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Homeowners insurers doing business in Florida — established as well as new –are losing money and the state regulator says rates may need to go up.

Also, the state’s largest private home insurer, State Farm Florida, which wants to leave the state because the regulator won’t give it rate hikes it says it needs, could be staying after all, perhaps as a slimmed down model of its former self.

Insurance Commissioner Kevin McCarty told Gov. Charlie Crist and Florida Cabinet members that 84 of the 210 property/casualty insurers doing business in the state reported underwriting losses in their national results at the end of the second quarter. Also, of the state’s newest 21 insurers, 15 lost money on underwriting as of that date.

McCarty said this is not a loss situation unique to Florida but is happening nationally. He also said it is not unusual for start-up insurers to lose money at first.

But he told officials that in Florida insurers have identified a number of cost factors that are driving their results. These include greater-than-expected premium reductions for mitigation discounts, rising fraud related to mitigation discounts awarded to property owners, the cost of reinsurance, the replacement cost methodology used in Florida, and an increase in not just sinkhole claims but in the costs to investigate homeowners’ claims for possible sinkhole-related damage.

He said that insurers have told him that these concerns are “exacerbated” by the continuing economic downturn and the decline in Florida’s real estate market and rise in foreclosures.

Asked what can be done, McCarty said the state’s options are limited. “There are only two alternatives: Increasing rates, which is really just affecting the symptom, or looking back at the core problems and what can be done,” he told officials.

The latter — looking at core problems — might include re-examining the mitigation credits, sinkhole coverage and replacement cost programs and beefing up anti-fraud efforts.

However, one of the main cost drivers, reinsurance, is outside the state’s control to fix, he added. He also expressed “cautious optimism” that the insurance marketplace will be helped as the state’s economy and housing markets improve.

He cited reinsurance as the “overriding concern” for insurers. He said Florida’s state-backed hurricane reinsurance fund provides important stabilization but that insurers in the state are still heavily reliant upon Lloyd’s, Bermuda and other private markets for reinsurance. He said reinsurance rates have been rising at a 15 percent clip, driven in part by catastrophes around the globe, and Florida insurers have had to cope with higher reinsurance costs even though the state has not suffered a major storm for several years. If the state is hit with a major storm, this cost pressure will only get worse, he warned.

McCarty said the state is still negotiating with big insurer State Farm over its proposed withdrawal from the property market. The insurer wants to drop some 770,000 policies but the state and the insurer have not yet agreed upon a plan to do this. Until they do, State Farm is blocked from dropping its customers.

McCarty raised the possibility of State Farm remaining in the state but with a scaled down company.

“We would be better served if State Farm stayed to some degree,” McCarty said. He suggested that the insurer’s recent move, which the insurance department approved, to discontinue certain policyholder discounts is a step towards the insurer reducing its exposure in the state that could help its bottom line.

However, if State Farm does finally exit, he said the marketplace appears poised to absorb most of the policies it leaves behind. About 30 insurers — with what McCarty said “appears to be enough capital” — have expressed interest in taking on some of State Farm’s business. Most of these carriers are established players with “superior ability to negotiate reinsurance contracts” and not the newer entries into the market, he stressed.

McCarty said the state is reviewing the program that awards discounts to homeowners who make modifications to their houses to limit damage from major storms. He acknowledged that there appear to be incentives for fraud in awarding of the credits and that there may be some duplication in the implementation of credits by insurers. A report released this summer by the Florida Insurance Agents Association concluded that the program is riddled with errors and fraud by vendors, insurers, customers and agents.

McCarty suggested it may be necessary to introduce some sort of affidavit requirement or verification procedure to assure that modifications qualify for discounts. He also said the state will have to augment its fraud investigation efforts surrounding the mitigation program.

He also said that some insurers told him they underestimated the impact on their revenues of the mitigation discounts, which has contributed to some of them losing money.

He explained that insurers’ complaints about sinkhole claims are not over legitimate claims but have to do with the considerable expense of investigating an increasing number of complaints that may have more to do with normal ground settlement than with sinkholes.

McCarty also said the state needs to work with insurers on the replacement cost problem to “balance” the concerns of consumers who need enough money to fix their roofs with those of insurers concerned that that too often the insurance money isn’t spent on the roof.