Hard Feelings, Doubts Linger Over Florida Insurance Reform Law

Published May 24, 2011

To Florida Governor Rick Scott (R), a new law designed to lower costs for property insurance carriers and increase competition is a “significant step forward.”

To Christian Cámara, Florida director of The Heartland Institute’s Center on Finance, Insurance, and Real Estate, the law is an “epic disappointment.” (The Heartland Institute publishes FIRE Policy News.)

Scott signed the bill in May, calling it “a comprehensive property and casualty insurance package” that “strengthens Florida’s property insurance market by addressing cost drivers associated with burdensome regulations, and confronting the sinkhole crisis. It is a significant step forward to making Florida more competitive and attracting new companies into the state.”

Addressing ‘Cost Drivers’
Among other things, the law—SB 408, dubbed the “Cost Drivers Bill”—increases insurance rate flexibility and imposes higher solvency requirements on insurers. It also restricts public adjuster practices that many insurance trade groups said were driving costs higher, does more to root out fraud, and allows insurers to withhold claims payments until home repair contracts are signed.

The law also addresses sinkhole claims, which have become a major problem. Sinkhole losses are now restricted to damage to the main building, excluding driveways, sidewalks, swimming pools, or separate structures. And repairs must follow recommendations of the insurer’s professional engineers.

However, it’s what the bill does not do that bothers Cámara.

Still Subsidizing Coverage
It does not significantly address reforms to the Florida Citizens Property Insurance Corporation, a state-run insurance facility that sets rates below those in the private market, Cámara says. The taxpayer-backed Citizens has become the dominant insurer in many high-risk areas as it subsidizes insurance in environmentally sensitive and risky areas.

The bill also does not address the Florida Hurricane Catastrophe Fund, which provides reinsurance to property insurers. Nor does it dedicate the state to investigating human causes of sinkholes.

Citizens and the Catastrophe Fund put taxpayers on the hook for potential losses that could total tens of billions of dollars, Cámara notes.

“The Legislature did the right thing in addressing fraud and other cost drivers that are pushing up insurance rates on consumers. However, it is an epic disappointment that the Legislature failed to even take up legislation to address the enormous liability Floridians face through the Cat Fund and Citizens Property Insurance Corporation,” said Cámara.

“Combined, these two state-run entities could foist on taxpayers the single largest tax increase Floridians have ever experienced should a hurricane strike,” Cámara said. “If property, auto, renters, and commercial insurance rates are high now, imagine a 40 percent across-the-board tax on those already-high rates for decades to pay off the debt Citizens and the Cat Fund would have to incur after a hurricane.”

Rates Could Rise
Rate increases were on the minds of many opponents of the measure, who fear property insurance buyers could pay substantially more for coverage in coming years. Defenders say the fears are overblown and the result of misrepresentations.

Florida Today columnist Matt Reed told his readers, “In the end, your Florida Legislature scaled back its wish list of dozens of misguided and punitive insurance ‘reforms.’ Instead it passed one market-rigging bill that could multiply private insurers’ premiums and make your next hurricane repair job take longer.”

He added, “The bill specifically enables self-dealing in which national insurance companies sell radically inflated amounts of backup catastrophe coverage to their own Florida subsidiaries—allegedly to pay hurricane claims—then pass the subsidiaries’ inflated costs to you through rate hikes.”

Reed slammed Republicans for the bill becoming law, but Republican Sen. Mike Fasano (R-New Port Richey) spoke against the measure and then called for Scott to veto it.

Republicans Bicker
The law “virtually guarantees a 15 percent premium ‘reinsurance’ increase for Florida policyholders who have no choice but to buy property insurance on their homes if they have an outstanding mortgage,” Fasano said in a statement.

Fasano called this “a backdoor tax and fee increase that will hurt most homeowners, consumers, and small business owners at a time with very high foreclosure and unemployment rates, and a fragile economic recovery underway.”

The bill’s chief sponsor, Sen. Garrett Richter (R-Naples), responded with a statement of his own, in which he said, “I cannot simply watch from the sidelines as a 17-year career politician mischaracterizes and demonizes badly needed public policy reform.” Richter said there “were many false statements surrounding Senate Bill 408” published in area newspapers, and he accused Fasano of misrepresenting the law.

15% Rise Not Guaranteed
For instance, Richter said the law does not virtually guarantee a 15 percent premium increase.

“Any company that proposes a rate increase must file for the increase with the state’s insurance regulator for a full review before it is approved or denied. The 15 percent reinsurance piece he refers to is a limit to what they are allowed to file for, not a predetermined percentage increase. Any rate request must be completely reviewed and approved by the Office of Insurance Regulation (OIR) before it is granted.” Richter further noted reinsurance makes up only one portion of the rate that is charged.

Richter also said it’s false to say homeowners will have to pay for some repairs in advance and hope to be reimbursed.

“In fact, the bill specifically states that an insurer is prohibited from requiring the policyholder to advance payment to replace property. For dwelling repairs, the insurer is required to pay the full cash value of the loss up front, and pay the remaining amounts necessary to perform the repairs as the work is completed.”

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Finance, Insurance & Real Estate News.