A Game of Risk for Small Insurers

'Mixed Blessing': Jeff Grady, president of the Florida Association of Insurance Agents, says many agents worry that some domestics lack the claims-handling foot soldiers needed in a crisis. Grady has another concern: Domestics are more highly leveraged, he says. [Photo: Ray Stanyard]

The modeling produces a limit on how many homes American Strategic will write in a particular area — diluting risk and keeping reinsurance costs low. In addition, because it’s a new company, American Strategic can also be more selective. “We have way more than our fair share of newer homes,” Auer says.

Multistate firms like State Farm and Allstate also are trying to accomplish that selective risk-taking, of course. But having built their books of business when seizing market share was the name of the game, the multistates must do it in reverse, by shedding policies.

Holding down reinsurance costs is particularly critical for American Strategic. Most domestic insurers keep a bigger share of the risk they underwrite — meaning they suffer bigger losses after storms and rack up bigger profits when the wind doesn’t blow. By contrast, American Strategic achieves the stability of a traditional multiperil company — fire, theft, etc. — by turning over most of its hurricane risk to reinsurers.

That strategy dampens profits — but minimizes the potential for devastating losses. American Strategic’s worst year, 2004, is a good example. That year, it took in $134 million in direct premiums, turning over $80.5 million — 60% of the total — to reinsurers. But after Charley, Frances, Ivan and Jeanne, American Strategic was on the hook for only $25 million of the $218 million in losses customers claimed; reinsurers ate the rest. In 2006, when no storms hit, the reinsurers enjoyed the feast portion of their feast-or-famine business, clearing $189 million in premiums ceded from American Strategic.

The company differs from its peers in other respects. It employs 150. Most domestics have much smaller staffs and outsource claims handling and support work. The in-house staffing, Auer says, is why American Strategic posted the lowest complaint ratio among the top 20 residential insurers in Florida in 2004.

Not everything has gone according to plan. In 2006, the state offered $250 million in low-cost matching loans, known as the insurance capital buildup incentive program, to help domestics grow. Auer’s team founded — and American Strategic became a minority owner in — a new company, American Capital, that became one of 13 companies that got state loans and promised to collectively write nearly 2 million policies. American Capital’s target market was condo associations, but the company has fallen substantially short of growth projections because of increased competition, most notably from Citizens.

One question domestics face is their staying power. Jeff Grady, president of the Florida Association of Insurance Agents, calls domestics a “mixed blessing.” They sell through independent agents, which is to his members’ benefit. But agents worry these virtual companies lack the claims-handling foot soldiers that companies need in a crisis. They generally don’t have the financial backing that multistate insurers have and are more highly leveraged, Grady says. Florida’s largest insurance failure, Poe Financial, was made up of Florida domestics. A.M. Best and other brand-name services don’t even rate most Florida domestics because of their youth or Florida-only concentration.

Tags: Florida Small Business, Entrepreneur