State leaders and the insurance industry have sent the message time and again to Florida homeowners.
Add hurricane shutters, strengthen your roofs and make other home improvements.
And if you do, you’ll get a two-pronged reward: better protection against hurricanes and lower insurance bills.
But with hundreds of thousands of Floridians receiving insurance discounts, a debate is building about whether the system has gone amok.
Insurers complain they are being forced to give price breaks that are larger than justified and contend home inspections are riddled with fraud and errors. They say excessive discounts are causing financial losses in the industry — with the issue helping lead to State Farm Florida’s announcement this year that it would stop selling homeowners insurance.
State Farm spokesman Chris Neal said the company wants customers to upgrade their homes and supports giving discounts, known as “mitigation credits.” But he and other industry officials point, in part, to a 2007 state change that effectively doubled the size of credits.
“What we are challenged with is the amount of credit we’re supposed to give,” Neal said.
State and industry officials are setting the stage for a legislative debate in the coming months. But the discount issue is complex for technical, financial and political reasons.
If lawmakers or regulators revamp the credit system, the changes likely would lead to reducing discounts. That could be a difficult sell when many homeowners have spent thousands of dollars to upgrade their houses and enjoyed insurance discounts as a benefit.
“Now that we’ve been down this path for a few years, it’s hard to change course and tell people, ‘I know you spent $20,000 on shutters and reinforcing your roof. We’re going to reduce the amount of credit you get for that,’ ” Deputy Insurance Commissioner Belinda Miller told a commission studying the issue.
Sean Shaw, the state’s insurance consumer advocate, said he doesn’t want to fix problems in the system by placing burdens on homeowners. For example, he rejected a recent suggestion that home inspections should gradually become mandatory and that insurers should be able to pass on the costs to consumers.
“The mitigation-credit issue is not the consumer’s fault,” Shaw said.
But Lisa Miller, a former deputy insurance commissioner who is a consultant and lobbyist, said the program is causing a financial “drain” on insurers that ultimately will hit consumers.
Lisa Miller said policyholders have benefited from substantial discounts in the short term. But longer term, she said lost revenues will hurt the ability of insurers to pay claims and could affect the availability and cost of coverage.
“The insurance companies want to reward and incentivize their customers, but they don’t feel the current discounts are valid,” said the former regulator, whose clients include insurers.
HOW BIG SHOULD CREDITS BE?
The mitigation-credit system is based on 2002 studies that analyzed potential hurricane losses and the effectiveness of various construction techniques.
The state requires insurers to give discounts to customers whose homes have features that will limit damage, with the amounts based on a complicated matrix.
As an example, roofs are a key factor in how much damage a hurricane causes to a home. The credit system takes into account issues such as the shape of a roof and how it is attached to the building.
Insurers complain about the financial impact of the state doubling the discounts in 2007. But Belinda Miller said regulators initially held down the size of discounts in 2002 to help start the program and that those reduced amounts were not intended to be permanent.
Also, she said insurers could conduct their own studies to justify different mitigation discounts but have not. Neal said State Farm is doing such a study.
“It’s not just a simple thing,” he said. “You don’t just fill out a little worksheet and submit it.”
Ideally, credits would match up with reduced risks of hurricane damage. If a homeowner puts on a new-and-improved roof, for instance, the insurance company would give a premium discount that reflects the relative lower risk.
Insurance industry officials are careful to say they support giving discounts but contend the current system is out of balance. Also, some officials question whether homes really are being protected as much as the discounts would indicate.
Julie Rochman, president and CEO of the industry-backed Institute for Business & Home Safety, said the system offers credits for individual home improvements and building techniques. But simply adding hurricane shutters, for instance, might not save a home from being destroyed if it has a weak roof.
Rochman, whose institute studies the effects of natural disasters on buildings, said focusing only on single improvements is “sort of a lose-lose” situation. While insurers give discounts and homeowners think they are safer, the buildings might not be able to withstand hurricanes.
SYSTEM ‘OUT OF CONTROL’?
State lawmakers this year directed a panel known as the Florida Commission on Hurricane Loss Projection Methodology to study the mitigation-credit system and submit recommendations by Feb. 1.
Commission members have heard testimony during the past few months about the technical details of the system, its financial effects and fraud.
Jack Nicholson, a commission member and chief operating officer of the Florida Hurricane Catastrophe Fund, said the concept of home mitigation is like “mom and apple pie.”
But during an October meeting, Nicholson described the system as “out of control.
“Somebody needs to take responsibility to make sure it is done right,” he said.
Insurers argue, in part, they are being required to give larger-than-justified discounts at a time when companies are not able to charge high enough insurance rates.
Also, they say they are losing income while facing increased expenses for reinsurance, a crucial form of backup coverage that helps pay hurricane claims.
In the highest-profile example, State Farm last year sought a 47.1 percent rate increase and pointed to mitigation credits as a major reason.
After regulators rejected that increase, the company’s Florida subsidiary announced it would gradually stop selling homeowners insurance because it was losing money and facing eventual insolvency. State Farm has not started pulling out of the market because of long-running negotiations with regulators.
“That (mitigation credits) was probably the single biggest factor that led to our revenue problems,” Neal said.
The state-backed Citizens Property Insurance Corp. also has been heavily affected, providing an estimated $700 million in discounts as of June 30. The lost revenue has come as many industry and state officials worry that Citizens could face multibillion-dollar deficits if it has to pay claims after a major hurricane.
One issue drawing heavy scrutiny is the inspections that are required before homeowners can receive discounts.
Though inspectors were approved by the state, insurers say they suspect widespread fraud and errors, including blatant fraud such as submitting inaccurate inspection reports.
The Florida Association of Insurance Agents released a report that warned of fraud and discounts being given when they are not warranted. That report summed up one fraud scenario by saying everybody would be “happy until the wind blows.”
When that happens, the report said, “The carrier didn’t collect enough premium, and the homeowner is upset because his fully credited roof is in his neighbor’s front yard and his family is living at a Motel 6.”