How Insurance Works in Florida
Insurance in Florida is provided by private and public organizations such as Medicare and Medicaid. Medicare is funded through payroll taxes and premiums paid by recipients. In Florida, Medicaid is jointly funded by the federal government and the state government. On the other hand, private insurance organizations are funded primarily through premiums paid by beneficiaries. Premiums are the monies paid by the policyholder in exchange for the coverage provided by an insurance company. The cost of premiums is determined by various factors, including the extent of coverage, type of insurance, and possible costs of compensating for any potential losses. Typically, higher risks usually carry higher premium costs in insurance. For example, the cost of home insurance in an area prone to earthquakes and other disasters will be higher than what people pay in regions not prone to disasters.
The Florida Office of Insurance Regulation is the organization that regulates and superintends over all insurance entities within the state. Insurance in Florida helps residents manage the various risks that could arise in the course of their personal lives and business. To further provide sufficient coverage, there are various types of insurance offering protection for different purposes. Insurance types are extensive and include life insurance, health insurance, home insurance, car insurance, and many others.
HEALTH INSURANCE
Health insurance primarily covers healthcare-related risks. It can cover the costs of emergency care, routine care, and treatment for chronic illnesses. As with most states in the U.S, in Florida, health insurance can be provided for employees by employers as part of their benefits package. Although the Federal Affordable Care Act (ACA) requires residents of Florida to possess valid health insurance coverage, there is no penalty for a failure to comply with this law. Consequently, due to the high costs of health insurance and the absence of any penalties, many residents decide against purchasing health insurance or choose short-term coverage options. Within Florida, an average of 19% of the state population do not have adequate health insurance coverage. In places like Hendry County, an average of over 35% of the residents do not have health insurance. On the other hand, Broward county, with the lowest number of persons without health insurance in the state, still has 19% of the population without health insurance. The price of health insurance in Florida varies based on many factors, but prices range between three categories: bronze, silver, and gold. Floridians can purchase health insurance through the federal exchange or private insurance companies.
AUTO INSURANCE
Auto insurance is a specialized type of insurance that covers financial losses that may be incurred from an accident, theft, or any other damage to your vehicle. Having auto insurance is compulsory under Florida law. However, residents can determine the extent and type of coverage to purchase. The coverage provided by auto insurance could include damage to your vehicle or another vehicle, damage to property, and bodily injury caused to others. The cost of your auto insurance premium is affected by a wide range of factors, including your credit rating, type of vehicle, and location.
RESIDENTIAL PROPERTY INSURANCE
Residential property insurance provides coverage against any loss to tangible or real property. Coverage provided under this type of insurance could be for property protection or liability coverage for the policyholder. Residential property insurance can be embedded in different policies, including earthquake, homeowners, flood, and renters insurance.
COMMERCIAL INSURANCE
Commercial insurance is designed to cover all aspects of a business, including the employees, business operations, and the owners of the business. There are different commercial insurance policies for different purposes, including commercial property insurance, commercial auto insurance, and marine insurance. These policies provide protection for a business to the extent stated in the policy documents. Most plans under commercial insurance are specifically designed to cater to a business’s unique needs.
LIFE INSURANCE
In life insurance, the policyholder makes payments of an agreed premium in exchange for a guaranteed amount that will be paid to the policyholder's beneficiaries after death. There are different types of life insurance policies to suit individuals’ preferences, and these could be short-term or long-term plans. Some life insurance policies will expire after a set period, while others will remain active throughout the lifetime of the insured.
DISASTER INSURANCE
Disaster insurance is also known as catastrophe insurance or hazard insurance. It provides coverage against unforeseen natural disasters that could damage your home, business assets, or other properties. Disaster insurance is typically specialized to address different types of disasters. You may need to purchase separate plans if you want coverage for multiple disasters. Examples of disaster insurance policies in Florida include flood insurance, hurricane insurance, and earthquake insurance.
How Does Florida Insurance Work?
In insurance, an individual pays an insurance company an agreed amount (monthly, quarterly, bi-annually, or yearly) to bear the risks and cost of unplanned losses in the case of a covered event. Insurance is a financial service offered by companies to protect you against unforeseen circumstances.
Insurance companies collect non-refundable payments, called premiums, from different policyholders. Because there are often many customers who make these payments, but a lesser number make claims, the insurance company is able to pool the monies paid to service any claims that may be made. This process of collecting different premiums and pooling them together is known as risk-sharing, and it helps reduce the overall risk. Insured often file claims at different times, so the company can pay claims as they show up.
What is an Insurance Claim?
An insurance claim in Florida is a formal request to an insurance company for payment based on the stated terms of the policy document. An insurance claim is based on the occurrence of one or more of the risks or losses insured. To file an insurance claim, you will typically need to fill out a form and outline the damages or losses you may have suffered, providing evidence. After investigating your claim, if the insurance company is convinced, it will pay out such claims.
What is the Cost of Insurance?
The cost of insurance in Florida differs and is determined by several factors. These factors include the insurance company used, location, the type of coverage required, and credit history. Each type of insurance coverage will also typically have different considerations when deciding the amount to be paid as a premium. For example, if you purchase tornado insurance, the provider may consider the frequency of tornadoes in your location, home structure, and the precautions taken to mitigate damage by tornadoes to determine premiums. Different insurance providers may also charge different prices for similar coverage types.
How Can Insurance Companies Afford to Pay Out Claims?
There are two major ways through which insurance companies in Florida can afford to pay out claims. They are:
Investment Income: Insurance companies charge premiums, and numerous policyholders make payments resulting in a large pool of money. Rather than place these amounts received in a low yield savings account, insurance companies invest the sums received in financial or non-financial assets to make profits while awaiting claims from insureds. These investments are typically short-term but can be longer depending on the financial buoyancy of the insurance company
Underwriting Income: Insurance companies in Florida can also make money by collecting more money from premiums than they have to pay out as claims. Under this model, an insurance company that collects premiums to a total of $10 million in a year but has to pay out claims totaling $7 million can hold on to the excess $3 million as profit. The underwriting income is the difference between the total amount paid in as premiums and the total amount paid out by the company for claims.
Although these two methods are the major ways insurance companies generate revenue, they can also generate income via other means. Some insurance companies provide additional financial services such as financial planning, retirement planning, and investments to boost income and increase the funds available for the payment of claims.
Another way insurance companies can afford to pay out claims is through reinsurance.
- Reinsurance is when an insurance company purchases an insurance policy to protect it from unnecessarily high claims or situations where high claims could result in a significant loss to the company.
Insurance companies can also generate money when there are coverage lapses. If you fail to renew your insurance policy on time, or your coverage comes to an end without any claims being made, the insurance company gets to keep all premiums paid.
Additionally, insurance companies can earn money through cash value cancellations. Cash value cancellation is when a policyholder voluntarily cancels an insurance policy before its maturity date. This is particularly peculiar to life insurance policies. When an insured decides to claim the cash value, the insurance company may be able to make such payments while still retaining the profits made from the investment of the premium. Some insurance companies may also have a surrender charge, which is taken from the total amount to be paid out to the policyholder.
What Happens if an Insurance Company in Florida Goes Bankrupt?
An insurance company goes bankrupt if it cannot pay out claims or settle its debts. After a company declares bankruptcy in Florida, it is placed under receivership by the courts, and the Department of Financial Services is appointed as the receiver. The receiver will attempt to get the company back on track. If that fails, the receiver will sell off the company’s assets to pay out claims while also working closely with the Guaranty Associations to ensure that payments for outstanding and valid claims are met.
All insurance companies in Florida are mandated by law to be part of a Guaranty Association. The Florida Insurance Guaranty Association Act established the Florida Insurance Guaranty Association to handle insolvency claims for casualty and property insurance companies. Also, the Florida Life and Health Insurance Guaranty Association Act established the Florida Life and Health Insurance Guaranty Association to handle payments for insolvent life, accident, and health insurance companies. The Florida Workers' Compensation Insurance Guaranty Association covers claims by insured workers against insolvent companies. If you are a commercial HMO member, the Florida Health Maintenance Organization Consumer Assistance Plan will pay you.
What are the Insurance Company Ratings in Florida?
Insurance companies in Florida are given independent credit ratings by specific agencies to indicate their financial strength. These independent rating agencies help you determine the financial capability of any insurance company before getting a policy from them. Five different agencies rate insurance companies, and each has a different rating scale and parameters. Companies with good financial standing and perceived to be in a good position to handle and meet their financial obligations are usually rated high. The insurance company ratings determine the company’s ability to pay out claims and remain financially buoyant. Although it is usually a well-considered opinion by the rating agency, it is not a statement of fact but an opinion. As such, the same company might be rated differently by different agencies.
The five rating agencies and their rating scales are:
Moody’s - AAA to C
A.M Best - A++ to D-
Fitch- AAA to D
Standard & Poors- AAA to D
Kroll Bond Rating Agency - AAA to D
Before you purchase any insurance policy in Florida, it is advised that you check the company’s rating across at least two rating agencies to help you make an informed decision.
How Do Florida Insurance Companies Make Money?
Insurance companies make money through various means, but the two most common ways are:
Investment income
Underwriting income
Investment income is money pooled together from premium payments and invested in other ventures, typically financial markets. These investments, which are usually short-term investments, generate profit for the insurance company.
Underwriting Income is the money that insurance companies have left after making all payments for claims by insured persons. By assessing the risks that are associated with a particular event, the insurance company can adequately price its premiums to effectively strike a balance between what should be paid and the income that will accrue to the company.
Insurance companies can also make money through coverage lapses and cash value cancellations. Coverage Lapses when an insurance policy is terminated. As such, the insurance company will no longer be obligated to make any payments even if any of the perils previously insured against occurs. As a result, the insurance company can write this off as a profit. Cash Value Cancellations are particular to life insurance. A life insurance policyholder might decide to cancel the policy and cash out the money that has accumulated. The insurance company will pay the policyholder from the money accrued from the investments, while all the money paid as premiums go to the insurance company as profits.
