In a major turnabout for the property-insurance market, State Farm Florida said Wednesday it will continue doing business in the state — though it will drop 125,000 residential policies and raise rates.
State Farm and Insurance Commissioner Kevin McCarty announced an agreement after months of negotiations about the future of Florida’s largest private insurer.
In January, State Farm sent a jolt through the insurance industry when its Florida subsidiary disclosed plans to stop insuring homes and condominiums because it was losing money and in danger of insolvency.
Under the agreement Wednesday, State Farm will drop 125,000 of its 810,000 residential policies and also pass along a 14.8 percent across-the-board rate increase to customers.
“This is an important step,” State Farm Florida President Jim Thompson said in a prepared statement. “It helps stem State Farm Florida’s deteriorating financial condition. It reduces the company’s risk exposure. It moves us closer to rate adequacy. And for most of our customers, it means that State Farm Florida continues to be there for them.”
State Farm will drop the 125,000 policies over a one-year period, with the first customers losing coverage in August as they come up for renewal. The company must give at least six months’ notice to customers before eliminating the policies.
The rate increases also will take effect at renewal times. Though an exact timetable was not available Wednesday, the rate hikes are expected to start showing up in customer bills in early 2010.
McCarty touted the agreement as benefiting policyholders, agents and the overall property-insurance market. He said it will allow State Farm, Florida’s largest private insurer, to continue being a “significant market player.”
“A smaller, leaner State Farm in Florida is better than no State Farm at all,” McCarty said during a news conference.
Lisa Miller, a former deputy insurance commissioner who works as a consultant and lobbyist, described the agreement as a “turning point.” The insurance market has been tumultuous since eight hurricanes hit the state in 2004 and 2005, with companies dropping customers and disputes frequently flaring about rates.
“Baby steps are important,” said Miller, whose clients include competitors of State Farm. “I think this is an incredible baby step.”
The announcement, however, will leave hundreds of thousands of State Farm customers digging deeper to pay insurance bills.
The 14.8 percent increase comes on top of a State Farm decision in August to eliminate or reduce discounts that many customers receive. Those discounts vary widely, but some customers will see premium increases of more than 20 percent because of the August decision, which started taking effect this month.
Wednesday’s announcement also raised immediate questions about where the 125,000 customers will find coverage after getting dropped by State Farm.
“The State Farm saga now turns into those unfortunate 125,000,” said Jeff Grady, president of the Florida Association of Insurance Agents, a group that represents independent agents. “Where are they going?”
One of McCarty’s key concerns throughout the negotiations was that State Farm would pull out of the market and dump policies into the state-backed Citizens Property Insurance Corp.
Part of the agreement will allow State Farm agents to place policies with other private insurers, which could help keep customers from going to Citizens. Nevertheless, McCarty acknowledged Citizens could end up taking some of the 125,000 policies.
State Farm did not announce what policies would be eliminated, but spokesman Chris Neal said it is trying to drop as few customers as possible — while also reducing as much financial exposure as possible.
In hurricane-threatened Florida, that often translates into homes located in coastal areas or homes that have other risks, such as being older and not constructed to stringent building codes.
Many other private insurers also have tried to shed those types of risks in recent years — or at least have limited the number of such homes they would cover.
“Do you think (State Farm officials) are getting rid of their good business?” Grady asked rhetorically.
The announcement Wednesday came after a contentious year that included legal and legislative debates about State Farm’s plan to leave the market. At one point, Gov. Charlie Crist even said he thought Floridians would be “much better off” without the company.
The January decision to pull out of the market over two years came after regulators rejected a proposed 47.1 percent rate increase. The company, which said it was losing about $20 million a month, never moved forward with the withdrawal plan amid the negotiations.
State Farm agents would have continued selling auto insurance if the company had left the property market. But agents were worried about losing income and lobbied lawmakers this spring for help.
Two State Farm agents in Volusia County referred questions Wednesday to company officials, while another did not return a phone call seeking comment.
But Bob Lotane, a spokesman for the National Association of Insurance and Financial Advisors-Florida, which represents many State Farm agents, called the agreement an “early Christmas gift” to agents across the state.