Government run insurance – bad at the state level too.

Everyone remembers how Florida got hammered by 4 hurricanes in 2004. People forget that there were actually 8 named storms in the 2004 to 2005 hurricane seasons that hit Florida. Several regions of the state were hit in multiple storms causing overlapping damage to property. Insured policyholders were outraged that they had to pay their deductibles on their policies for each storm. Then Governor Jeb Bush went down a slippery slope by leaning on insurers to waive multiple deductibles for residents hit on the same property. That liberalised insurance contracts in a manner companies cannot predict for loss. If they cannot predict for loss, they cannot stay in business.

Now I realize most people reading this like insurance about as much as using sandpaper for toilet paper, but insurance serves a purpose and function by allowing people to transfer risk. If a million dollar home costs $12000 to insure and the premium screams of looting and pillaging, it is still cheaper that having to cough up a couple of hundred thousand dollars or the whole million if a loss occurs. Having spent 17 years in the industry, I recognize all the faults and know we need to have more options for people on contracts. However, when the courts or political pressures force a contract change that was never thought out by the dweebs in actuary – you have a problem.

What happened next was all the major carriers postured for major rate increases to cover the losses for the state. In 2004, over 30 billion was paid out from hurricane related losses. Critics of the insurance industry say that a company should base rates on its overall profit, not just a region, state, etc. Reality is that insurance does not work that way. You base rates on your expenses, investment income, and claims from the rating base.

In 2006 Jeb Bush pushed for sweeping insurance reform that essentially set up Florida to become a self insured state. While initiatives were placed to make homes stronger and created grants for Florida based insurance companies to step in the fray, nothing was done to relieve the national carriers in the state or attract other large property carriers. Local carriers would never have the financial strength to tackle Florida’s catastrophe exposure. National carriers began to push hard for rate increases and were being dealt rejection after rejection from the Florida Department of Financial Services and new Governor Charlie Crist. In 2008 and 2009 the large national insurance companies left Florida – the largest blow being dealt by St Farm in January 2009. Since 2009, even smaller regional carriers have decided to leave the state. Floridians have very few choices from the free market and none in coastal zones.

Citizens Insurance is the state of Florida’s own program and was designed as the insurer of last resort or coastal coverage. Today, it insures over 80% of the Florida property insurance market. It is estimated that 80% of the states exposed property coverage is projected to be a whopping 2 trillion dollars. You think that can wipe out the piggy bank? All Citizens policies have a provision that in the event of total liquidation of the company from a severe catastrophe, any and all insureds can and will be assessed a surcharge to cover the loss. Ouch.  Since all of this occurred, Florida premiums through Citizens have went up and up. People are screaming for free market solutions. Does this sound strangely familiar?

In May of this year, the Florida Senate Finance & Banking Committee passed SB2044 for Gov. Crist to sign. This bill was designed to have carriers have higher reserve limits to operate in the state (this means rate increases), would have allowed for replacement cost adjustments, and the ability for carriers to increase base rates for profitability reasons. This was all needed in 2006. This was a good bill and would have brought in competition to Florida residents. This may not have been a perfect solutions to skyrocket rates down, but it would have been a start. One problem – Governor Charlie Crist vetoed the bill. You can Google the topic and read more. I thought Crist was an idiot when he let carriers leave, but this is even more insane.

Does this tie into to BO Care? You bet it does. The new law requires health carriers to have at least an 80% loss ratio.  That means for every dollar taken in premium, eighty cents must be paid out. This is before factoring in operating expenses. Another condition is that the Health czar can review and reject loss data a carrier uses. If a company has a large loss they anticipate from a lawsuit or catastrophe, it is common to set aside reserve money. That factors into a loss ratio as it is a projected loss. It will take about one time for a loss component to be rejected for health insurance carriers to say ” See Ya”. Bottom line – if a carrier cannot make a profit they will not write the coverage. This is essential to profit and a part of capitalism. BO Care is designed to micro manage a carrier until they get out of the business. Once the free markets are out-of-the-way, the feds can raise premiums and you have no choice but to pay.

The funny thing is that government-run insurance is a failure regardless of the political party. Bush and Crist are Republicans. At least Crist claimed that at one time. Obama is a Commu.., I mean Democrat.

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