Florida: insurance decisions keep getting stranger and stranger

I’m not sure what to think about Florida’s possible decision to strip cash from the underfunded state-run insurer, as reported in the Miami Herald, and give it to start-up insurers that might blow away the first time a hurricane comes by.  Well, yes I am sure — the governing classes have lost their minds.

Citizens Property was formerly the state insurer of last resort.  However, due to the fact that regulators and lawmakers impose price controls more successfully on Citizens than on private insurers, it has to provide coverage at actuarially unsound rates — officials know, of course, that ultimately Citizens is backed by the wallets of all insurance purchasers in the state, who are in line for a special surcharge on insurance premiums if a bailout is needed.

Martin Grace has more at RiskProf.

Also, see this post by the Truck Insurance Extremist, which includes the following:

So weird has the Florida insurance market become that contrary to Governor Crist’s hopes that Citizens would foster competition, it has actually had the opposite effect. Private insurers treat Citizens with kit gloves and pray that it grows rich and strong. That’s the only hope for avoiding a gigantic assessment bill. As with Florida’s regulatory culture the assessment risk presented by Citizens only adds to the state’s unattractiveness.

With one exception: "Take Out" speculators love Florida. The speculators who form these thinly capitalized insurance companies do little more than bet on hurricanes. Here’s how the scheme works. You capitalize an insurance company in this state for $5,000,000. Simultaneously you start a management company to operate the insurance company. You then offer to take over (take out) a chunk of policies from Citizens Insurance Company. It is not uncommon to see these small take-out companies write $50 to $200 million in premium. You then pay your management company a fee of 10 to 15% of the premium income. The management company quickly recoups the initial $5,000,000 investment. Everything after that represents pure profit. A few years without a storm and you’ve made a fortune. Best of all, if a hurricane ever causes you to go bust; the state insurance guarantee fund picks up all the claims. For obvious reasons most of us would not regard speculation as a permanent solution to the state’s insurance difficulties.

5 Comments

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5 Responses to Florida: insurance decisions keep getting stranger and stranger

  1. Delta Boy

    That would be kid gloves?

  2. State sues former Poe Companies, seeking $100 million
    By RANDY DIAMOND
    Palm Beach Post Staff Writer
    Tuesday, April 01, 2008
    “The state said today it has filed suit against the officers and directors of the failed Poe Financial Group, charging that they fraudulently diverted more than $100 million in dividends to themselves in 2004 and 2005, even though they knew their businesses were insolvent.
    The civil suit, filed Friday in Tallahassee but announced today, maintains that Poe officials kept Southern Family, Florida Preferred and Atlantic Preferred Insurance companies in business after the 2004 storms in order to continue the flow of property insurance premiums and then to divert them to their own personal accounts.
    The suit filed by the Department of Financial Services seeks more than $100 million in damages.
    “Florida’s insurance consumers were forced to foot the bill when the Poe Companies became insolvent so that policyholders could have their claims paid,” state Chief Financial Officer Alex Sink said today in a statement. “We will aggressively pursue any opportunity to recoup additional funds to reduce the assessments levied against Florida’s insurance consumers.
    Officials of the former Poe companies including founder William Poe Sr., a former mayor of Tampa, were not immediately available for comment today.
    While the three insurance companies are out of business, Tampa-based Poe & Associates still runs an insurance agency that represents other insurance companies.
    The Poe Cos. went into liquidation May 31, 2006. As receiver, the state Department of Financial Services took control of the Poe operations and liquidated their assets to pay outstanding claims.
    More than 320,000 Floridians held insurance policies from one of the three companies when Poe was liquidated. The company was the third-largest property insurer in Florida and did most of its business in Palm Beach, Broward and Miami-Dade counties.
    Many of the companies’ policies were assumed from state-supported Citizens Property Insurance Co. In return for assuming policies, Poe received millions of dollars in fees from the state.
    Most of the failed policies were automatically transferred back into the state-funded Citizens in July 2006.
    Any recovery of money from the lawsuit would go the Florida Insurance Guaranty Association, which is paying claims of the failed insurers.
    The total bill, which is being paid by insurance policyholders throughout Florida in the forms of surcharges on their insurance policies, could total $790 million, Sink said.
    The Poe liquidation was the biggest insurance insolvency in Florida history, and one of the largest in U.S. history. More than 46,600 policyholder claims have been filed against the Poe Cos.”

  3. WOW

    Great post David. State of Florida is really out there. Let’s take a fundamental approach like keeping the insurer of last resort small to non-existent and turn it on its ear to have it be the largest carrier in the state.
    Assessments can apply to both homeowners and auto insurance policies. Nice. Way to go Fidel….I mean Charlie.

  4. MORE COWBELL

    Remember that Charlie could be one heartbeat away from the Presidential slot, if John and Mitt don’t make nice.

  5. Susan

    Do you know the case law to support paying a drain back up claim in Florida?