Florida: The other insurance crisis
The same shockwaves that have homeowners reeling are striking business owners who must now confront premiums that have increased since last year by as much as 400 percent -- when they can get insurance.
By TOM ZUCCO
St. Petersburg Times
June 19, 2006
Florida homeowners have railed for months about the skyrocketing cost of residential property insurance and the suffering it is causing.
They're about to have a lot of company.
Business owners looking for commercial property insurance are increasingly finding themselves in the same rickety boat as homeowners.
And should the crisis get out of hand, the effects could reach throughout Florida's economy.
"The commercial insurance market is in chaos," said Craig Sher, president of the Sembler Co., which developed BayWalk in St. Petersburg and acts as landlord for about 1,000 small businesses.
Insurance companies that write commercial policies for everything from strip malls to restaurants are raising premiums as much as 400 percent, dropping policies as they come up for renewal, or both.
One insurer simply decided to cancel policies. North Pointe Holdings of Southfield, Mich., said recently that it plans to cancel nearly half of its 28,000 commercial policies in Florida.
Experts say the net effect of huge premium increases coupled with a shrinking insurance market can range from higher costs passed on to consumers to a slowdown of economic growth.
"Businesses have become shocked upon receiving their new insurance bill," John T. Long, president and CEO of the St. Petersburg Chamber of Commerce, said last week. "That's the buzz going on all over the place.
"What's also interesting," he added, "is that I also hear this from people considering relocating to this community, which has a tendency to add to the many challenges of a successful business."
Or the reverse can happen. An insurance crisis can cause established businesses to leave.
Mastry Engine Center, a marine engine and parts distributor near Tyrone Square Mall in St. Petersburg, has 66 employees and has been in business since 1962. Last year, the company paid $50,000 for $13.3-million worth of insurance through Westchester Surplus Lines Insurance.
"They wouldn't even talk to us when it was time to renew this year," president Tino Mastry said. "We had to get the same coverage from three different companies."
At a far steeper price. The total: $226,000, a 350 percent increase.
Mastry took the policy because, like many other businesses, banks would be reluctant to loan him money for other projects if his company was uninsured.
"So now we're going to have to generate an additional $8-million in sales to cover the cost," he said. "It's not possible for us to do that. We're either going to have to pass the cost on, or move."
That is no idle threat. Mastry, 60, found he could buy a 40,000-square-foot warehouse in Valdosta, Ga., move his company there, and save $75,000 a year.
"We would do everything not to move," he said. "But it's the same insurance situation until you get out of Florida, which is really a shame.
"Hopefully, it might be better next year. But we are actively pursuing property in Georgia."
The business community was bracing for some increases in property insurance this year, Long and others said, because of the past two hurricane seasons.
"But these increases are extreme," Long said. "Not much different from what homeowners are seeing. And it's especially difficult for small businesses."
In one respect, business owners are at a disadvantage when it comes to finding a company to insure them. Unlike home and condo owners, most businesses don't have Citizens Property Insurance Corp., the state-run insurer of last resort, to fall back on.
Citizens insures about 1.2-million property owners in Florida, but only about 15,000 of them are commercial accounts, and most of those are in South Florida.
That's because Citizens only writes commercial business in its high-risk account, which includes coastal sections of Pinellas, Pasco, Citrus and Hernando counties, but no part of Hillsborough.
And unlike the vast migration of new residential policies to Citizens, new commercial policies come to Citizens at a trickle. That, said Citizens spokesman Justin Glover, "is because we've already got most of the commercial policies in the high-risk area."
If a business is outside the relatively small high-risk area and can't find insurance in the private market, it must pay rates many times the average. Or go without coverage.
Even in the future, Citizens may not be able to help. Citizens' windpool boundaries, which effectively form its high-risk account, were frozen in 2002 by the Florida Legislature.
"If businesses are not in the windpool area, there's nothing we can do," Glover said. "It's not in Citizens' authority to modify the boundaries."
Citizens has gone on record in opposition to expansion of the high-risk account because it was damage in that area that accounted for what Glover called "a vast portion" of Citizens' 2004 and 2005 deficits.
What also hurts the issue of a crisis in commercial insurance is that residential insurance issues are usually considered more politically sensitive. A story about retirees having to sell their home because of soaring insurance costs grabs a lot of attention.
But insurance experts say the spotlight may soon shift as the commercial climate deteriorates.
Ken Jacobs, senior vice president of commercial lines for insurance broker Acorida, can point to examples of rates that have risen from 100 to 300 percent or more in the Tampa Bay area, based mostly on the age and construction of the building.
"What's happening is that all at once there is this problem with capacity," Jacobs said. "When the state needs more commercial insurance than ever, the state has less than ever. And what is there has skyrocketed in price."
At some point, Jacobs said, higher insurance premiums, along with higher property taxes and other expenses, are passed down.
"The tenant or customer," Jacobs said, "is ultimately going to pay for this."
The risk is that a business owner raises prices or rents so high that his tenants or customers go elsewhere.
"But the increases are so dramatic," Jacobs said, "that owners have had to take on a lot of the costs themselves. They can't pass it on."
That, Jacobs said, is leading to real estate deals not closing and businesses that aren't able to expand or update equipment.
"The commercial insurers understand," Jacobs said, "and within the government, they're starting to hear it.
"But if we have another bad wind season, I can't see any options other than something like the national flood program for wind."
Commercial property insurers are cutting back or sending rates soaring for the same reasons as residential insurers. The 2004-2005 hurricane seasons prompted insurers to look for ways to cut future losses.
In addition, the cost of reinsurance, which is insurance the insurance companies buy to limit their risk, has risen nearly 50 percent and is increasingly hard to find.
Just as Citizens provides a backstop for the residential market, business owners have a few alternatives.
The most common way for a business to protect itself against being dropped by an insurance company is to layer its coverage - string together three or four smaller policies from different insurers, often from surplus lines carriers such as Lloyd's of London, to create a complete package.
Another tactic is insurance pools, where large groups of businesses pool their money and spread the risk over a wide geographical area.
But in both cases, the insurance that is available often comes at a hefty price.
The problem in the commercial market has caught the attention of state Insurance Commissioner Kevin McCarty. A spokesman for McCarty's office said the department has been "made aware by agents, consumers and small-business owners that there are availability problems in the commercial market.
"Concerns have also been expressed that there is a lack of availability of reinsurance for certain commercial insurance products in the state."
While state officials assess the extent of the problem, others wonder how to cope.
"If you add a dollar or two a foot to operating costs because of insurance, that's significant," said Sembler Co.'s Sher. "We're very concerned about tenants' ability to conduct business.
"Nobody cries," Sher added, "over commercial property owners. We haven't come to that."
But that may change.
In Oldsmar, Mary Bailey and husband David own Creative Body Works Inc., an auto body shop with 12 employees, 25 service bays and, come July 1, no property insurance.
Three weeks ago, Bailey got a notice from Universal Underwriters.
"They said they were no longer insuring any buildings within 10 miles of a body of water," she said. Her business is about half a mile from Tampa Bay. "I didn't know what to think. I'm not in a flood zone."
The notice sent her scrambling for other carriers.
"But the problem is that so many other people are looking, too" she said. "The insurance companies are bombarded by all these businesses looking for policies.
"This hasn't been talked about. You'd be surprised how many business owners think Citizens will help. I even thought that. Now you find out there is no place to go."
Agents have told her that sometime soon the surplus lines companies that are writing policies will reach a saturation point and stop.
"I can understand their position," Bailey said. "They're looking at the risk and what happened the last two years.
"I just need to find insurance somewhere."
In the meantime, the Baileys will likely put off building an addition and buying equipment.
And like Tino Mastry, they're going to tighten their belts, ride out the year and see what happens.
"Maybe then," she said, "things will improve."
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