Thursday, May 26, 2005

Depopulation - The New Insurance Storm

In their infinite wisdom greed, the incumbent politicians who make up the majority of the Florida legislature this year refused to amend the state law governing "depopulation" of wind policies from Citizens Property Insurance. The result of that inaction is about to fall on the heads of hundreds of Pensacola Beach residents.

Under the current statute, whenever a private insurance company offers to "take out," or take over, the insurance policies held by Citizens, the state-owned insurance company is required to assign those policies to the private company. This is known as "depopulating" the Citizens Property Insurance Co. customer base.

In fact, the law requires Citizens to pay a bonus to any private company for every policy it takes over. Homeowners have no choice in the matter. The bonus is so generous that it, alone, creates a powerful incentive to "privatize" wind insurance coverage with just about any Johnny-come-lately to the world of Florida wind insurance. There are millions to be made just in collecting the "take out" bonuses.

From the homeowner's pespective, what happens is Citizens cancels your policy and your 'new' insurance company takes over the coverage. That process is now beginning, as Pensacola Beach residents will be finding out when they check their mail.

Here's the rub: the ability of your 'new' company to pay the claim in the event your property suffers a windstorm casualty depends entirely on the actual financial strength of the 'new' company. That, in turn, depends on how well the Florida Insurance Commissioner regulates each new company to be sure it has adequate reserves, appropriate reinsurance, and sound investment policies.

If the Insurance Commissioner is overwhelmed by new companies with unproven track records, or for a myriad of other reasons doesn't catch on -- or care -- that a company's coffers are inadequate, you won't know until it is too late. The company will simply declare bankruptcy. When is this likely to happen? Right after the next hurricane. As the saying goes, "bankruptcy is just another business plan for corporations." You, the insured, will be left in the lurch.

(It's worth noting that, thanks to Congress' "Consumer Bankruptcy Reform Act," which President Bush just signed, taking bankruptcy for an insured customer will be much more problematic, more expensive, more time consuming, and offer much less protection starting in October. Short of throwing the majority of incumbents in Congress out of office, there's not much to be done about this. Except maybe pray that next time you'll be born into this world as a corporation instead of a person.)

A month ago, Citizens announced "three new companies who have applied to write homeowners policies in the state." An optimistic gloss was slapped on this news by the same guy who will be responsible for fingering any of the companies who are poorly capitalized:
Several established companies are joining these new companies in a proposed take out of 370,323 policies from Citizens Property Insurance Corporation (Citizens). Florida policymakers enacted legislation to encourage and provide a means for companies to remove policies from Florida's insurer of last resort.

Florida Insurance Regulation Commissioner Kevin McCarty welcomed the new companies to the Florida residential insurance market. "Despite the unprecedented string of catastrophic hurricanes it is reassuring to see a continued interest from new investors," McCarty said.
'New' investors? Reassuring?

Unlikely. What this really is, one legitmately may fear, is evidence that a lot more Florida businessmen have tumbled to the game of pretending to be an insurance company, raking in the bonuses and the first year premiums, raiding the company treasury, and then tip-toeing away from the 'new' insurance company before it fails.

Take a look at all the take-out companies. Almost every one of them is a 'new' company that exists largely on paper, only, supposedly headquartered in Florida. As summarized by the Florida Insurance Comissioner (with the number of new "take out" policies in parentheses) they include --
  • Atlantic Preferred Insurance Company (Tampa) - 64,471

  • Federated National Insurance Company (Lauderdale Lakes) - 20,000

  • First Home Insurance Company (Tallahassee) - 30,000

  • Florida Peninsula Insurance Company (Davie) - 45,000

  • Seaside Property Insurance Company (Winter Park) - 75,000

  • Service Insurance Company (Bradenton) - 1,080

  • Southern Fidelity Insurance (Tallahassee) - 30,000

  • United Property and Casualty Insurance Company (St. Petersburg) - 30,000

  • Universal Property and Casualty Insurance Company (Miami) - 30,000
The Commissioner adds --
Their interest follows the addition of three takeout companies, Security First Insurance Company, Gulfstream Property and Casualty Insurance Company and Southern Oak Insurance Company, scheduled to take out a total of 39,426 policies from Citizens."
You won't hear this from the state insurance commissioner, but according to inside insurance industry sources, "most" of these companies are headed up by insurance executives and former regulators who know exactly how the game is played: grab the bonus now, collect the first-year premiums, pay the board and executives handsome salaries and bonuses for 'good performance,' and hope like hell no one gets hit by a storm. The individuals who 'work for' the company will still get rich even if the company is broken by a storm.

So, as beach people start getting their "take out" notices from Citizens, they may want to contemplate how living on the beach has become twice the gamble it was. First, as every year, you hope against hope you'll dodge the hurricane bullet. Now, second, you have to hope the executives of your 'new' insurance company will be slower than others to run off with your money.

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