Truce Reached With State Farm Florida; Citizens Property Insurance Corp. Could Grow Due to Deal

Copyright 2010 The National Underwriter Company All Rights Reserved Florida Underwriter's Magazine

January 2010

FEATURE STORY; INSURER STAYING PUT -- MOSTLY; Pg. 24 Vol. 27 No. 1

1094 words

Truce Reached With State Farm Florida; Citizens Property Insurance Corp. Could Grow Due to Deal

By Gary Fineout, Contributing Editor

Abitter, 17-month dispute between state regulators and Florida's largest private property insurance carrier was resolved following an eleventh-hour deal between State Farm Florida and Insurance Commissioner Kevin McCarty.

The agreement, announced in December, gives State Farm a rate hike and permission to shed up to 125,000 policies, many of which have a higher risk of hurricane damage. In return, the state avoids the prospect of losing a major carrier at a time when Florida's property insurance market remains volatile.

"This is an important step," said Jim Thompson, president of State Farm Florida. "It helps stem State Farm Florida's deteriorating financial condition. It reduces the company's risk exposure. It moves us closer to rate adequacy. And for most of our customers, it means that State Farm Florida continues to be there for them."

The decision, however, will likely do little to derail ongoing efforts to make additional changes to the Florida property market. Some legislators are moving ahead with a proposal for the 2010 session to limit rate review by the state. Lawmakers pushing the bill contend the change could convince more companies to do business in Florida.

"The negotiations remind us of the perilous nature that is the property insurance market in Florida," said Gary Landry of the Florida Insurance Council. "We welcome continued serious talks with state officials in crafting public policy that will further entice new capital into our market and enable those companies that have invested in our state to likewise remain here."

The decision to grant State Farm an across-the-board 14.8 percent rate hike comes at the end of a year that saw state regulators grant more than 40 rate hikes requested by property insurance carriers. State Farm's rate hike also comes four months after the state gave the carrier permission to drop various policy discounts, except wind mitigation discounts, that could increase premiums as much as 28.4 percent.

But McCarty, who has expressed concern about the financial state of some carriers, said the final rate hike was not a "compromise," nor did it represent a change in state policy. He called the hike justified because regulators were able to "glean substantial enough evidence" to support it.

"I can say absolutely, categorically, and without hesitation, there has not been a policy change," said McCarty. No More "Good Riddance"

State Farm first announced a year ago that it was shutting down its property insurance business after regulators denied a 47 percent rate hike sought by the company. At the time, Gov. Charlie Crist said, "good riddance," even though the carrier's departure would have meant trying to find a place for more than 800,000 existing policies. Many feared an avalanche of policies into Citizens Property Insurance Corp., the state-created insurer of last resort.

The carrier's departure was blocked after state regulators insisted on imposing conditions on the withdrawal plan. McCarty initially wanted State Farm to free up its agents to place the policies with other carriers instead of placing all of the policies in Citizens. Under the final agreement, State Farm agents will be allowed to place the 125,000 policies with companies that have servicing agreements with the agents. Unclaimed policies will be placed with the Florida Market Assistance Plan, an online referral service, but they eventually could end up in Citizens.

All carriers must give homeowners' customers six months notice before they can drop them. That means the first batch of State Farm's policies will not be dropped until later this year. Company officials said they intend to send out their first non-renewal notices in February.

McCarty said the final agreement results in a much better situation for the Florida property insurance market. "A smaller, leaner State Farm is better than no State Farm at all," said McCarty. More Growth for Citizens?

The downside of the deal is that it could result in Citizens, which already insures many of the state's oldest and riskiest homes, winding up with the bulk of the dropped policies, further fueling its growth.

A year ago, state regulators flatly insisted that they would not agree to any proposal that would increase the number of policyholders with Citizens, which already covers more than one million policyholders. While Citizens is on a firmer financial footing than it has been in the past, the company is still overexposed in the event of a large hurricane.

John Kuczwanski, a spokesman for Citizens, said the final agreement with State Farm represented a "better scenario for Citizens in the long run" than the plan outlined by the company in early 2009.

Prior to the State Farm deal, Citizens officials announced that they anticipated that its policyholder count in 2010 would remain relatively flat. Citizens' Chief Financial Officer Sharon Binnun projected that Citizens would probably gain 110,000 new policyholders this year, but that an equal amount would likely be transferred over to private take-out companies. Binnun stressed that those numbers were based on the assumption that a major hurricane would not hit the state this year.

State regulators say that they are confident that most of the State Farm policies will be assumed by private companies. "It is very unlikely that Citizens will absorb all of these policies," said McCarty, adding that he was hopeful that the policies would be taken by a company "ready, willing, and able to provide coverage."

Jeff Grady, president of the Florida Association of Insurance Agents, sharply disagreed. He said that some of the companies that State Farm previously had servicing contracts with have had questions raised about their own viability. Plus, he predicted that many of the policies would represent some of the "bad risk" now with State Farm.

Grady said a few "cherries" might get picked up by companies, but most of them would eventually get covered by Citizens.

"The idea that these policies are not going to Citizens is laughable," said Grady.

Chris Neal, a spokesman for State Farm, said that it would be incorrect to assume that companies under previous servicing agreements would be those utilized for the 125,000 policies. He said that "right now, there is no list," and State Farm may reach out to other carriers in the Florida market that had previously expressed an interest in taking some of the customers.

Neal stressed, however, that in the end, policy movements would be up to each agent, and that agents were unlikely to have agreements with more than three-to-five companies.

January 12, 2010

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