In Florida, property insurance now a rigged game

What did we hear in 2006, after two bad hurricane seasons?

Property insurance will cost more. A lot more.

The insurers said that even though the implicit agreement in the big sweetener package the Legislature approved after Hurricane Andrew in 1992 - to keep property insurers in Florida - was that rates wouldn't drop a lot after calm years but wouldn't rise a lot after stormy years. So now, after five calm seasons, what are we hearing?

Property insurance will cost more. A lot more.

Some who read last Sunday's story in The Post ("Distant disasters cost Fla.") might have been confused. The story explained that even though Florida has been spared, other parts of the country and other parts of the world have been hit hard. Floridians pay for those tragedies.

Wait a minute. Don't the big property insurers have "pups?" Florida-only companies that supposedly aren't tied to the finances of the big dogs? Haven't we heard that these companies set rates based on what happens in Florida? Aren't all the other companies Florida-based? Companies that don't worry about earthquakes in Japan?

Yes. Yes. Yes. Yes. And yes.

Doesn't matter.

Rates must go up.

Why? Supposedly, because of reinsurance. Just as bookies lay off bets with their own bets, and hedge funds cover long positions with short positions, insurance companies buy insurance for their insurance - reinsurance. If they have to pay lots of claims in a really bad year, they need the reinsurance to cover the difference between the damage and what premiums cover.

Here's the catch for consumers: Reinsurance is a global business. Insurance companies might have to ask state regulators for a rate increase, but reinsurance companies can price their product based on the past 12 months of disasters. Their product is unregulated.

If you think that for consumers, it works out to heads we win, tails you lose, you're right.

It feels very 2007. Property insurance rates were set to rise dramatically, and Floridians wondered why, since the previous summer had been calm. Blame reinsurance, the insurance companies said. It's 40 percent of the increase.

So the Legislature did yet another favor for the insurance industry. Florida's Hurricane Catastrophe Fund, created after Andrew, is really a reinsurance fund. Everybody with a policy pays into it, and companies can tap the fund to pay claims. Because it's run by the state, the reinsurance costs less than on the unregulated market.

In 2007, the fund was $16 billion. The Legislature raised it to $28 billion, but added this one teeny condition: Companies had to pass on any savings from the publicly subsidized reinsurance to customers. First, the companies sulked. Then they pushed back. Some of the big ones began buying their own reinsurance, churning business within the company to get around the rule. The companies also got creative. They created units within themselves, called managing general agents, that are unregulated and can be used to do business with each other and hide company profits.

Last year, in a series that won the Pulitzer Prize, Sarasota Herald-Tribune reporter Paige St. John found that in 2008 property insurers moved almost $2 billion off the books of regulated entities into unregulated entities. The regulated entities then could plead poverty and ask for rate increases. Ms. St. John also found that the Florida companies' overhead was much higher than the industry average.

If you listen to Sen. Marco Rubio, R-Fla., he's the free market champion. In 2007, though, he was the new speaker of the Florida House and voted for what some legislators now call a mistaken experiment in socialism. Sen. Alan Hays, R-Umatilla, who was in the House four years, also voted for the plan, but told me last year that he was "hoodwinked" in 2007. These days, he's all for letting companies charge what they want and having the market sort it out.

But who would have "hoodwinked" the Legislature into passing a bill aimed at helping consumers? Any hoodwinking has been done since 2007 by the property insurance industry, which will find ways to raise rates whether storms come or not. Last year, the new excuse was that discounts, designed to encourage storm protection, have become too expensive. This year, it's fraudulent sinkhole claims and, again reinsurance. Companies got permission for a reinsurance rate increase on top of the standard increase.

The Legislature touts insurance deregulation as a business draw, but insurance costs discourage businesses from coming. We need changed attitudes on insurance. A lot more.

Randy Schultz is the editor of editorial page of The Palm Beach Post. His e-mail address is schultz@pbpost.com