As 'Keystone' Crumbles, So May Charlie Crist's Insurance Plan for Florida

Florida Gov. Charlie Crist has a history of flogging the insurance industry. As major insurers like State Farm flee the state, he says “Good riddance,” while pursuing the U.S. Senate seat that will be open in 2010. With luck, he’ll be there before another big storm hits the Sunshine State.

But Crist’s plan for helping Floridians deal with future hurricanes - and, eventually, they will - leaves something to be desired. Apart from praying at Jerusalem’s “Wailing Wall,” his basic strategy has been to replace major insurers such as Allstate, Travelers and, of course, State Farm with about 30 mini-insurance companies propped up by reinsurance and the state’s underfunded catastrophe fund.

If this sounds like a house of cards, well, it could be. Remove a couple and the edifice starts to crumble, even before the hurricane hits.

And some already are falling down. Earlier this month American Keystone, one of the 2007 crop of property insurers, was placed into receivership and will be liquidated. Policies will be canceled on Nov. 8, and heaven help the hindmost, because 8,000 policyholders will be scrambling for new home or business insurance.

American Keystone is the second mini-insurer to go under. Coral Insurance went into receivership in April, even though its unique business model was supposed to be its biggest asset. Coral insured older south Florida homes, but only those that had been “hardened,” that is, brought up to the state’s new, more stringent building code to be better able to withstand the inevitable hurricanes. In 2007 Coral gained notoriety when it lowered rates. In retrospect it was probably a big mistake, but good publicity at the time.

But it’s too early to tell whether this is a trend. There are a myriad of small insurers who are still in business and writing some kind of property insurance, not all for the general public. It’s also true that Kevin McCarty, Florida’s much-maligned insurance commissioner, has fulfilled his promise to be diligent in cracking down on insurers like American Keystone, which fell shy of the $4 million in reserves it was supposed to keep.

Florida homeowners might start to feel the house shake even before the storm hits. Most of these new insurers aren’t even rated by A.M. Best, the dean of insurance raters, which has ceded the field to Dublin, Ohio-based Demotech. It will be interesting to see if Demotech believes any of the other mini-insurers are in trouble.