California and Florida: Insurance Wastelands

State Farm Insurance Company, the nation’s largest insurer, just announced it was suspending all new Home and Business Property Insurance in California.


Misery may love company, but State Farm’s action in California does not help Florida’s insurance challenges.


California has been a challenge for insurance companies for many years. Restrictive rate regulations coupled with massive wildfire and landslide losses plus inflation have caused AIG and Chubb to reduce California business. Expect other carriers to follow.


Here in Florida, we have seen numerous property insurance companies fail. We are now at a point where finding insurance is as difficult as paying for it for many homeowners.


Insurance is a way to finance loss. Nothing more nothing less. It is a finance tool, not a safety blanket. Understanding this finance function is essential to understanding the insurance industry.


Modern society requires financing to function. Running a business, buying a property, owning a home, or driving a car all involve risks. We either keep a barrel of cash or we must finance these risks. Insurance is one of the financing options. There is a cost to financing risk, lenders expect a profit. A fair profit is acceptable, without it, there is no capital to take the risk. Risk-taking capital has stopped investing in insurance. Losses have replaced profits.


The risk-taking mechanism in Florida and California is obviously broken. One side (the insurance companies) has taken its ball and bat and gone home. Florida has taken major action to fix the problem [last year’s Senate Bill 2A]. What will California do?


People ask why states allow insurance companies to sell profitable insurance [life, auto, etc.] while refusing more risky property policies. Florida tried to mandate linkage between Homeowners and Auto after Hurricane Andrew. The insurance industry threatened to leave, and politicians blinked.


Perhaps it is time to look outside the box for tough actions on insurance companies as well as those who attempt to profit unfairly. I am not a defender of my industry. There is much it can do better. I am also a free market advocate.


Florida and California are great places to live but they are not great places to buy or sell insurance. The system is broken and needs to be fixed – quickly.


We need to send word to Tallahassee that Florida must have a healthy and competitive insurance marketplace.


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