The “State Farm” Bill: Perplexed? Me too.

by Kemp Brinson

Gov. Crist vetoed the so-called “State Farm” bill, HB 1171, which would have provided the state’s more fiscally sound insurance companies with the leeway to issue homeowner’s insurance policies largely free from rate regulation. I have spent a considerable amount of time reading as much as I can find about this bill and confess that I am more perplexed than when I began. If you are sure of your position on this bill after having only read the news articles, I hope I can convince you to think about it a little more deeply. Here’s some things I learned that were not prominently featured in any media accounts that I was able to find.

The Number of Affected Companies

Gov. Crist and other critics of the bill justified the veto on the grounds that it was designed to help out only a “select group” of Florida insurers (see Crist’s veto letter), namely State Farm, which has said it is pulling out of the Florida homeowners’ insurance market. But how big is that select group? According to the Office of Insurance Regulation and the legislature’s staff analysis of the bill, there are 323 insurers in Florida that would be eligible to issue unregulated policies under the bill. 323!

Not being an insurance industry expert or an economist, perhaps I am missing something.  But it would seem to me that based on this fact alone this bill would have a far more profound impact on Florida’s insurance industry than merely allowing a “select group” of insurers to offer another choice to Florida homeowners. That “select group” is huge!. Not only that, but it stands to reason that these companies are probably in the upper tier in terms of market share because qualifying for deregulation would require higher reserves. How many companies can we realistically expect to stay in the regulated market if 323 of our top insurance companies are eligible to participate in an unregulated market?

The Effect on Citizens and Regulated Policies

Citizen’s is the state’s so-called “insurer of last resort” which, as of February, had a 27% market share and is the largest insurer in the state. The general consensus is that it is under-capitalized. Unlike regulated policies, the proposed deregulated policies would not be required to pay assessments into Citizens to help shore it up. The staff analysis of the bill acknowledges that “[t]he bill will reduce the assessment base of Citizens through the removal of some residential property insurance policies. If the Citizens assessment base is reduced, then insurance policies that remain in the assessment base will be subject to higher assessment costs than currently.”

Let me translate: because the new policies don’t have to pay into Citizens, and the old policies do, as people jump ship from the old policies to the new policies, the Citizen’s assessments on the old policies will go up!

That means that the total cost of insurance to consumers who choose to stay with the old, regulated policies will go up, too. How much depends on how many people purchase the new policies.

Again, I don’t know quite what to make of this. It seems that the effect would be significant given the number of customers of State Farm, alone. Factor in the other 322 companies that could start offering deregulated policies, and I suppose it may have a profound effect on Citizens and the regulated policies that aren’t supposed to be changing. Will the cost of those policies rise? Will the under-capitalization of Citizen’s get worse?

The Failure to Find An Easy Solution

State Farm pulled out of the Florida market in part because they did not receive approval for a proposed rate increase. Other insurers have been disgusted with the inability to get rate increases approved by the Office of Insurance Regulation. This bill is commonly perceived as a fix to enable Florida residents who are willing to pay a little more to use these larger, stronger companies.

But this bill creates a whole new class of insurance.  Again, I’m neither an economist, a politician, nor an insurance expert, but why couldn’t the legislature simply have changed the statute governing the Office of Insurance Regulation to require them to authorize higher regulated rates for companies that could demonstrate higher levels of solvency? Wouldn’t that have accomplished the same goal without the side effects?

Conclusion

My best guess about this is that, if the governor’s veto is overridden, this bill will do more than simply bring State Farm back to Florida.  I grieve mightily for State Farm and the good people of Polk County whose economy will be severely effected if State Farm completes its pull-out. I myself have a State Farm policy on my home and would love to keep it, even if it costs more, because I trust them not to go belly-up. We need a solution!

But the hype doesn’t seem to line up quite right with what the bill actually accomplishes, and I fear that someone’s political gamesmanship is lurking in the gap. What is troublesome to me is that no one in the know has bothered to answer the questions I describe above in an empirically sound way. All we get is superficial rhetoric about “consumer choice” and the evils of deregulation.

If the veto is overridden, clearly it’s a short-term win for me and my community, where State Farm is one of the largest employers. But long term… what’s the catch?  It might be a crippling government bail-out of Citizens when The Big One hits. It might be rates in excess of what we are envisioning. It might be an increase in premiums or unavailability of cheaper regulated policies. I just don’t think this bill has been adequately explained or analyzed.

If any readers have informed insight into this, please comment.

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