Cracking the code on sinkhole claims
The Tampa Bay Times launched its new name and the New Year with a three-part series on the Great Sinkhole Lottery, titled ”Cracks in the System.” Here, at last, is the “big picture” on what the cost of dubious sinkhole claims is doing to the availability and affordability of property insurance. It was a well-researched and balanced series on how and why people are cashing in on what may or may not be actual sinkhole damage—because they could. There’s a quote from a guy who got a $260,000 payout and decided to invest the money in something other than repairing his home. He is quoted on the front page saying the house can fall into the ground for all he cares because “I made my money already.” Woohoo for him. He’s another lucky winner in the Sinkhole Lottery, and I’m among those paying for his winnings. So are you.
For those living in the It’s-All-About-Me World, which seems to be fairly well populated, it’s okay to take the money and run. They don’t care that insurance is pooled risk and that the reason Citizens Property Insurance needs to raise sinkhole rates is because they took in $32 million in premiums and paid out $245 million in losses in 2010. Is anyone curious about where the money comes from to pay claims 7-plus times greater than what people pay for? It comes from Citizens’ surplus, which is the financial cushion that protects policyholders in case of unexpectedly high claims. A flattened financial cushion means less money in the rainy-day (aka hurricane) fund and greater chances of assessments. That’s the gravity for people living on Planet All-About-Us.
Reader’s faulty math doesn’t add up
I have a habit of looking at reader comments following insurance news stories to help me figure out gaps in knowledge to address in this blog. And, I found one from a Times’ reader who “did the math” to prove the misguided premise that insurance policies from Citizens should only cost $163.33 per policyholder annually. The reader divided Citizens’ 1.5 million policyholders into the $245 million in sinkhole losses to get that figure. This person “reasoned” that since the average premium a homeowner pays is closer to $2,000, people were being led like sheep to think premiums are insufficient to cover payouts. Baaaad math. Several factors were left out of the equation, such as the fact that not everyone buys comprehensive sinkhole coverage because it’s optional – and people who don’t buy it should not subsidize claims payouts to those that do. Second, this math totally ignores that Citizens has other losses besides sinkholes. In fact, a report from Citizens’ Claims Committee showed a nearly 40 percent increase in claims volume overall for the state-run insurer through October 2011. And, this will likely astound astute people: Sinkhole claims for Citizens represent only 6.3 percent of all the 55,280 new claims filed last year. Get this: The #1 cause of loss was water-related – at 40.5 percent of all new claims reported. Weather-related claims represent 26.4 percent, and burglary/theft claims were at 9.2 percent. If you’re going to do the math, add those numbers, too.
Here are links to other parts of the Time’s special report on sinkholes: