One On One With Florida Insurance Commissioner Kevin McCarty

It’s been more than four years since Florida was directly hit by a hurricane, but many Florida homeowners face rising property insurance rates and find few options when they shop around for coverage.

We asked state Insurance Commissioner Kevin McCarty recently what he considers some of the biggest problems in the state’s property insurance market and what can be done to solve them. McCarty has been insurance commissioner since early 2003.

Q: Why are rates increasing again?

A: There has been an “unprecedented” increase in payouts for claims for water damage and other non-catastrophe claims, including an “explosion” of sinkhole claims.

The Office of Insurance Regulation has not quantified the increase yet, but is attempting to do so.

“We have non-catastrophe losses in Florida of the likes that I have never seen before…This is in my view, at least in the last 10 years, unprecedented.”

Higher claims costs also could be a byproduct of the recession. “There are a number of reasons for that. Many times people can’t afford to say, ‘I’ll pay the claim instead of turning it to my insurance company.'”

Reinsurance, or backup coverage that insurers purchase, only helps them pay for catastrophe claims.

Q: What’s the fix?

A: Lower insurers’ claims costs by targeting fraud, eliminating a law that requires insurers to hire experts to prove a sinkhole claim is unjustified and cracking down on unscrupulous public adjusters, who are hired by policyholders in claims disputes with their insurers.

Q: What are the next key insurance issues for Florida?

A: Personal injury protection fraud. Floridians are required to have at least $10,000 of PIP coverage, which pays for the driver’s medical expenses, a portion of lost wages and a death benefit after an auto accident.

But about 30 people have been arrested this year for alleged involvement in staged accidents and fraudulent PIP claims.

“PIP is certainly going to be an issue this year. There certainly is an increase we’re seeing in the cost of PIP claims.”

Automobile insurance policyholders ultimately pay for those claims through higher rates.

Q: Should Citizens Property Insurance consider competitively bidding more of its contracts and reviewing its overhead costs and executive pay, issues that the Sun Sentinel has reported on this year?

A: Citizens’ executive pay compared to private insurers is “certainly within the range of reasonable.” The insurer is probably the most examined insurer in the state because of the internal and external audits done on it, including audits periodically by my office.

“I don’t want to put myself in the management of the company. As a state agency, I have very stringent standards for when I have to [bid contracts], and as frustrating as those may appear at the time – in terms of your business goals and objectives, in terms of getting something done – there’s a good public policy purpose for making sure that they’re appropriately [selected through competitive bidding] to ensure transparency in the system. Although they’re operating as a business, they are in fact a quasi-governmental entity and should abide by those same processes and procedures.”

Q: What is the Office of Insurance Regulation doing to address your concern that some insurers may be effectively hiding profits in affiliated companies instead of saving the money to pay claims in Florida?

A: A priority of my office in the next legislative session will be closing a loophole in a law requiring insurers to file audited financial statements for their affiliates. The Office of Insurance Regulation can request the information while doing a company examination, but that is expensive and labor intensive.

“We’ve been doing it fairly comprehensively over the last two years. We have found four companies last year where we fined the companies, had them return money from affiliated parties.”

Q: You’ve said federal legislation expanding the federal government’s role in providing catastrophe backup coverage and loan guarantees for state catastrophe insurance funds is key to addressing Florida’s home insurance problems. Opponents, especially lawmakers in states less prone to hurricanes, ask why should they subsidize hurricane-prone Florida?

A: The legislation would create a plan for the federal government to back up loans and support states’ efforts to plan for catastrophes such as hurricanes, floods, earthquakes, mudslides and tornadoes – disasters that strike nearly all states, not just Florida. It’s more costly for the government to pay for relief efforts after a disaster strikes instead of planning for it beforehand.

But the attitude of many lawmakers is “when the house is burning, we’ll put it out. …It’s a future problem that may happen. They’ve got real problems that are happening” like the financial meltdown and uninsured Americans.

Florida pays 40 percent of the premiums for the National Flood Insurance Program but receives a fraction of the claims payouts. So lawmakers in some other states are OK with having Floridians essentially “subsidize” that program.

Q: Why are so many homes in Florida still not fortified against hurricanes and what’s the status of efforts to encourage people to beef up their property?

A: “You have a culture of amnesia as you move further and further away from the storm, the less and less you…put your shutters up. …And { there’s] the pressure to build homes cheaply. That’s a real problem everywhere, not just Florida. They don’t want to build earthquake-resistant homes in California either. … It costs 3 to 5 percent more to build them. It costs a whole lot more to replace them.”

Florida spent $250 million to provide free home inspections and matching grants for home upgrades. “We certainly have taken the biggest step in the history of the world in terms of providing money for that. That money ran out.”

About 60 percent of the homes in Florida were built before the new building codes, and it would be too expensive to upgrade many of them. They will eventually just have to be rebuilt. The only way to lower the huge, projected potential damage in Florida from major hurricanes is to make homes stronger.

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