Via Claude Penland, the Wall Street Journal discovers Florida’s sinkhole phenomenon. And not far from the problem is the public adjuster industry.
Public adjusters can be the bane of a claims department. They are adjusters that contest an insurance company’s settlement offer, and are a recent phenomenon. They receive a percentage of a settlement reached with an insurance company, so they have an incentive to get the size of a claim as high as reasonably possible. This also means their incentives align with their clients, the people making the claim, and the economist in me looks at that with favor.
Of course, there can be abuses, too. To get business, the public adjuster may encourage a person to file a claim that maybe doesn’t quite make sense.
Florida is Ground Zero for the business. In the 2004 and 2005 hurricane seasons, public adjusters flooded the state to help claimants sort through claims. Remember the storms in those years followed similar tracks, so the same person many have had losses from three different storms – meaning three different claims, three deductibles, etc.
Since 2005, though, Florida hasn’t been hit too hard by hurricanes. Fortunately for the adjusters, the state has suddenly started sinking.
Sinkholes until the past year or so occurred primarily in Hernando and Pasco counties, near Tampa. The map on the right shows sinkholes Now they are happening everywhere. Citizens, the state’s largest HO insurer, saw the number of sinkhole claims double from a year ago.
Here’s how things were a couple of years ago. The top map at right (from here) shows the number of sinkhole claims in Hernando County in 2008. (Clicking on either map will give you an enlarged version.) The little yellow circles are small sinkholes, the red circles are big ones, the orange – in between. There’s a lot of circles on that map. And actuaries knew about the risk, so they priced for it.
However, they didn’t price for Broward County (Fort Lauderdale), and the bottom map shows why. There weren’t many sinkholes.
Last year, Citizens booked a 500% loss ratio on sinkhole claims. The average claim was more than $85,000. Verifying a sinkhole claim costs $10,000.
“It’s an alarming increase,” says Susanne Murphy, chief administration officer of Citizens, a state-run insurer. Some Florida officials are worried that sinkhole claims could threaten the solvency of weaker small insurers, including companies that the state helped nurture to expand the availability of hurricane insurance.
The number of public adjusters, who are hired directly by policyholders, has grown to 2,914 as of 2009 from 678 in 2004, according to a January report by state public-policy analysts.
[Since the 2004 and 2005 hurricanes,] adjusters have had to “direct their attention elsewhere,” says Kevin McCarty, commissioner of Florida’s office of insurance regulation. “It’s like Whac-A-Mole.”
In defense of the public adjusters, I should note that the Journal story doesn’t cite any specific abuses. The adjusters blame overdevelopment in areas susceptible to sinkholes.
In the end, I fall back on my Florida experience. I lived there for seven years, and the atmosphere always seemed to encourage – uh, exaggeration, let’s say. Sometimes it felt like everybody in the state was on the make, except maybe Mickey and Pluto.
So I wouldn’t be surprised if quite a few of those sinkholes claims have creative origins.