Homeowners insurance in the state of Florida

¶ … insurance industry as it has been impacted by the Florida homeowners' insurance crisis over the past two decades. The writer explores the crisis itself, the impact it has on the overall insurance industry and the insurance commission. In addition the writer explores the principles of business management, business law and economics as they pertain to this topic. There were seven sources used to complete this paper.

The Florida Homeowners Insurance Crisis Doesn't Just Impact the Homeowners

An examination of how it impacts the insurance industry and its clients

While Florida has always had to contend with the occasional natural disaster, the past decade has been an almost constant stream of them. Hurricanes, tornadoes and floods have battered the Sunshine State over and over again leaving behind a path of death and destruction.

When the disaster hits the media rushes to pipe video streams into living rooms across the nation depicting the horror of it all, but inevitably once the news crews have left and the sensationalism has ended, those who live there are left to deal with the reality of what has happened. For homeowners it can mean the loss of a home, or the destruction of property that needed extensive repair. To the naked eye the solution appears to be a simple filing with an insurance company, however, to those in the industry as well as those who have actually lived through the disasters it is often anything but simple.

For the most part, homeowner's insurance is in place to pay for the repairs and reconstruction needs in such events, however since the early 1980's insurance companies covering homes in Florida have been hit again and again without a chance to recoup the claim losses they have had to pay out.

Recently the situation has reached crisis and epidemic proportions with homeowners scrambling to find insurance to cover their homes, and insurance companies shying away from providing it.

The homeowners' insurance crisis in Florida serves as a warning to the rest of the nation about what can happen if the unexpected begins to happen. Financial issues, business and legal issues and human issues become part and parcel of the package when it comes to such crisis.

The crisis has created tension between the insurance companies and the homeowners, as well as politicians, financial institutions and other entities that have had to work to try and piece the hard hit areas back together while managing to remain in business. Insurance companies have had to pay out significant amounts of money during some years, only to be hit again the following year or the year after that. News shows broadcast the crisis from the homeowner standpoint without exploring the financial and business disasters that the natural disasters of Florida have created for the insurance companies along the way. When natural disasters strike, the insurance companies are immediately thrown into overdrive as they try to handle the influx of claims that threaten to break the bank, while their insurance clients become increasingly frustrated at the response times to their needs.

When all is said and done, it is clear that the Florida homeowner's insurance crisis is serious, and needs immediate solutions if the insurance industry is going to continue to underwrite homeowner's policies in that state.

The Crisis

For one to understand how the insurance crisis impacts both clients and insurance underwriting companies, one should have an understanding of the crisis itself (McKinnon, 1995).

There have been many debates throughout the years about what caused the homeowner's insurance crisis in the state of Florida but there are several basic contributors that most experts agree played a part in its development.

For one to find the cause of the crisis one needs to return to the middle 1980's at that time many insurance companies that did underwriting in the state of Florida found themselves in the middle of a price war when it came to premiums being charged to their customers (McKinnon, 1995).

It was during those years that many private insurers wished to complete for market shares in Florida and decided the most effective way to do so would be to undercut the premiums charged to the clients of other companies. The companies being challenged answered the challenge by dropping their premiums as well (McKinnon, 1995).

In the past, in other states when such price wars would begin the state insurance officials would step in and regulate the companies so that there would be no chance of financial disaster and the inability to pay out claims in the event a large scale claim area occurred. In Florida during the 1980's however, state officials chose not to step in and regulate the premiums (McKinnon, 1995).

The way insurance operates, is that premiums are collected and if a claim is filed the claim is paid out from those collected funds. It is a given that insurance companies are supposed to be sure to collect enough in premiums to handle all claims and in addition make a profit, however, in the case of Florida two things came together at once to start the ball bouncing toward the current crisis.

The price wars were causing insurance carriers to drop their prices to rock bottom, with the hope that they could out wait their competitors before a natural disaster occurred that could potentially wipe them out (McKinnon, 1995).

It was a gamble that had been taken in the past without disastrous results, however, this time the gamble went bust (McKinnon, 1995).

While the price wars were occurring and insurance companies that underwrote homeowners in the state of Florida continued to maintain bare bones premiums in the effort to attract their share of the insurance market, hurricane Andrew hit (McKinnon, 1995).

In addition to the practice of cutting premiums to the bone, there was some evidence that they had been concentrating their efforts in the high risk areas, so when the hurricane hit it wiped out many of the areas that the Florida insurance companies had been covering (McKinnon, 1995).

All this meant that premiums were inadequate to cover losses from a major hurricane. This dangerous crap shoot came up snake eyes when Hurricane Andrew blew through southern Florida leaving behind $16.5 billion in insurance claims (McKinnon, 1995)."

When Andrew first swept through the lower part of the state insurance companies were stunned and shocked but immediately began to regroup as they counted their losses. Many of those companies made the decision to raise their property rate premiums, however, they were stopped from taking that action by the local, and state politicians.

In addition to refusing to allow the price hikes that were needed to counteract the significant amounts of money that would be paid out for claims from the hurricane, officials also decided to place a moratorium on cancellations of policies on the part of the insurance companies (McKinnon, 1995).

Essentially the politicians and other insurance regulators made decisions that they believed were protecting the property owners, but were at the same time creating serious problems for the insurance companies that had to pay out the claims for hurricane victims while at the same time not being allowed to recoup any of those funds through increased premiums (McKinnon, 1995).

In addition, politicians created their own makeshift insurance company - one that wouldn't trouble them with threats of cancellations or politically unpopular premium hikes. Thus were born the state's Residential Joint Underwriting Association and a similar pool for condos (McKinnon, 1995)."

In the beginning the JUA's were sold to insurance carriers and others as a very temporary solution to the problems that were created in Andrew's wake, however, once it was in place the politicians made the decision to maintain them indefinitely (McKinnon, 1995).

To make matters worse for private insurers, the Residential JUA has the power to hold private insurers liable for a big chunk of any major hurricane losses the JUA itself can't cover. Thus, the more insurance the companies write, the more unfunded JUA risk they take on (McKinnon, 1995). "

This served to create a mass exodus of insurance companies throughout the state of Florida.

At the time this was occurring there were many efforts by industry leaders to try and turn the problem around. "At one raucous all-day insurance summit in Fort Lauderdale in January, industry officials warned Nelson over and over that the JUA will never be depopulated unless private carriers can take business away at higher rates. In addition, some industry types want the JUAs' board reconfigured to include more industry representatives who could give momentum to the push for higher rates. Many want to go still further, forcing the JUA by law to hike its prices higher than those private insurers are offering (McKinnon, 1995)."

The effort was unsuccessful and insurance companies continued to lose money while at the same time being held legally liable for damages caused by the hurricane and the hurricanes that followed Andrew's lead over the next few years.

As the problems began to mount and the insurance companies were legally stopped from canceling policies or raising premiums in the amount they needed to raise them to recoup their losses, other issues began to move to the forefront (Burr, 2006).

While the insurance companies worked to satisfy claims there were so many of them that there were backlogs for months at a time. Clients were left to figure out how to survive without having insurance money in their hands and tempers began to flare on all sides of the crisis (Burr, 2006).

As additional natural disasters continued to loom over the sunshine state and wreak havoc, insurance companies won the right to begin raising their premiums to try and recover from the massive and unprecedented losses that they had suffered over the past decade (Fogg, 2006).

The legal decision to allow an increase in premiums pleased the insurance companies however it angered the policy holders in significant numbers.

The Sunshine State is suffering from a symbolic cloud cover of epic proportions. The ominous overcast outlook is a result of two major factors in the Florida insurance atmosphere -- public outrage that continues to build over rate hikes and dropped policies, and the threat to Florida's economy this insurance crisis poses. The state needs both short-term relief and a long-term solution, but a magic formula is yet to be found (Fogg, 2006)."

While many suggestions have been tossed around to try and resolve the problem of insurance crisis in Florida, including a one cent raise in state sales tax with the proceeds going to bail out the insurance companies, most of the idea suggested have been met with anger or refusal from Florida homeowners whose lives have been turned upside down by the recent hurricanes and are struggling to survive while at the same time making the effort to maintain their homeowner's insurance policies.

Bruce Douglas, chairman at Citizens Property Insurance Corp., the state-run insurer of last resort, raised the sales tax idea at an October "Insurance Crisis" forum in St. Petersburg, Fla., according to local news reports. At the same meeting, Florida Insurance Commissioner Kevin McCarty stressed the importance of making homes better able to withstand catastrophic storms (Fogg, 2006).

Another option would be difficult to pass by Florida's insurance lobby: to allow Citizens to write all windstorm policies in the state, as well as all perils in high-risk areas. This could unburden the private insurers of the worst risk, while providing Citizens with capital to turn to during future catastrophes (Fogg, 2006)."

Experts and laymen alike agree that there is a current insurance crisis in Florida with regard to homeowner's policies, however, the solution is not easy nor being agreed on by all a parties.

Solutions

The insurance crisis in Florida began in the early 1990's and has not been solved because of the constant hurricanes and claims that have occurred there (Razzi, 1996).

Insurance companies have moved to raise premiums, been refused, then years later been allowed to do so after losing hundreds of millions of dollars along the way.

Clients in Florida who have been victims of hurricanes and other problems have raised serious concerns about the response times by insurance agents and companies and are angered by the rapidly rising premiums of late in the effort by the insurance company to recoup losses (Razzi, 1996).

One example of premium increases was seen shortly after 1995 when companies not only raised the prices, but tripled them.

When all was said and done, the insurance companies realized they had taken on too much risk at to low of a cost and when disaster struck they almost lost their business in some cases (Razzi, 1996). Insurance companies are bound by a strict set of codes and rules and are expected to step up and pay out every single claim that is legitimate. The very purpose of insurance is to be there when needed (Razzi, 1996). Because of the trust and importance placed on the insurance companies it is important that the current and ongoing crisis in Florida be addressed as soon as possible.

There are several steps that can be taken to correct the current crisis in Florida with regards to homeowner's insurance.

One of the most obvious methods of curing the crisis is to raise the premiums that are being charged for insurance in the state of Florida. While this sounds like an easy step it is actually quite complicated. It has to be approved not only by the state insurance commission office, but also by political financial watchdogs that have the power to allow or not allow such a move (Razzi, 1996).

The rate hikes are designed to recoup the losses experienced during natural disasters however, must remain low enough for clients to be able to afford to obtain insurance.

While rate hikes are an obvious solution to the problem it will not be the only solution that is needed. Because of the constant issues that insurance companies have had with regard to natural disasters in Florida for the past decade there will be several steps needed to turn the crisis around for good (Razzi, 1996).

One of the things that must be done is to push for federal and state level reforms that will provide relief when natural disaster strikes before the crisis is fully handled.

The insurance companies need to be relieved of their insurance risk for the next few years so that they can continue to pay out for the claims that are currently pending, while recouping some of those losses with increased premiums.

Insurers are driving hard to get states and the federal government to relieve them of disaster risk. Industry representatives say that if a hurricane as strong as Andrew were to hit a densely populated area, such as Miami, claims could exceed $50 billion - and wreck the industry (Razzi, 1996)."

One of the solutions that has been suggested to help alleviate the problem of Florida insurance crisis has been the idea of a natural disaster insurance plan at the federal level. If the plan is passed it will mean when a natural disaster occurs, and catastrophic losses are the result the federal insurance would kick into gear and alleviate the independent insurance companies from their liability.