Posted on 08 Feb 12
As widespread fraud associated with the Florida automobile insurance market racks up costs for insurers, industry experts are wondering if the state is nearing an unsustainable tipping point.
In recent years, things like staged accidents, medical fraud and excessive legal fees have driven the price of personal injury protection sky high for insurers and consumers, said Jeffrey Mango, assistant vice president of property/casualty ratings at A.M. Best Co.
Florida legislators are attempting to address the issues in their current session. A bill that would make significant changes to the PIP no-fault coverage recently cleared the House Civil Justice Subcommittee.
"If fraud continues to be left unaddressed by legislators, you get closer to that unsustainable point," Mango said.
Sam Miller, executive vice president of the Florida Insurance Council, said state residents have seen massive increases to PIP coverage in the past four years and can expect more in the future.
“It's becoming unaffordable," Miller said. "If we can't effectively fix our auto system, we are going to start to have a capacity problem and an availability problem. It's just a matter of time.”
Chris Neal, public affairs manager for State Farm, said auto insurers have historically been able to get their Florida rates increased when needed. But, he said, prices can only rise for so long.
“Are we at a point where people can't afford it?" Neal said. "That would be a question I don't know an answer to, but that's something that really needs to be considered.”
Fraud is part of the "adverse trends" that A.M. Best Co.'s analysts cited when they recently downgraded Peachtree Casualty Insurance Co. to B (Fair) from B++ (Good) (Best's News Service, Jan. 27, 2012). The downgrade reflected Peachtree's unprofitable performance in the Florida market, among other factors. Attempts to reach Peachtree for comment were unsuccessful.
While Peachtree has a small share of the Florida market, unfavorable trends have the attention of an insurance giant. During their recent fourth-quarter earnings report, Allstate Insurance Group said they have had reduced auto policy counts because of their efforts to improve profitability in Florida and New York, another PIP state.
Fraud in the system is racking up costs for insurers on several fronts, Mango said. Accidents are being staged by people in order to get their hands on the $10,000 PIP benefit, he said. There are also medical providers engaging in fraudulent billing practices, in which the injured party may or may not be aware it is occurring.
Those two fronts have led insurers to bolster their special investigation units, which check out or verify suspicious claims, Mango said. That's another cost.
Neal said his company has always placed a priority on investigative units.
"We've always made a significant investment in that area to make sure that our customers aren't being charged for accidents that aren't legitimate," Neal said.
Insurers also attempt to combat costs by monitoring claims in the state and watch for unusual loss patterns, Mango said. The results can lead insurers to be more selective where they write business.
"We're seeing a lot of activity from the carriers from that perspective; trying to be selective as they can in writing it and pricing the product more effectively to reflect the cost of doing business in that market," Mango said.
Legal fees stemming from the defense of lawsuits in PIP situations have also been high for insurers, Neal said. The state has provisions, known as attorney fee multipliers, that can send attorney fees through the roof, as much as 2.5 times he said.
"The attorney fees can be that $10,000 limit, multiplied by many times," Neal said. "I can show you many, many examples where we are paying $50,000, $80,000, $90,000 in attorneys fees over a $10,000 coverage."
So far, a steady stream of rate increases, along with other preventative measures, has prevented a mass exodus of insurers from the state, Miller said.
"Companies are hanging in because the rates have been increased, but the loss ratios on auto insurance and PIP are just incredible," Miller said.
The top five writers of passenger auto insurance in Florida in 2010 were: State Farm Group, with market share of 20.8%; Berkshire Hathaway Insurance Group, with 16.2%; Allstate Insurance Group, with 13.9%; Progressive Insurance Group, with 10.9%; and USAA Group, with 5.6%, according to BestLink.