Private Insurers Agree: Claims Abuses Driving Up Costs, Rates

March 05--Executives of property insurance companies with large numbers of Florida policies say assignment of benefits abuse is driving up claims costs at their companies, though not as severely as at state-run Citizens Property Insurance Corp.

Insurance rates at many companies are set to rise next year in South Florida and possibly across the state, one executive said this week.

In recent earnings calls this week and in late February, executives with Heritage Property & Casualty Co., United Insurance Holdings and Homeowners Choice discussed the issue that's raising alarms at Citizens.

Rate hikes are being driven by sharp increases in non-weather-related water claims. The trend, which had been occurring primarily in South Florida over the past few years, is now starting to spread across the state.

What Citizens' CEO is calling "a crisis" is also the focus of intense lobbying in the state legislature this session. Insurers and their allies want more control over costs incurred after policyholders sign over policy benefits to repair contractors, while contractors support licensing water damage restoration companies and other fixes that don't restrict assignments.

On Friday, bills in the House and Senate dealing with the issue never made it to the floor, raising concerns that no reforms will be enacted for a fourth straight year. One week remains in the legislative session.

Until the legislature enacts reforms, water claims abuses will continue to drive up rates, Heritage executives told investors on Thursday.

Heritage Chairman and CEO Bruce Lucas said that rate increases will average 4 percent across the state for Heritage policyholders who voluntarily signed with the company. In much of South Florida, those increases will be in the double digits, he said. Rate increases for former Citizens customers obtained by Heritage in "takeouts" haven't been calculated yet, he said.

"So we are pricing the book of business to go along with the increased risk, just like everybody else in the market is doing," Lucas said.

The other companies did not discuss rate increases in their discussions, but Lucas said recent rate filings monitored by Heritage by companies that are among the state's 25 largest insurers suggest they are requesting increases averaging 7 percent.

Citizens warned in a news release Wednesday that its South Florida policyholders will see 10 percent increases every year for the foreseeable future. The rest of the state, which should be enjoying rate decreases because of an absence of hurricanes over the past decade, is also seeing higher losses that could drive up rates, the release said.

Increases in South Florida would be much higher if not for a 10 percent annual cap on Citizens' rates under state law, the release said. Citizens CEO Barry Gilway called the situation "a true crisis."

Claims costs are inflated after water damage restoration companies persuade policyholders to sign over benefits of their insurance policies as a condition of commencing repairs, insurers say. If insurers refuse to pay inflated bills, the restoration companies stand in the policyholders' shoes and sue the insurance companies.

Attorneys have a strong incentive to file suits, whether they represent restoration companies or homeowners.

"Florida's insurance code requires insurance companies to pay plaintiffs' attorneys fees if, in litigation, the plaintiff is awarded even one penny more than was originally offered by the insurance company," explained Paresh Patel, chairman and CEO of Homeowners Choice parent company HCI Group, during that company's earnings call on Thursday. "Plaintiffs' lawyers use this statute as a weapon to extract higher settlements in small cases. In some litigated cases, fees gained by the attorneys dwarf the settlement awarded to the plaintiff by tens of thousands of dollars."

"These costs get folded into rate-making formulas," Patel said.

Yet, while all of the companies said they've been hit with heavier losses stemming from assignment of benefits abuses, the for-profit companies said they've been able to avoid the crisis now faced by Citizens.

That's because as the "insurer of last resort," Citizens is stuck with the riskiest policies, including policyholders who make frequent claims and have poor credit.

Heritage has built a majority of its business atop the state's policy of shrinking Citizens by encouraging "takeouts." In a takeout, companies select Citizens policies and notify policyholders they will be transferred to their company unless they opt out.

But Heritage is careful to select Citizens policyholders with good insurance scores -- a combination of claims history and consumer credit ratings, Lucas said. Citizens customers with poor insurance scores don't receive takeout offers from Heritage.

"No doubt that there is a correlation between better insurance scores and lower loss ratios," Lucas said, later adding, "So we're very careful what we take out of Citizens from the tri-county area."

Patel said Homeowners Choice takes a similar approach and has suffered lower losses than Citizens. "We spend a lot of time underwriting and picking the right policies out of Citizens," he said. In addition, the company recently hired five staff attorneys in the South Florida region to deal with litigated claims.

The company has allowed its policy base in South Florida to shrink from around 46,500 in 2012 to just over 36,000 at the end of 2015.

"By reducing [policy] count, you reduce exposure to litigation." The company plans to remain in "defense mode" until lawmakers come up with a fix, he said.

John Forney, CEO of United Insurance Holdings, said in the company's earnings call Feb. 18 that while water losses are the primary cause of non-catastrophic claims for his company, it has avoided heavy participation in takeouts and doesn't have a high concentration of policies in Miami-Dade and Broward.

Arash Soleimani, who analyzes publicly traded insurance companies for Keefe, Bruette & Woods Inc, a New York-based investment banking firm, said Citizens is naturally going to suffer worse losses from assignment of benefits abuses because they're left with the riskier policies after private companies are allowed to cherry-pick the best.

"Companies like Heritage and HCI took the good policies from Citizens," he said. "What's left in Citizens is riskier policies more likely to use assignments of benefits."

Barring changes in state law, about all policyholders can do to keep rates down is to call their insurance companies first when filing claims, he said. "AOB losses will go down dramatically. If losses go down, prices go down."

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