Ranking the Villains in the Florida Home Insurance Tragedy

It’s June 1st and you know what that means? It’s now officially hurricane season! You know what else it means? We are one day closer to the meltdown of the Florida home insurance market!

Stresses are arguably the worst they have ever been. Carriers are dropping like flies and we haven’t even had a meaningful event during the last three summers!

Florida isn’t just the state most exposed to hurricanes. It is the state most exposed to corruption that uses homes as a source of funds to steal from its citizens.

There are a lot of words written every year about how we got here or how to fix the market or which insurer will fail next. Those are all interesting, sure, but I would like to address things from a different direction. I am here to assign blame!

Let’s stop talking about how to fix things and remember how we got here. Because, the truth is, we can’t fix things until we admit what the real problem is. It’s not hurricanes. They’re the MacGuffin. It’s all the bad actors feeding off this diseased system and letting others suffer while they profit.

So today’s exercise is to rank all the bad actors in Florida. There are so many that I’m sure I have left some off (you can nominate others in the comments). We can certainly debate the rankings. But here’s the thing: the fact that I can write an article like this is a giant freaking indictment of all the players in the system.

The Bad Actors

I’ve nominated eight candidates for the inaugural Worst Actor in Florida award, more commonly known as the Chief Villain.

Before revealing them, I think it’s worth reviewing what makes them so villainous. Normally, when bad actors take advantage of a situation, they feed off the excesses in society, the fat and happy – big corporations, the wealthy, the famous, etc.

Not that this behavior is acceptable, but at least it is logical. Target those who can afford to pay the extortion and will view it as a cost of doing business. Better yet, it is a sustainable “annuity”. That’s a good business model, even if distasteful.

By contrast, only the lowest of life forms feed off the weak and defenseless. Think of crime syndicates demanding protection money from the poor or pawn shops making usurious loans. This is profiting off those most in need. There is no pride in that.

It is pretty clear which category Florida home insurance fits into. There is no excess profit in the home insurance ecosystem. In fact, there is no profit at all. There are only leeches who suck off the system and leave a wasted shell of a host struggling to survive.

It takes a special kind of person to decide they want to get rich by capitalizing on a bankrupt model and trying to steal as much as they can from it before it implodes. It would be like if you knew the Titanic was headed for the iceberg and you made plans to not just evacuate ahead of time, but to steal all the lifeboats while you were leaving.

With that, let’s reveal the nominees…

Bad Judges

People forget that the real explosion in assignment of benefit (AOB) cases came after the 2017 Joyce decision. Judges certainly could have reined in AOB abuses and excessive fees but have not been willing to do so. They may be a longshot to win the Villain, but they are a worthy nominee.

Office of Insurance Regulation

The OIR has consistently turned a blind eye to fundamental flaws in order to avoid making hard decisions. The failure to understand that denying rate now only means more rate is needed later is a basic failure. I’m not just referring to the denial of much needed rate filings. It is also permitting bogus adjustments to cat models, not requiring adequate reinsurance to be purchased, and other actions that deny reality.

Florida “Takeout” Carriers

Let’s be honest here. The business model of the Florida domestic companies is, and always has been, a house of cards. Thinking you can support hundreds of millions of premiums on $25-50M of capital and hoping that a) reinsurance will remain cheap enough to fund your operating leverage and b) that you can skim the “good” policies out of Citizens is beyond ludicrous.

Ethically Challenged Lawyers

If you’ve driven along any major highway in Florida, there is a good chance you’ve noticed every other billboard is from a lawyer looking for auto personal injury cases or homeowners with “damaged” roofs.

Much of this is driven by the egregious one way fee structure in Florida where there is little downside to trying for the plaintiff. Of course, some lawyers go beyond trying marginal cases and manufacture fraudulent cases.

For example, pre-existing roof damage is attributed to a storm and the homeowner walks away with a brand new roof when otherwise small repairs would suffice.

Ethically Challenged Roofers

However, the shady lawyers wouldn’t have so much success if they couldn’t find equally shady roofers who were willing to lie to homeowners about the condition of their home’s roof. Why tell a client you can fix the roof for $2,000 out of pocket when you can force the insurance company to pay $25,000 for a full roof replacement?

Ethically Challenged Homeowners

Are some homeowners duped into believing their roofs really are in a state of disrepair and need replacement? Sure. Don’t underestimate the ability of the roofer and lawyer to talk a naive homeowner into signing a piece of paper they may not understand.

But there are also too many homeowners who would rather make the insurance company pay then pay themselves even if they know the damage is not from an insured event.

While these may be a small minority of all homeowners in the state, their actions raise the price of insurance for all the honest homeowners who don’t game the system. This has led to calls to put stricter laws on roof replacement when there are legit losses, which ends up punishing the innocent for the sins of the guilty few.

Florida politicians

We can always blame the politicians! And with good reasons. The legislature has kicked the can for thirty years now (including last week‘s efforts). They don’t understand how insurance works. They don’t understand what solutions actually would work. They blame the wrong parties. They refuse to do anything about the crooked lawyers because they donate too much to their campaigns.

Much of the legislation they have passed in prior years has only made the problem worse. From making toothless changes to AOB fees, capping annual price increases, allowing thinly capitalized insurers to hold most of the market share, allowing full roof replacement even if damage occurred to only 25% of the roof, making the solvency of Citizens and the FHCF reliant on potentially giant post storm assessments to name just a few, the cowardice of the Florida legislature has allowed this problem to continue to grow year after year.

Insurance Company CEOs

I mentioned earlier the house of cards nature of the local Florida insurers. What I left out earlier is why do these companies still exist? That’s easy. Because, just like the exploitative lawyers, roofers, and pols, the CEOs of many of these companies steal from the system to line their own pockets.

It’s an open secret that Florida insurers are set up with service companies, MGAs, or other similar structures which allow the actual insurer to be thinly capitalized and unprofitable while outsized fees are passed through to the service company.

The executives of these companies use these service companies to pay themselves excessive salaries and bonuses. There have been CEOs who have made north of $10M annually. Many CEOs make millions.

Note, these are on companies with small capital bases. Should something like 10% of capital be used each year to pay management? For companies who overall can’t make a profit?

These insurers exist solely to pay the management teams outrageous comp packages. There is no business case to support their continued existence. If I lived in Florida, I’d rather have a policy from Citizens. At least I know the state will be around to pay me.

So why do we let these companies take business away from Citizens just to add a fat layer of executive comp as an additional expense on an overburdened system?

The Not So Bad Actors

Before we give out the big award, there always needs to be some commercial filler and maybe a lifetime achievement award. Since I don’t have any of those, I will offer brief remarks on two parties that weren’t nominated and why.

National Carriers

Notice I didn’t assign any blame to the big name carriers like the State Farms, Allstates, Nationwide, etc. Why? Because they have been held hostage (or some might say Stockholm Syndromed?).

They don’t want to lose all the auto market share they have in the state so they write a bit of home business to stay in the game and hope for the best. Of course, one may ask whether Florida auto business is really worth it given PIP, fraud, and the NASCAR like driving on the highways there.

But whether it be a sense of obligation to customers and agents or a fever dream that someday Florida will reform itself, they have continued to participate in the market, often to their detriment.

Cat Reinsurers

I know, it’s easy to pick on those greedy reinsurers who make so much money in non storm years off the backs of ordinary citizens. Except, have they? I mean the occasional storm years offset all the loss free years and some of these reinsurers have been foolish enough to write below the Cat Fund or even do quote share, so they’re not making too much money.

Now, they’re faced with the prospect of their best clients disappearing due to financial distress caused by all the fraud. The reinsurers are doing what they’re supposed to do. They don’t have an obligation to bail the state of Florida out of its bad policy.

The reinsurers job is to charge a fair price for the cost of the risk and the capital they put behind it. If you’ve owned reinsurance stocks over the last ten years, then you know that writing Florida cat has not been generating any windfall profits.

And The Villain Goes To…

Can there be any doubt? While we have some very worthy candidates, nobody has done more damage to the state of Florida than the lawyers. Without them, AOB wouldn’t exist. I know this because other states don’t have these problems. It is endemic to Florida, even more so than alligators or hurricanes.

The politicians are a worthy runner up because they are the only ones with the power to stop the lawyers, but they refuse to do so. Too much campaign cash would disappear! Rather than do what’s best for the citizens of Florida, they do what is best for their re-election prospects.

Waiting For A Hero

If I can paraphrase from the Dark Knight, Florida gets the home insurance it deserves, but not the home insurance it needs. If voters keep electing politicians who don’t serve their interests, then they will continue to get more of the same policies.

Maybe someday a true hero will emerge who can protect innocent homeowners from all these parasites feeding off of them, but it’s more likely that the big storm will arrive first resulting in many literal dark nights for Florida residents who will live in the dark waiting for home repairs they can’t afford.