Insurance companies in Florida used loophole in law to bypass required rate savings

BY JULIE PATEL | South Florida Sun-Sentinel
Originally published 07:10 a.m., February 6, 2008
Updated 07:10 a.m., February 6, 2008

TALLAHASSEE, Fla. — It appears some of the state's biggest insurers tried to use loopholes in a law to skirt a requirement that they pass savings from a state-backed financial safety net to homeowners.

That's one of the conclusions drawn Tuesday after two days of Senate hearings on compliance with a law passed last year to quell Florida's property insurance crisis.


Executives from insurance companies testified under oath about why they didn't reduce prices for consumers, as the Legislature demanded last year in exchange for offering insurers cheaper backup storm coverage.

With the annual legislative session starting in March, lawmakers said they could consider fixing loopholes in last year's law.

In one such gap, the law didn't explicitly indicate methods insurers can't use to predict risk and ultimately set insurance policy prices, said Sen. Steve Geller, D-Hallandale Beach.

Insurers such as Allstate Floridian Insurance Co. and Nationwide Insurance Co. of Florida based rate increase requests last year on storm risks over the next five years instead of the customary 100 years. A special state commission approves risk prediction methods, but use of unapproved methods, such as the five-year projection, results in higher insurance rates.

"This is the single most significant issue that we've heard," said Geller, co-chairman of the Senate Select Committee on Property Insurance Accountability, formed last month to hold insurers accountable for rate cuts that legislators pledged to the state's homeowners last year. "If we simply resolved that issue, I think we'd resolve half the disputes we're having."

Another issue senators may want to look at during the regular session, Geller said, is whether to clarify a state law enacted in 2006 that allows insurers to earn "reasonable profits."

State insurance regulators have recommended insurance companies use a 3.7 profit margin — not including income earned on investments — to calculate property insurance prices. But executives from companies such as Allstate Floridian, Nationwide and Hartford Insurance Co. of the Midwest testified that they used profit margins of 15 percent or more to calculate rate requests last year. What's more, Hartford officials said they used $1 billion last year to buy back stock. Allstate also has bought back stock in recent years.

The Senate committee might continue its hearings on Feb. 18 or 19 to discuss findings and recommendations such as those outlined by Geller. If there's time before the Feb. 29 deadline for final drafts of new bills for the coming legislative session, the committee might ask rating agencies, risk predicting companies and reinsurers to testify about their relationships with the insurance industry.

This week's hearings are the latest battle in a long feud between state government leaders and the property insurance industry. Last year, legislators expanded the state reinsurance program and expected insurers to pass along the savings by cutting homeowner coverage prices. But many insurers requested rate increases that were rejected by regulators.

One insurer, American Strategic Insurance Corp., managed to reduce rates last year by a statewide average of 20 percent, and senators praised the company during the hearings.

In December, Gov. Charlie Crist threatened to sue the insurance industry, and state Insurance Commissioner Kevin McCarty last month tried banning Allstate Insurance Co. and nine affiliates from selling new insurance policies statewide until they turn over all the financial documents his office wants as part of an investigation. A state appeals court blocked McCarty and now the two sides are locked in litigation.

State insurance regulators and legislators at the hearings said they thought modeling – or methods used to predict the risks of hurricanes that help set policy prices – had been addressed after Hurricane Andrew in 1992. That's when insurers said they needed computer models using tens of thousands of years of hurricane data to help predict risks in the long term to level out drastic fluctuations in the short term.

Legislators in Florida and several other states approved the models even though rates shot up. But after damaging hurricanes in 2004 and 2005, industry officials started saying they needed to project risks five years out because they believed this is a time of increased hurricane activity, in part because of warming sea surface waters.

State law doesn't explicitly prohibit insurers from using the models, according to testimony at the hearings. Allstate and Florida Farm Bureau General Insurance Co. use the near-term methods to estimate risks that ultimately determine rates.

Insurance executives said the near-term projection helps them better assess risk and is backed by scientists at modeling companies.

State officials said modeling company executives developed the five-year method to meet demand from insurers.

"The short-term model was developed at the behest of the insurance industry," Deputy Insurance Commissioner Belinda Miller said.

Some senators said they think the law passed last year will work as long as regulators continue rejecting proposed rate hikes. Rate requests from Allstate, Hartford and Florida Farm were rejected last year and are pending negotiation or final decisions.

"They can use the models all they want until the cows come home, but (regulators) haven't approved a penny" in situations where they thought insurers were unreasonable, said Sen. Bill Posey, R-Rockledge.

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