Although Florida has gone largely unscathed by hurricanes for the past five years, the state’s property insurers, including state-run Citizens, are being swamped by a different kind of catastrophe: sinkholes.
A sharp increase in claims related to damage caused by collapsing earth contributed to Citizens’ request for an average statewide 8.4 percent rate increase heard Tuesday by insurance regulators.
Comments are being accepted until Sept. 14; a ruling could come later this month.
During 2009, Citizens collected about $19.6 million in premiums for sinkhole coverage, but covered losses worth about $97 million. While sinkholes bring to mind the image of a home being swallowed by a circle of collapsing ground, said Paul Palumbo, Citizens’ senior vice president of underwriting, no claims in the insurer’s history have been for a catastrophic loss.
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Instead, they have been for damage including cracks in driveways and other parts of homes.
“You’re not making money on homeowners insurance even in a non-hurricane year,” Deputy Insurance Commissioner Belinda Miller said. “That’s a lot of money.”
In August, Insurance Commissioner Kevin McCarty requested that Florida insurers report data about sinkhole claims to his office by later this month.
“The Office has heard from the industry that there has been a substantial increase in the frequency of claims, and that these claims are being filed outside the traditional ‘sinkhole alley’ in Hernando and Pasco counties’,” his office said in a statement. The results could lead to regulatory changes or requests for legislative action.
Claims for other damage, including fires, also contributed to the request for rate increases, along with the need to shore up Citizens’ ability to pay claims in the event of a catastrophic storm. Citizens is the state’s largest property insurer, with about 1.2 million residential policies — including about 900,000 the insurer has absorbed since March and following the liquidation of at least two private insurers.
A rate increase would be the second-straight hike following a three-year freeze that ended in 2009. The new rates, if approved by the Office of Insurance Regulation, would take effect in early 2011, Palumbo said.
Steve Alexander, an actuary in the state’s insurance consumer advocate office, said the exponential increase in sinkhole claims needs a hard look. To keep up with sinkhole payouts, Citizens would have to ramp up premiums from the current $20 million to about $140 million, Alexander said.
“With the 10 percent cap on premiums ... the concern is you’re never going to get there,” Alexander said. “Somebody needs to look at this problem and figure out a solution. It’s a very, very serious problem. I think the 10 percent cap does not work for this coverage.”
Unlike other states, Florida’s law about how far property insurance extends is unclear, said Lynne McChristian, of the industry-backed Insurance Information Institute.
“Cracks in your home — that’s not necessarily a sinkhole,” McChristian said. But it can be difficult to prove exactly what the cause is. “There are more claims happening down in (South Florida), which is not an area historically known for sinkholes. That makes those claims even more suspect.”
While Citizens is struggling to raise rates at a pace that would keep the insurer solvent in the event of a major storm, Chief Financial Officer Alex Sink and state Sen. Jeff Atwater, R-Palm Beach Gardens, have questioned some of Citizens’ expenses.
Both want information about why the insurer did not go out for bid on more than 30 contracts, relying on an emergency exemption — even though some of the vendors were given multiyear deals.