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Insurance Rate Update – Rates Dropping in ’08

From the Cape Coral Daily Breeze, Nov 2007 

Controversial property insurance reform passed in January should start to make an impact at the start of the coming year, according to a pair of local legislators.

State Sen. Burt Saunders, R-37, said Friday that Florida’s Office of Insurance Regulation informed members of the state’s legislature that residents can expect a major drop in the cost of property insurance.

“There are estimates that with the new proposal that went into effect this past year is that the insurance rates could be dropping as much as 20 to 25 percent as we get into 2008,” he said in a telephone interview.

Rep. Gary Aubuchon, R-Cape Coral, took a similar view.

“The rates come down as each individual insurance company purchases their reinsurance policies,” said Aubuchon. “Depending when that renewal period is is when ratepayers should see lower rates and for some, it’s already begun.”

Before the reform measures were approved, insurance companies in the state of Florida would provide their own insurance to customers and cover the cost of losses through the premiums that they receive. But it would also “insure the insurance” by purchasing coverage for themselves from reinsurance companies. These firms, many of which are based overseas, allow for insurance companies to smooth their income and transfer risk so that they can provide higher limits of protection than they could underwrite on their own. The new insurance laws have changed that system completely.

“Up until this past year or two, the insurance companies would purchase reinsurance themselves and then pass that cost on to the consumers. We have now stepped into the place of those reinsurance companies and the savings is passed on to consumers. The state of Florida has assumed a huge amount of potential liability in case of a hurricane or other disaster.”

Aubuchon said that storm seasons several years ago made the reform necessary.

“After the very active 2004 year, the cost of reinsurance doubled or even greater.”

Aubuchon compared private reinsurance policies to one year term life insurance

“If you survive the year, then whatever you paid for that year is lost. If there was another active (hurricane) year, reinsurance rates would continue to rise and rate payers would pay higher rates.”

But while the insurance companies can now charge less because they will not have to pay for private reinsurance coverage, Florida residents could still face serious issues if a hurricane with the intensity of an Andrew or Katrina batters the state.

“There are some things that could become real problems,” Saunders said. “The first is that if there is a major storm we are on the hook for it.”

The senator further explained that the state does not have funds stored up to cover the potential multi-billion dollar losses that it could face with a serious hurricane making landfall and that the revenue would have to come from the taxpayers in other ways.

“If there is a major storm and we have a major loss, we will sell bonds and the debt service will be made up through assessments on all other types of insurance policies,” he said.

That means auto insurance, health insurance, and even life insurance polices would be subjected to assessments to make up the shortfall. Only medical malpractice insurance would be exempt from disaster debt assessments.

“It would be spread out and hopefully would not be too much of a burden,” said Saunders.

But there will be some money for a disaster fund as the state of Florida will set aside the money it takes in during calm seasons like it has experienced in the last two years instead of taking it for profit like a private firm would do.

“The benefit is if the state of Florida provides the reinsurance, we keep all the premiums paid to protect us against active years. Regardless of whether the state was in the reinsurance business or not, if we have an active season the rates are going to go up. The private companies would raise the rates just like the state of Florida would,” Aubuchon said.

“In a quiet year, there is no savings to the rate payers if the reinsurance is issued by the private sector. There is truly an upside to the state doing it, and the downside exists whether or not the state does it.”

The representative also encouraged residents of southwest Florida to get a free home inspection to test their houses’ strength against hurricanes.

Homeowners can go to to get information on how to order such a test.

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