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Kicking Big Insurance Is Great Politics But Bad Policy

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By TOM COTHRON

Special To The Tampa Tribune

Published: February 14, 2009

Many politicians, editorialists and citizens have weighed in on the recent decision by State Farm to withdraw from Florida's property insurance market. Some of the comments have derided the decision. These comments sometimes emanate from a lack of understanding of the issues and, unfortunately, others come from people who know better.

Gov. Charlie Crist has said that Florida is better off without State Farm; last year he made similar derisive comments about another large insurer. Regulators have said no problem, there are many new smaller insurers that will accept many of these policies; the state will have to pick up the rest.

The fact is State Farm's decision to withdraw is nothing new: The national A-rated companies have been reducing Florida business for years. State Farm is just the latest and largest example.

Let me paint a scenario to illustrate why this is dangerous. Imagine if all of these A-rated companies had similarly withdrawn - as in recent years - prior to the 2004-05 hurricane seasons. What if the policies from the top-rated companies had transferred to these new smaller insurers with minimal capital and experience or to the state insurer, Citizens Property?

The 2004 hurricanes, alone, wiped out the substantial reserves of many of the A-rated companies. State Farm and Allstate were effectively bankrupt and faced state takeover - fortunately the parent companies sent in billions to recapitalize, and to adjust and pay claims. These new, small insurance companies would not have this luxury - when their reserves are gone, so are they.

Following the 2005 storms the substantial Poe Insurance Group went insolvent; its policies went to Citizens, and thousands of its unpaid claims became all of our responsibility to pay through taxes from what is called the Florida Insurance Guaranty Association (FIGA). Almost all Floridians with insurance have paid or continue to pay policy taxes, from both hurricane seasons, from Citizens, the Catastrophe Fund or from FIGA.

Had the hundreds of thousands of policies reduced from the A-rated companies been with the newer, smaller companies or with Citizens prior to those brutal hurricane seasons these financial challenges would have gone from expensive to ruinous. We likely would have had numerous companies bankrupted, an incalculable amount of claims would have gone to FIGA and claims - overall - would have taken far longer to settle.

It is not too late to change the dangerous path on which we find ourselves. I strongly urge our political leaders and regulators to take a deep breath and work to change the worsening relationship with the insurance industry. No less than the solvency of the state is at risk.

Tom Cothron is the president of the National Association of Insurance and Financial Advisors - Florida.

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