“quick-fix feel-good” price rollbacks

Dear Citizens of Florida;


I find it so very interesting, that instead of a common sense long term insurance solution to catastrophes, you merely seek to have “quick-fix feel-good” price rollbacks and discounted premiums.  You indicate there should be an investigation of all insurance companies by a committee, not involved in the insurance industry, to determine reforms.    I am involved in the insurance industry, and I certainly would not tell you how to run your business, especially when I am most likely unfamiliar with the aspects of an industry which you find commonplace on an everyday basis.


The insurance industry is regulated by your state government.  The government decides which insurer may be considered domiciled in the State of Florida; who is authorized and not authorized; and what amounts of profits may be made before being required to return such profits to you.  The citizen and the state also regulate the amount of surplus an insurer must carry to enable it to pay losses which occur.  Likewise, all insurance agency actions are regulated.


The state of Florida, because of heavy taxation on the insurers who are admitted, and also now are taxing the non-admitted insurers, is causing one insurer after another to flee the state.  So now, the theory of free commerce in the state of Florida has fled as well.


Your insurance company does not have a fat pot of gold, with a never-ending balance, to pay losses.  Those insurance pools which reinsure individual insurance companies, likewise are few and far between.  There is simply not enough money.  And the more pressure which is placed on these insurers with taxation and unfair representation would probably leave Citizens Property Insurance Corporation as the only insurer which will provide any coverage in this state.   And, if an insurer leaves this state because of the assessments made against it, and the dictation of rates, which could bankrupt their operations in free commerce, then guess what, your boat insurance and your automobile insurance will eventually be written by Citizens as well.  With non-admitted insurers (those not domiciled in Florida) also pulling back because of taxation, there will be no one to insure you.   And, we in the insurance industry and those in the real estate industry may as well pack up our bags and go to another state that is not so “taxing”.


My previous article pertained to the administration of Citizens Property Insurance Corporation.  Its unfair policy writing practices, because of inconsistencies in underwriting and in policy processing, leave much to be desired.   Administration, by those individuals who understand insurance practices, especially in the residual market, could fix such discrepancies.  Think of those property owners, who today, may not have been covered by Citizens Property Insurance Corporation, who suffered a loss from the recent tornados (which are a covered wind peril) only because their applications were not processed timely or because premiums were not correct the first time.  And, if you do not have 80% of the premium into Citizens Property Insurance Corporation the first time, you will be cancelled, if the additional premium is not paid within the allotted time.  If you do not send the second portion in time, the initial premium will be sent back to you, but not in a timely manner. Thus when you cannot afford another large premium, you are forced wait until all the checks can reach a deadline by the same time.  In the meantime, coverage begins the day after your premium is received by the underwriter.


In defense of Citizens Property Insurance Corporation, it has filled a market gap.  Many insurers’ surplus funds could not have handled the payment of claims for the natural catastrophes which we have all suffered.  And before you consider everything to be a matter of pure premium, going straight into the insurers’ pockets, let’s look at the regulations from your state government.  Let us also look at the premiums you are charged, and perhaps you should note all the surcharges and taxes which are associated with those premiums.  Sometimes it seems as though the surcharges and taxes become greater than the premium.


So, Citizens of Florida, let’s throw out all the legislators and those who understand insurance as well as the amount of surplus which should be maintained so that an Insurance company may pay losses when they occur.  After all, you are blaming an industry for your own problems which stem from your choice of living in Florida.


In the Western part of the United States, insureds did not blame the industry for construction defect claims nor poor legislation.  Instead, they worked together to determine a solution.  With 9-11, all industries and the public worked together to solve the problems.  The government provided great solutions to overcome such difficulties and everyone was willing to assist.


In my previous article, I discussed a possible solution.  Yes, its foundation is based upon the very theory of insurance.  And I know many of you hate the word “insurance” because it is a word which you do not understand and choose to blame for all of your problems, rather than work on a solution with your legislators.  Insurance operates on the mathematical theory of the “Law of Large Numbers”.  Insurance is defined as a social device for handling risk or uncertainty regarding loss, by spreading it among a sufficiently large number of similar exposures, in order to predict the individual chance of loss.  In insurance, a probability of loss must be made from actuarial numbers to derive prediction.  In theory, all individuals in paying relatively small premiums will benefit by exchanging the uncertainty of a large future loss for the certainty of the immediate premium.


Do I detect you sneering about the “small immediate premium”?  You are correct.  In the state of Florida, you definitely are not paying small premiums.  Neither is your insurance agent, nor representatives of the insurers.  Nor are your legislators in the state of Florida paying small premiums for their real estate investment.


So let’s look into this further.   Do you see what is missing?  Yes, you are right.  It is the law of large numbers.   Let’s look at this logically.  Who is paying for all of the natural disasters in the State of Florida?  You are!   Competitive insurers could not afford the probability of another such hurricane, or bankruptcy would have been on the agenda next.  And, in the case of an admitted insurer going bankrupt, who do you think will pick up the pieces?  You will, as will all the other insurers who write business in the state of Florida on an admitted basis.   Frankly, there are not enough people in the state of Florida to pay for all the natural disasters that may occur, based upon the predictions made by the National Weather Service.    And, as a business person in this state, if a product consistently was sold at a loss to you, would you not cut your losses and run?  If not, you must be a gambler.


Now we realize, perhaps, that it is not the insurance companies who are the bad guys, nor are your legislators.  Your legislators got where they are because you have placed them there.  And, because of your complaints, they are willing to jump through hoops to assist you with rollbacks, et cetera, whether or not such rollbacks may bankrupt the entire insurance industry.


Why don’t we consider another idea?  I know this will be hard for any state legislator to stomach because if they have an ego, Federal intervention will not be a consideration.  But wouldn’t a program similar to the National Flood Insurers Program, run by the Feds, for which servicing companies get paid (instead of taxed), be great?   And the flood program covers flood disasters across the entire United States, with some government subsidization, so that the premiums charged would not overburden the public.


The Feds also provided terrorism insurance through the private sector, after 9-11.  And some of you chose not to purchase such insurance since it was voluntary.  However, the majority of you realized you had a responsibility, even from a liability standpoint, to protect persons and property and you fortunately purchased the insurance.  Terrorism insurance was written at a minimal cost because the burden was spread across the entire United States and partially subsidized by the Feds.  Prior to this new insurance there was no wars peril coverage.  Isn’t it funny how low costs and a certain amount of predictability still falls under that wonderful mathematical equation of the “Law of Large Numbers”.


Consider the idea of spreading the costs of all national disasters throughout the entire United States. The disasters would include, but not be limited to Flood, Terrorism, all Wind damage including straight line winds, hurricanes and tornados, volcanic eruptions and wild fires.  And with the latter, if such fires fell within Federal Jurisdictions, perhaps campers and smokers would be more cautious because such would fall within Federal Jurisdiction.  Further, one would not have to determine, in the case of a hurricane, whether the proximate cause of a loss was due to either rain or wind, or both, so a loss payment would be more readily made.


And with those insurance people who are questioning “adverse selection” (only those who are in need will buy), they should think again… most individuals have mortgages.  Mortgagees will not only require one to carry flood for regular flood zones, but would also require wind coverage for every homeowner and business owner.   The benefits of being insured under the federal programs are subsidization through the payment of taxes, resulting in a lower cost for multiple perils spread by that “Law of Large Numbers” and competitive premiums will be given for the balance of your perils under an insurance policy.


More insurers would be willing to write insurance if they were not consistently faced with shouldering the burden of one disaster after another.  And not only would competition drive down prices, but people would now have an array of products to choose from.  Let’s do what the Fed’s now do….a waiting period and a premium that is clearly defined based upon the programs provided.  There would be underwriting errors should occur because you would be working with an actual insurance company who would be paid to service the account and who would have knowledge, and FEMA’s ear, to work out any discrepancies, to the insured’s advantage.


Dear Citizen, be assured I feel your pain.  Each day, I am following up on your policies, to assure the best price and service for your account; to assure you are not cancelled and to suggest alternatives to best serve you.  In a very real sense, I am you.  I face the same problems.  A better understanding of what we both are going through should help us both formulate better ideas for tomorrow.  Remember, forewarned is forearmed.  You (we) have been through too much.  We need to fight for a better tomorrow together.  It is not the insurance industry that is at fault nor is it your legislators, who jump at your very whim.  Instead, it is the lack of an integrated thought process to remedy the situation and look for a long term solution.


Karin for the blog

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