I had planned to write and attempt to answer the question, How Demotech could give a completely new company (Florida’s newcomer, Vyrd Insurance) an A rating before they even wrote one policy. When I looked at the classification process (which I didn’t quite understand yet, but I plan on), I decided that Demotech used the best and most relevant information available at the time. I’ve looked at their results and from what I can tell, their rating system seems to be achieving their stated goals so they get a pass from me for now.
As I researched it, I started to see a question behind the question (thanks, John J Miller, author of QBQ) decided that Demotech did a yeoman in their rating. My problem is not with the rating and it’s not with Vyrd. I’ve researched quite a bit on it and from what I’ve read so far in the OIR (Office of Insurance Regulatory) files, nothing jumps out as a system problem, except for one small detail.
The problem comes from the unique wrinkles in how property (homeowners) insurance works in Florida. In Florida, we don’t have a JUA or FAIR plan for homeowners anymore. We have Citizens Property Insurance Corporation, our remaining market for homeowners, commercial property and wind coverage.
Before I go any further, I should probably tell you that I used to work for the Nationals and love my job there. I’ve worked with some insurance professionals and learning professionals. I am not talking to Citizens here. I object to a problem created by the state and burdened citizens (and the rest of us) with it.
Looking at the news and in their filings, the problem comes because their business model for getting an influx of premiums is to be Citizens take out, which is hardly as good as having this little sandwich spot. The Road. Since citizens are supposed to be the state’s market of last resort, standard market firms (such as Vyrd) can apply for policies from Citizens.
The short version of the story is that citizens not only write policies on those risks that would qualify for a JUA plan or a FAIR plan, but potentially every building in the state would be secured by Citizens. When I first went to work at Citizens, they were the largest property insurance company in Florida, which was never the intent, but that’s another story for another day. Those who could qualify for Standard Market coverage are eligible for the Takeout Program. This allows carriers to identify risks based on specific criteria they create. This is how companies end up quickly putting thousands of new policies on their books with no expense to choosing new policies.
Here’s the business model problem. It doesn’t work as well as most carriers think it will. They plan to get hundreds or thousands of policies, receive a premium dollar payment right away, and instantly get a business renewal book that’s worth a lot. Remember that Florida homeowners insurance premiums are among the highest in the country. If everything goes the way carriers planned, they will have a solid business book without having to pay any acquisition costs or customer claims.
It doesn’t work exactly that way.
What usually happens is that the carrier provides a list of the risks they are willing to take and so do dozens of other carriers. There are always many carriers that end up wanting the same risk, and that means someone loses, and in fact, most carriers don’t get what they want. This is just the first cut on their list.
The document holders are then notified that they have been selected for discharge. They receive a letter telling them that on a specific date, their policy will not be with citizens, but with a new company. Many document holders will ignore the letter for the time being. Others will take the letter and call their agent, which is what the letter instructs them to do. When they call, it doesn’t mean thanks for finding this new policy. Who is this insurance company? Who said I want them to write my insurance? Will they be there in a year? Will they raise premiums or reduce coverage? What often happens next is that the policy holder sends his response back to the citizens. No thank you. Better not to change insurance companies.
The list is smaller now.
Eventually, those customers who ignore the messages receive a bill, renewal notice, or something else that alerts them to the fact that they have a new insurance company. This is when they call their agent to ask these questions. What is this insurance company? Why did my company change? No, I haven’t seen the messages telling me this change. Is there anything I can do now? No, I don’t think I want that insurance company. I can’t even pronounce it.
The list is smaller now.
Upon renewal, some policies will be renewed. Others will not. costs will be incurred. Claims will come. The reality of the Florida insurance market will reach somewhere between the bottom line and the bottom line. Claims reserves will increase. Maybe there is a storm. Maybe there isn’t. There may be four storms. It is never as easy as it seems on paper. Perhaps they can apply for other nationals.
The disadvantages of this business model are in numbers. Companies may think they will get as many policies as they need, but the truth is that they never work the way they think they will on paper. It’s the same lesson I learned in my early days in the army.
No plan survives first contact with the opposing force.
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