By CHRISTOPHER OSTER, CARRICK MOLLENKAMP, and CHAD TERHUNE, The Wall
(Sept. 7, 2004 ) - As Floridians begin picking up the pieces from the
second devastating hurricane in less than a month, many are also
discovering the full effects of a decade of maneuvering by insurance
companies and state officials that has dramatically reduced the obligations
of private insurers to pay for the impact of catastrophic storms.
Charley and Frances are two of the biggest hurricanes to hit the U.S.
since Andrew slammed into southeastern Florida in 1992, wreaking $15.5
billion in insured damage and wiping out every cent of profit insurance
companies had ever generated on property policies in the state. The losses
forced 11 insurers out of business and triggered a wholesale revamping of
Florida's insurance market in a desperate attempt to prevent other carriers
from fleeing the state.
Big players such as Allstate Corp. agreed not to abandon a combined 1.2
million policyholders in Florida only after state officials began
cooperating in a legislative and regulatory effort to shift from insurance
companies to consumers the burden for paying hundreds of millions of future
storm-related losses. As a result, hundreds of thousands of Florida
homeowners -- including many who have paid for what they believed was
"full" property insurance -- now find themselves holding the bag
for a much bigger portion of the estimated $10 billion to $15 billion in
insured damage from Frances and Charley than they would have a decade ago.
Florida regulators and legislators allowed private insurance companies
to add hefty new deductibles to homeowners' policies and to raise premium
rates in some cases by as much as fourfold. Thousands of property owners
now hold policies with small local companies, whose financial stability is
severely strained by the back-to-back storms of the past month and concerns
that others may soon follow. Already, another major hurricane, Ivan, is
gathering force in the Atlantic and could threaten Florida by the end of
Big insurance companies say the changes in deductibles and the decision
to set up separate units in Florida were necessary to preserve the
availability of adequate insurance across the state -- for situations just
like the past month's storms. "This is all happening without any
market turmoil," says Robert Hartwig, chief economist for the
Insurance Information Institute, a trade group.
After dumping more than 13 inches of rain along Florida's central east
coast on Sunday and knocking out power to about six million people, Frances
entered the Gulf of Mexico. It then made a second landfall Monday near
Apalachicola, a major oyster-harvesting area in the Florida panhandle. The
storm has been blamed for at least four deaths. Even after being downgraded
to a tropical storm, Frances roared into Alabama and Georgia still packing
fierce winds and sheets of rain.
Gasoline retailers and Florida state officials were scrambling Monday to
replenish fuel supplies at depleted service stations, as about 2.5 million
residents who evacuated from the storm zone began heading back home.
Frances also threw another wild card into the unpredictable political
equation in Florida -- a critical battleground in the November presidential
election. The well-organized relief effort after Hurricane Charley,
directed by Gov. Jeb Bush, appeared to blunt the risk of political fallout
from that storm for President Bush. But tempers were growing strained in
the wake of Frances as relief agencies struggled to get essential supplies,
electricity and emergency services into hard-hit areas, and victims of
Charley took a second round of torrential rains.
When Hurricane Andrew slammed into Florida in 1992, private insurance
companies, primarily Allstate and State Farm Mutual Automobile Insurance
Co., picked up the lion's share of the damage tab. The companies were sent
reeling by the scale of the devastation, and in the aftermath, there was
little debate that changes had to be made in the state insurance system.
It will take weeks or months to tabulate the precise losses from Frances
and Charley, and how much of that insurers will absorb. But consumer
advocates say the increased liabilities shouldered by homeowners during the
two recent storms raise the question of whether the changes have been too
generous to the insurers.
Already, it is clear that the steps taken by big insurance companies are
successfully shielding them from responsibility for huge losses that in the
past would have fallen directly to them. State Farm and Allstate paid a
combined $6.2 billion in claims after Andrew 12 years ago. After Charley,
which ripped through Central Florida on Aug. 13, causing considerably less
damage than Andrew overall, State Farm and Allstate -- still Florida's two
largest private insurers -- estimated their combined losses at just $625
million, after collections from the state catastrophe fund and private
reinsurers. A State Farm spokesman said some of its Florida unit's
reinsurance was provided by State Farm itself, but he declined to say how
What has happened in Florida is partly the result of a big shift in the
way U.S. insurance companies have operated over the past decade. The
industry has adopted increasingly sophisticated underwriting tools to avoid
insuring higher-risk homes and has taken steps to lay more of the burden to
pay claims on policyholders themselves. California residents who face the
threat of storms or wildfires, for example, must choose between sometimes
bare-bones coverage offered by insurance pools organized by the state and
high-cost policies from niche insurers such as Lloyd's of London. But the
shift of responsibility for property losses in Florida -- in terms of the
number of policyholders pushed into state-backed insurance funds and the
hefty increases in premiums and deductibles -- far exceeds what has
happened in most other states.
Insurers in Florida also have shielded themselves from losses through
the use of private reinsurance sold by companies including Berkshire
Hathaway Inc., large European insurers and Bermuda-based companies
including XL Capital and Ace Ltd. Homeowners insurers didn't heavily rely
on such reinsurance prior to Andrew and the coverage was hard to come by in
the years following that storm. Even so, the state-sponsored relief
mechanisms shouldered nearly $3 billion of Charley's $7.4 billion in
After Andrew in 1992, state officials agreed to set up a backstop fund
called the Florida Hurricane Catastrophe Fund guaranteed by the government
that will pick up the bulk of the insurance companies' tabs from Charley,
Frances and other massive storms.
Claims from Charley are expected to consume about $2 billion of the $6
billion in cash held by the hurricane catastrophe fund, which has about an
additional $9 billion of noncash assets. Frances will take another
so-far-unknown bite. Once the fund's cash is gone, it can sell bonds to
raise more and impose an assessment, or surcharge, of up to 2.27% on each
policy written in the state.
In 2002, Florida lawmakers combined another insurer of last resort, the
Florida Windstorm Underwriters Association, with the other big
state-organized insurer, the Joint Underwriting Association, to form the
Citizens Property Insurance Corp. Now, about 800,000 coastal homes that
private insurers refuse to fully cover are currently insured by Citizens
Property. Its capital base, already rocked by Charley, could be depleted by
Citizens Property Insurance expects to pay about $950 million for 37,000
claims related to Charley -- nearly two-thirds of the $1.5 billion surplus
it reported at the end of June. It also could levy a surcharge on
homeowners' policies if it runs out of money.
Many of the largest insurers in Florida also have established separate
corporate entities to operate in the state. Rather than distributing the
cost of Florida losses across all policyholders of the insurance company,
as is traditional in the insurance business, the new Florida units pay
losses only from the assets of the single-state units. If massive storms
wipe out those funds, the Florida companies can dissolve without affecting
the parent company's operations elsewhere in the U.S.
For homeowners, the biggest change came through dramatically higher
premiums and new deductibles that require policyholders to absorb thousand
of dollars in costs from wind damage.
A total of 2.5 million Florida homeowners have policies with windstorm
deductibles of 2% of their home's policy value. A further 177,000
homeowners have 5% deductibles, meaning a homeowner with a policy value of
$300,000 would pay $15,000 to repair hurricane damage before the insurer
would pay any part of the claim.
Many homeowners hit by Hurricane Charley three weeks ago were already
smarting from having to pay higher deductibles for storm damage. They're
livid that they may be forced to pay a second deductible for
Frances-related damage when their homes have yet to be repaired. The damage
has been exacerbated in some areas by flooding, which isn't covered by most
private insurance under a decades-long practice.
Charley did about $15,000 of damage to Don Boyle's roof in Orlando, Fla.
Then Frances shredded the blue tarps covering his two-story house Sunday
and caused eight new leaks in his kitchen, garage and elsewhere. He got up
on his roof during Frances and tried to put the tarp back down, but the
winds were too strong.
He called his insurer, USAA, to ask whether he risked getting charged a
second 2% deductible -- about $4,000 on damage from the second storm. The
company told him a claims adjuster would make that decision after he
surveyed the new damage. "Now Ivan is lurking out there," said
Mr. Boyle, a 32-year-old engineer at Lockheed Martin. "Paying a $4,000
deductible again wouldn't be my first choice."
Mac Jones, a 53-year-old mailman living in Belle Isle, south of Orlando,
has a 5% deductible totaling $6,200 on his house. He was incensed at the
prospect of having to pay double that if Frances inflicts more damage.
"This is legalized price-gouging. They are ripping me off," Mr.
Jones said as the rains and wind of Frances rolled through his neighborhood
over the weekend.
He said he realized his deductible had increased only after calling
State Farm to report that a massive laurel oak tree in his front yard had
fallen on his house during Charley.
Some local insurance agents in Florida said homeowners shouldn't be
surprised by the level of their hurricane deductibles, given that numerous
notices were sent to policyholders after a separate windstorm deductible
was introduced in Florida in 1996.
The decision on charging policyholders one or two deductibles could be
open to interpretation. Damage in the same area of the house could be
deemed a continuation by an insurer, agents say, but a tree falling on a
separate part of the house could be treated as a new claim from Frances. In
1996 insurers were allowed by the state to charge double deductibles for
separate storms under a "named storms" provision. Charley and
Frances are the first major hurricanes under the windstorm deductible.
Florida officials say the state's onerous deductibles are simply part of
the price residents had to pay to keep private insurers in the state.
Insurance generally is regulated on a state level, typically by powerful
commissioners who have the authority to block rate increases proposed by
companies and to set voluminous rules under which insurers operate. But
after Andrew hit, many insurance companies said they would abandon Florida
unless the state made radical changes in its regulations and rate
Just months after that hurricane, more than a dozen insurers threatened
to dump policyholders, potentially leaving more than one million homeowners
without coverage. In April 1993, Allstate alone proposed dropping 300,000
The following month, then-Florida Insurance Commissioner Tom Gallagher
issued a moratorium preventing insurers from refusing to renew
policyholders. Almost simultaneously, he urged Florida's governor and
legislature to form the insurer-funded hurricane catastrophe fund that
would help shield insurers from future hurricane losses. The fund was
formed later in 1993, and insurers began paying premiums into it. The costs
were passed along to policyholders in the form of higher premiums.
Just weeks after Andrew hit, the state also created the Florida
Residential Property and Casualty Joint Underwriting Association, an
insurer of last resort for thousands of property owners that private
companies were no longer willing to cover. By early 1994, it had 300,000
customers, despite offering only limited coverage on property and some
contents of homes.
Even with the state and the new association taking up a significant
portion of hurricane risks, insurers in Florida also asked for huge
increases in premiums. In October 1993, the state approved increases for
State Farm and Allstate of 24% and 30%, respectively. Still, private
insurers remained lukewarm about doing business in the state. The Joint
Underwriting Association had more than doubled to 760,000 policyholders by
To induce insurance companies to compete for more of those homeowners,
Mr. Gallagher's successor as insurance commissioner, Bill Nelson, now a
U.S. senator from Florida, proposed offering private insurers $100 for
every policyholder they took out of the JUA. Insurance regulators also
promised some insurers they wouldn't have to pay assessments that other
carriers would if a hurricane drained the underwriting association's
assets. In response, a handful of small insurers, including Florida Select
and Sunshine State, were formed with the specific purpose of taking
policies out of the state JUA pool.
Dropping 90,000 Policyholders
Big insurers continued dumping policies. After the state-imposed
moratorium against dropping insurance policies, the Florida legislature
passed a law that said insurers could refuse to renew no more than 10% of
their policyholders in any one year. Allstate took advantage of that
provision and refused to renew 90,000 policyholders between 1994 and
In July 1996, Allstate said it would stop sending nonrenewal notices to
policyholders, sparing another 37,000 homeowners who already had been told
they would be dropped after Sept. 16 of that year. But the company agreed
to do so only after the state approved its fifth rate increase since
Andrew, a 22% jump. More importantly, Florida officials gave Allstate the
green light to form the Allstate Floridian Insurance Group, a subsidiary
that would issue policies only in Florida and potentially shield the parent
company from any losses in the state that exceeded the unit's financial
Allstate had been pushing to form the Florida-only company since shortly
after Andrew, but Mr. Gallagher had turned down the request. "I didn't
think it was a good idea," Mr. Gallagher says, adding that he didn't
want the big insurer to set up a thinly capitalized subsidiary without
being obligated to back it up in the event of another hurricane.
But after Mr. Nelson took office, he approved Allstate's request.
Allstate capitalized the company with $450 million, and it currently has
total assets of more than $1 billion. It's not clear how much of Allstate's
$425 million in Charley losses will be taken out of that capital, as the
Floridian company doesn't include Allstate's auto business, or non-Florida
losses from the recent hurricanes. But rating agency A.M. Best last week
placed the company on watch for a possible downgrade of its rating for
Until last month, the company had been a money-maker for Allstate. Over
the past three calendar years, Allstate Corp. has taken about $300 million
in profits out of the Florida subsidiary, according to A.M. Best.
Michael Trevino, a spokesman for Allstate, said forming the separate
"well capitalized" unit in Florida was a sensible business
decision. He said that if a storm strained Allstate Floridian's capital,
the decision of whether Allstate Corp. would pump money into the firm would
be difficult, given the damage such a decision might have on Allstate's
reputation nationwide and potentially costing the company auto-insurance
business in Florida.
Insurers in the mid-1990s also began adding "windstorm
deductibles" to their policies. Typically homeowners-policy
deductibles are expressed in dollar terms -- $500 is common. But in Florida
and other coastal locations, insurers required 2% and higher deductibles to
shift the cost of claims to policyholders. In 1996, the legislature
approved deductibles as high as 5%.
Insurers also have been able to dramatically raise their premiums
through an unusual three-person private arbitration panel set up by the
Florida legislature in 1996 to settle price-increase disputes between
insurance firms and the state insurance regulator. Previously, the state
insurance commissioner held most of the power in approving rate increases.
The panel is composed of one person nominated by the insurer, one person
chosen by the insurance commissioner and a third person chosen by the two
Mr. Nelson decried the use of the panel as "an arbitration system
that allows companies to go around the people's elected commissioner."
In the summer of 1997, Mr. Nelson shot down a request by State Farm Fire
& Casualty Co. to raise rates by about 20%. State Farm appealed to the
panel, and in its first hearing, in Miami, the panel voted 2-1 to approve
State Farm's request. It was the first of several defeats the panel handed