It is hard to imagine any Florida property insurers not making a killing in 2009. With no hurricanes or significant tropical storms, the most financially devastating peril was eliminated. Yet, over 100 Florida residential property insurers reported losses.
My impression is that a major reason for the loss is wind mitigation credits. I noticed the severe impact such credits had on net premiums when serving on the Citizens Property Insurance Mission Review Task Force. I could never figure out any actuarial or scientific basis for such credits in return for mitigation expenses. While there should be some break in premiums for a building "hardened" against wind loss, it seemed like the premium breaks were very high.
I may give the insurance industry criticism for a number of activities, but my impression is that it may have a point on this topic. Florida needs profitable insurers. If they are not making underwriting profits now, something is amiss or the books are being distorted, as in the case of State Farm charging itself for re-insurance expense.
The October 19 issue of BestWeek had a couple of articles on this point. It noted:
Mitigation credits in Florida have been widely criticized by the industry. Insurers say the credits are not calculated correctly, and there have also been allegations of fraud involving building inspectors who dole out the credits. In the end, insurers say they are unable to get the premium they need. The credits can ‘take as much as 90% of the wind premium away…..
The bottom line to policyholders is that everybody is predicting that rates are going up. Assuming the books are being accurately reported, there is simply no way so many carriers can be reporting underwriting losses unless the actuarial expectancy is wrong or the net rate after mitigation credits is not actuarially sound. My impression is the mitigation credits, with little scientific basis to support such premium reductions, have caused many carriers to report more severe losses than expected. I do not think the Florida insurance industry is making an inappropriate objection. This needs to get corrected.
From a social standpoint, tax reductions to rich and poor who spend money solely on targeted building improvements to mitigate from wind damage in coastal areas is something we should encourage. Everybody benefits when a loss is prevented or mitigated.
