FAIA’s Grady: Florida Needs to Improve Its Insurance Reputation

The following are excerpts from a wide-ranging interview by Insurance Journal’s Andy Simpson with Jeff Grady, president and CEO, Florida Association of Insurance Agents, from Grady’s Tallahassee office.

Insurance Journal: There are various players in the Florida property insurance market; private insurers are not the only ones. There’s Citizens, the Office of Insurance Regulation, the Governor, the Legislature… Who really controls this marketplace? Whose decisions really have an impact, especially from an agent’s perspective, for good or for bad?

Grady: Well I speak for the agents, and I speak what’s on their mind. In our view, this all started when the Governor was elected back in 2006. He came in on a wave of populism that said, ‘we’re going to get those dirty boys over there in the insurance industry,’ and he went after us, and has created a marketplace, at least for private residential property, that is dominated by Citizens. Citizens in this state has a threshold that says if a company has a price that is 115 percent of Citizens, you can go right to Citizens. That’s the barrier, if you will, for entry and it really is no barrier.

So what that creates is an index in the market that everyone else has to float towards. Well Citizens is acknowledged by everyone, including the OIR, to have a price that is well underneath what it needs to be. So how is it then that these companies can compete with that entity that does not buy reinsurance, does not pay taxes, and has an assessment authority when, indeed, they have a deficit after a storm and these carriers don’t have all these things but are yet supposed to compete with them in the marketplace? They can’t.

So a lot of this in our view is self-created. By the way, add the mitigation credits on top of that. It’s no surprise. This isn’t a surprise, what’s happening to the Florida property market right now with respect to insolvencies and financial losses that are piling up in the event of no storms for the past four years. This was self-concocted.

Now, by the way, a lot of these carriers are getting rate increases. They’re all occurring kind of underneath the radar screen. Many of them are getting the magical 14.9 percent which avoids a rate hearing.

But there have been many, many rate increases proved over these last 10-18 months that just demonstrate the facade that was put up about, ‘We’re going to lower your prices and drive these people away from our state,’ which they did, has not worked out in the consumer’s favor because they’re getting rate increases now and in addition to that they have a solvency question as to whether or not they can pay the claim.

If OIR had been less stingy with rate increases over the past couple years, would that have helped?

Grady: No one likes rate increases, and what they hate even worse is a sticker shock. I think you could have avoided some of that. I think you could have had a very moderate level of rate increase and maybe even some softening of the market through keeping a lot of these competitors in here trying to get the business of the consumer.

But what we’ve done is we’ve driven a lot of the larger players out, and they’re gone. They’re gone for a very, very long time, if not forever, and you have a concentrated group of companies that insure primarily Florida, and Florida only, and you don’t have as many players.

So you have a situation where there aren’t as many choices, they have high reinsurance costs, and now that they’re to a point of really needing the rate increase because some of them have very strong financial difficulties, they’ve got to have a big rate increase. So you have insolvencies, you have sticker shock that might have been avoided had you had a more sensible approach to allowing rate need to occur in a moderated fashion and keeping those companies in here that have left.

Commissioner [Kevin] McCarty says the fact that national carriers have exited is not unique to Florida; it’s happening elsewhere. Do you think the situation has been exacerbated here?

Grady: Absolutely. He’s right; it’s happening elsewhere. But nowhere to the extent that it’s happening here. You go anywhere up and down the coast and Florida is known as the most punitive regulatory environment, and frankly there are those in the state that are proud of that reputation. I think it sounds good sometimes from the microphone in front of a political pep rally, but it doesn’t do anyone any good over time and I think we’re seeing the results of that now. Like it or not, we’ve got to have more capacity in this market. We’ve got to have more companies competing for consumer’s business, and that will help stabilize our situation both from a price standpoint and a financial condition. So I think Florida has a reputation that it needs to rid itself of.

Florida regulators recently changed their approach to take-out business from Citizens. The carriers that took policies out were supposed to stay on those policies for at least three years. But now they’re being told they can non-renew some of those. What effect does that have?

Grady: Well, I will say this; it’s frustrating consumers and killing agents. In addition to the insolvencies that they’re dealing with on a very compressed timeframe right beside hurricane season, to replace coverage for those consumers. Then you add the dumping of all these policies from these 18 carriers on this list. It’s a pressure cooker for agents. In my judgment, the three-year requirement for these carriers to stay on that Citizens take-out at or below Citizens’ rates was completely imposed. There’s no statute that requires that. That is an OIR rule that they placed in each one of these companies’ consent orders. Again going back, Citizens is known to have rates that are actuarially unsound. There’s no debating that

Understand this as well: when these carriers go to that take-out window, they have to leave Citizens in a position where its PML is no worse than where they found it. So it’s not a cherry-picking exercise where they get to take the best and leave the worst behind. Citizens’ board agrees to the take-outs on that basis. Now what’s happening, because of a three-year requirement that allows you really little flexibility in adjusting the exposure and at rates that, again, are widely acknowledged to be unsound, the commissioner is having to allow them to put the policies back into Citizens. He suggests those are the worst policies.

So now it’s really reverse cherry picking. Citizens’ PML should theoretically be driven up by this. Would Citizens’ board have agreed to this take-out had they known that they were going to get the worst policies put back in it in less than three years? I don’t know.

It frustrates us, it really does, because we encourage agents to let these policies be taken out only to find out that you’re having to rewrite them in less than two years, and the consumer’s very confused about why you told me to go with this company and now I’m having to go back. Sometimes there’s the loss of mitigation credits, and you have to reapply for some of that. It’s a very, very frustrating exercise.

Again, what it tells us is this is a failed experiment. These 18 companies did something that they were required to do via their consent orders, and it didn’t work out. Now we’re having to repair that, so it’s very frustrating.

How important is the homeowners market to Florida independent agents? Has all the turmoil been a boon, in one way, but a burden in another?

Grady: Yeah, it really has. With the demise of the property market, it really created an exodus for a lot of the direct writer companies, those who used capped abatements. As a result, the void was filled, certainly by Citizens, but also by companies, many of which we’ve talked about, that write through independent agents. So the market share of independent agents with personal lines residential homeowner’s insurance has increased. That’s been a good thing.

The bad news is there’s turmoil in that market and that turmoil has infected these agencies, of having to constantly rewrite policies, deal with very, very confused consumers about why they continue to be shuffled around, and concern over whether or not those carriers are sustainable in the event of a large, catastrophic loss.

Is there a spillover effect for agents into other personal lines?

Grady: Yeah. With the home often comes the auto, so I think some agents have done well with respect to trying to procure auto insurance that they may not have otherwise been able to wrestle away from an agent that was a direct writer.

Other than property, what do agents tell you are their concerns in Florida?

Grady: The workers’ comp market has been pretty healthy here, recently. It’s gotten that way as a result of the reforms that took place, I think, in ’03 or ’04. A lot of the trial lawyer expense, frankly, was taken out of that line, and as a result, rates have dropped like a rock. They’ve come down over 60 percent. You add the economy to that, and the payroll reductions, and the exposure reduction, and you’ve got a line there that has really, really dropped off the floor. Add on top of that some aggressive dividend plans of carriers, and it reminds you of lions eating their young.

And so, it does worry me. I get questioned by agents a lot. “What’s going to happen? Are we selling ourselves up for the next workers’ comp crisis?” and the answer is probably, “Yes.” Every 10 years or so it seems to relive itself. But there are some questions about how long can this go on because the crisis for worker’s comp insurance… And it’s good for the business owner, and it really helps them at a time when the economy is impacting them negatively. But is that sustainable? That’s a question that a lot of agents have.