if a catastrophe hit. And, concerned individuals of Florida’s insurance situation should be asking whether those outrageous rates you claim exist may not be so outrageous afterall.

    There is no free lunch.

  • The whole situation is a mess….

  • Paul Terlizzi

    Let me see if I understand this correctly.

    Every homeowner pays $3000 per year for insurance and the price of a home is $200k. That means that the insurance companies make enough money to replace all the homes every 66 years. I wonder what the likelyhood of all the homes being destroyed in 66 years is. …and they say they are not making a profit in a no wind year?

    They must think I’m dumb enough to buy swampland in Florida.

    Wait-a-minute…