AP Analysis: Florida Insurance Bind Overshadows Louisiana
Louisiana homeowners stunned by their rising insurance rates should remember that it could be worse. They could live in Florida.
State Farm announced recently that it will stop doing business in Florida, the first big firm to follow through on industry complaints about the state government regulators who impose price controls and maintain a prohibition on “excess profits.” The company announced its departure after regulators rejected its proposed 47 percent average policy rate increase.
The situation is reversed in Louisiana, another hurricane-prone state where insurers see more – not less – opportunity to do business and make a profit.
“The way that Louisiana has handled it, it’s night and day different than Florida,” said Bill Ferguson, professor of insurance at the University of Louisiana-Lafayette. “I’m sure that’s one of the reasons that companies are happy to be in Louisiana, as opposed to Florida: at least they have a chance of getting a profitable return.”
Insurers’ profits stem from two areas: underwriting property; and investing the money they get from policyholders. The financial meltdown has eliminated their investment income. Now, as State Farm sees it, intrusive Florida politicians and bureaucrats have made it nearly impossible to make money from underwriting, their other income source.
“When markets are doing well, there’s more opportunity to get investment returns. When markets are bad, there is no cushion at all,” Ferguson said. “If they can’t make money underwriting, then where is the income?”
State Farm Florida president Jim Thompson said the firm loses $20 million a month on its property business, paying out $1.21 for every dollar coming in.
“When you look at our financial situation, we have no alternative,” Thompson said. “We’re going to be out of this business. We will not have the resources to pay claims.”
Louisiana insurers have also seen their investment income evaporate since the financial crisis started last year. But in Louisiana, compared to Florida, they see an underwriting atmosphere that has fewer government obstacles.
Insurers’ big complaint about Florida: the state-backed Citizens Property Insurance Corp., created as a “last resort” insurer to serve those who couldn’t otherwise insure their homes.
Florida Citizens has morphed into a competitive force, offering cheaper policies than the privates. From the perspective of private firms: imagine trying to run a car dealership when the dealer down the street has state government backing and undercuts your prices.
Florida Citizens is swelling – the largest insurance company in the state, on course to insure 50 percent of the state’s homeowners. It will presumably absorb a good chunk of the roughly 1.2 million State Farm policyholders who – if the company makes good on its threat to flee – will be looking for a new insurance company.
Louisiana Citizens, meanwhile, has been shrinking as more private firms do business here. By law, the firm cannot offer competitive prices except in some coastal parishes. From a peak of about 170,000 policies in 2007, it’s down to 130,000, slightly more than the company had before Hurricane Katrina, CEO John Wortman said.
“I don’t think it’ll probably ever get under 100,000, but we’re hoping to get down to about that, which is quite in contrast to what’s happening in Florida,” Wortman said.
Louisiana has healthy competition among private firms, though not in coastal parishes. Homeowners’ rates might be going up, but at least private firms are still writing policies, and not bolting the state altogether.
By reducing Citizens’ size and its level of risk, Louisiana could avoid the financial doomsday that’s predicted for Florida taxpayers.
In this scenario, Florida gets hit by one too many hurricanes and Florida Citizens gets swamped with claims it cannot pay. The cost of the destruction – a price tag in the multiple billions – would then boomerang. It would ultimately take the form of a huge tax bill – an “assessment” – for every homeowner in the state.
“It’s going to be the taxpayer who gets tagged,” Ferguson said.
Doug Simpson covers the Capitol for the Associated Press.