State Farm dumping policies

PALM BEACH COUNTY, Fla. – July 23, 2007 – State Farm Florida Insurance Co., Florida’s largest private-market homeowners’ carrier, said Thursday it will drop 50,000 coastal policies starting in January as part of a plan to reduce its overall hurricane exposure.

The company also will eliminate an additional unspecified number of wind-only policies.

Homeowners policyholders in coastal areas who also carry State Farm auto policies will, however, be permitted to keep their fire, theft and liability coverage – just not wind protection.

The announcement riled state officials, some of whom have said recently that Florida’s property insurance market had stabilized.

“These actions are inconsistent with State Farm’s previous statements outlining their underwriting intentions,” said Kevin McCarty, the state’s insurance commissioner.

Officials with State Farm, which has a little more than a million policyholders statewide, would not provide a breakdown by county of where the discontinued policies would fall. They did say, however, that all of the customers being “nonrenewed” live within 5 miles of the Atlantic Ocean or the Gulf of Mexico.

“We’re choosing to reduce our hurricane exposure in our most vulnerable coastal areas,” said Chris Neal, a State Farm spokesman.

The move comes just three weeks after McCarty said that Florida’s property insurance market was on stable ground. He said then that officials with the largest private-market insurers operating in the state – State Farm, Allstate and Nationwide – had informed him there would be no new large policy nonrenewals.

In a statement Thursday, McCarty said he was concerned about the filing. He promised a thorough review that also would examine State Farm’s previously approved rate hike.

That increase was based on State Farm’s overall exposure, which conceivably could shift with the elimination of thousands of coastal policies, said Jonathan Kees, a spokesman for the state Office of Insurance Regulation.

Florida has no law prohibiting insurers from shedding customers, but like all states it has laws prohibiting discriminatory practices. In the past, insurance regulators have allowed insurers to shed hundreds of thousands of coastal policies, arguing they did not have the power to stop the companies.

But Gov. Charlie Crist’s administration has been aggressive in dealing with insurance companies. One issue has been “cherry-picking,” where an insurer keeps profitable coverages, such as fire and theft, while letting riskier wind policies drop.

Crist pushed for the special session, held in January, that revamped state insurance law, including tightening restrictions on rate increases. Some insurers said the regulatory changes would force them out of the market. Neal said Thursday, however, that State Farm’s decision had nothing to do with those changes.

A review of State Farm’s rates would involve an examination of the 52.7 percent hike McCarty granted the insurer in July 2006. The increase, which McCarty said was fully justified at the time, actually went as high as 146 percent in parts of Palm Beach County.

Neal said the insurer was not happy about the decision but that company executives have been concerned about coastal vulnerability since the 2004 hurricanes wiped out the company’s entire $700 million surplus. He said the Florida company was able to continue in business only because of a loan from its Illinois parent, The State Farm Mutual Insurance Co.

Since the 2004 and 2005 hurricanes, State Farm has dropped coverage for more than 1,000 condominium complexes. But unlike Allstate and Nationwide, it has not engaged in massive nonrenewals of homeowners policies.

Pressure from rating services concerned about coastal exposure played a part in State Farm’s decision, Neal said, adding that State Farm officials had debated the issue for several years.

Robert Hunter, the insurance director of the Consumer Federation of America, said State Farm’s decision was disturbing, given the fact the parent is a mutual company, meaning it is owned by policyholders. State Farm’s Florida entity, however, is a stock company owned directly by the insurer.

“It used to be that policyholders were important and insurers treated them right,” Hunter said.

Because of the number of policies involved, State Farm’s action is expected to further destabilize Florida’s troubled property insurance marketplace.

Bruce Douglas, chairman of the board of state-sponsored Citizens Property Insurance Corp., said he expects Citizens will pick up most of the customers being dropped, resulting in additional risk for the insurer.

Citizens, which now has 1.3 million policyholders, is projected to grow to 1.7 million by the end of the year, Douglas said. In the event Citizens were to take enormous losses and run in the red, it would assess all auto and homeowners policies in Florida to make up any shortfall. That occurred in both 2004 and 2005 to offset losses from the hurricanes.

Copyright © 2007 The Palm Beach Post, Fla., Randy Diamond. Distributed by McClatchy-Tribune Information Services.