State Farm exit causes headaches
TAMPA – March 5, 2009 – Teresa Jackson, a State Farm policyholder for 18 years, has been looking for replacement coverage since State Farm announced, in late January, plans to pull out of Florida’s property insurance market.
After weeks of navigating Florida’s distressed insurance market, Jackson still feels helpless and is fraught with concern.
“I’ve never had to change my homeowners insurance,” Jackson said. “I don’t know how to do this.”
One thing, however, is becoming apparent, Jackson said. Her options may not be as abundant as state regulators have suggested.
After seeking bids from other insurers, only Citizens Property Insurance, Florida’s insurer of last resort, was willing to quote her a price for insuring her Lutz home.
“I live within a mile of a homeowner putting in a claim for a sinkhole,” Jackson said. “I will probably end up in Citizens because of that.”
Dale Chastain, a homeowner in the Carrollwood area, has been with State Farm since 1986. He too may be forced to buy homeowners coverage from Citizens.
Shortly after State Farm’s announcement, Chastain called a private insurer hoping to obtain coverage for his home, which was built in the 1950s.
“They said they wouldn’t write it because of the age of the home,” Chastain said.
The company referred him to Citizens, which is already bloated with about 1.1 million policies.
Shock of rates, risk State regulators say Florida’s insurance market can absorb most, if not all, of the 1.2 million policies State Farm plans to drop over two years beginning in November. About 470,000 policies, including all boat-owner policies, will be dropped during the first year.
But many insurers won’t sell policies for older homes and homes in high-risk coastal areas.
“Some policyholders are going to find cheaper rates, but many of them, particularly those in older homes, are going to find much higher rates,” said Alex Sink, Florida’s chief financial officer.
State Farm’s departure means Citizens may get even larger, increasing its chances of running a big deficit after a hurricane.
“I’m more concerned that it’s going to delay making it smaller,” said Chip Merlin, an insurance lawyer in Tampa who sat on a task force charged with returning Citizens to its original role as the state’s insurer of last resort.
When Citizens runs a deficit, the tab is paid by every property owner in the state through assessments levied against all property insurance policies in Florida.
State Farm’s decision to get out of the property insurance business in Florida has reignited the debate over the state’s controversial plan to keep premiums from rising. That plan, critics say, will drive more insurers out of the Florida market and has exposed all Florida policyholders and taxpayers to a massive debt that will have to be collected after the next major hurricane to pay claims.
“We have fooled the public into thinking that they’re getting lower rates now when, in fact, they’re exposed to an inordinate amount of risk in the future,” said Don Brown, former chairman of Florida’s House Insurance Committee.
Until insurers are allowed to charge customers higher rates, they will continue to flee Florida and the state will bear a larger share of hurricane risk, Brown said.
The state’s Hurricane Catastrophe Fund is obligated to cover $29 billion in claims but has only $10 billion in the bank. Given today’s tough economic times, the cat fund may not be able to borrow the money it will need to pay insurers’ claims should a major hurricane strike the state.
If the cat fund can’t cover those claims, the cost will be collected from every Florida policyholder through assessments.
“That’s not the fault of the people who administer the cat fund,” Brown said. “It’s the Legislature and the governor’s fault for expanding the size by $12 billion of the cat fund beyond its capability to perform.”
Market volatility at issue State Farm decided to pull out of Florida after state regulators denied its request to raise homeowner premiums 47 percent on average statewide. Without a rate increase, the company said it would be insolvent by 2011. But regulators said the rate increase proposal would have raised rates to unaffordable levels, as high as 90 percent in some parts of Florida.
Merlin, the insurance lawyer from Tampa, said State Farm is leaving the state because Florida’s insurance market is too volatile. Insolvency isn’t the issue, he said.
“They want to be in a business where profit is more certain, such as the automobile business,” Merlin said
The strategy crafted by Gov. Charlie Crist and the Legislature is a long-term solution that will benefit Florida’s insurers, he said.
“If you set rates properly, you will make money,” Merlin said. “There will be years you’re going to lose money and years you’re going to make a lot. If you keep plowing those profits back into the surplus, you will build up money in the long term.”
Under State Farm’s exit plan, the company would begin dropping policyholders in November. Altogether, 1.2 million policies would be canceled, including 700,000 homeowner policies.
But Jackson, the homeowner in Lutz, wants to find a replacement carrier before the industry runs out of capacity.
“If you wait until November when State Farm gives you the boot, there is not going to be anybody left,” Jackson said.
In addition to a sense of urgency to find a new insurer, many State Farm customers like Jackson feel betrayed. In her 18 years with State Farm, she has never filed a claim.
Jackson said she recently received a letter from her State Farm agent urging her not to take her auto policy to another company.
“I ripped it up into a zillion pieces.”
Copyright © 2009 Tampa Tribune, Fla., Russell Ray. Distributed by McClatchy-Tribune Information Services.
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