2005 P/C Gulf loss ratios point to insurers' pain, need for reforms.

The hurricanes of the past year hit personal-lines insurers in the Gulf states hard, showing the need for adequate homeowners insurance rates, experts said. But in some states, that's easier said than done.

For instance, Florida's total homeowners industry had an adjusted loss ratio of 138.47 in 2005 stemming from catastrophic hurricanes such as Hurricane Wilma, according to A.M. Best Co. market share reports. And in 2004, with four hurricane hits, the Sunshine State had an even worse total industry adjusted loss ratio of 304.08.

But go back another year or two, and Florida's homeowners industry had fairly low adjusted loss ratios of 33.97 and 38.76. William Stander, a regional manager for the Property Casualty Insurers Association of America, said people looked at those figures in 2003 and 2002 and saw insurers as "sitting on a lot of money." A common reaction, Stander said, was a call for rate decreases.

Stander said if people looked at the five- or 10-year loss trend, instead of a single year, they would get a different picture. According to A.M. Best, Florida's total homeowners industry had a five-year-average adjusted loss ratio of 121.51. A loss ratio is the percentage of each dollar in premium an insurer spends on claims. Any figure more than 100 is considered unfavorable.

"It shows you've got to make a lot of money in off-years in order to pay claims when the storms come," Stander said. "You have to accumulate that money in order to pay. It's not a question of 'if,' it's 'when.'"

A Struggle to Get Rates in Florida

However, getting what a company believes is an appropriate rate isn't that easy in Florida. While there have been several denials of rates, Stander said a great number of large homeowners rate increases have gone through in the state in the past 12 months. But the process to get to those approvals or denials is the big issue, he said.

"A majority of the companies would describe the Florida regulatory market as difficult," Stander said. "It has a tangible effect on the market."

Stander said while Florida technically has a use-and-file system, most insurers actually view it as a prior-approval system. That's because under Florida's version of use and file, if an insurer uses a rate that the Florida Office of Insurance Regulation finds fault with, the insurer must pay the difference between the used rate and the OIR-corrected rate to individual policyholders. In reaction to this, many companies are not implementing rates until the OIR officially approves the filings to avoid costly repayments and the expense of those repayments.

"They find fault with every filing," Stander said. "It's ungodly expensive to do."

Add to this, he said, the long time it takes OIR to approve a rate filing and many companies feel like "time is slipping away" on their attempts to react to market changes. Stander said the length of time it takes to approve a filing, many months, is inconsistent with the speed with which today's financial markets operate and how fast capital is moved in the industry.

Meanwhile, nearby states such as Alabama and Mississippi have systems that do "not have the same adversarial flavor of the Florida department." That's because those insurance departments "view the companies as partners, not just partners but customers," Stander said.

Tiffany O'Shea, American Insurance Association spokeswoman, said Texas and Louisiana had passed market reforms prior to Hurricane Katrina. And while Louisiana still has a rating commission to rule on rate filings of more than 10%, O'Shea said all rate increases filed after Katrina have been approved. "The rating commission and the regulators realized they needed to do that to keep insurers here,' she said.

"What needs to happen is a dramatic shift in the proper role of the Office of Insurance Regulation," Stander said.

Legislative Effort Needed

Stander said if the OIR's role were changed to help insurers be competitive in the market, he believes the OIR staff would take up the role "enthusiastically" But right now, they have to do their jobs under the current system. It would require a legislative effort to change the system, something Stander said he is hopeful will come, especially with "Florida's market on a precipice."

The two years of tropical storms and hurricanes have added up to $35 billion in total paid losses for Florida insurers and 2.6 million claims. This has left the homeowners market reeling. At the same time, reinsurance costs have risen dramatically, and availability has shrunk. The private insurance sector practically has ceased to exist. As a result, Florida's Citizens Property Insurance Corp., the last-resort homeowners insurer, has become the top property insurer in the state.

The Big Hit

Adjusted loss ratios, 2004 and
2005, United States and Gulf
Coast states:

               2005     2004

Louisiana     834.03    35.14
Mississippi   676.06    48.10
Florida       138.47   304.08
Alabama        92.74   147.08
U.S. Total     73.43    65.99
Texas          56.98    28.40

Source: A.M. Best Co.

Note: Table made from bar graph.