Mitigation discounts in Florida may prove that giving until it hurts is painful to far more people than the givers themselves. Insurers have reported that their underwriting profits have been slammed due, in part, to mitigation discounts. The discounts have been painful to Citizens, and since the state-run insurer's rates are currently not actuarially sound, charging even less makes the specter of assessments loom large. The insurance industry is going to have a difficult time gaining any support for unemotional, rational dialogue over the problem of selling a product for less than it costs to produce it, but we have to try.

While most private insurance companies do not publish data about how much mitigation discounts are costing them, state-run Citizens does make its numbers public. At its board  meeting in December, the Actuarial and Underwriting Committee stated that as of mid-November, Citizens had completed re-inspections of more than 7,200 buildings. Of those properties, undeserved discounts were received by 64 percent of policyholders in the personal lines account and 52 percent in the commercial lines account. That equates to more than $5.3 million in premium that should have been collected but was not.

Re-inspections also found that about eight percent of policyholders in each line of business were not getting discounts that they were entitled to receive. This is indeed a good news insurance story that will likely not be told in the media. Agents with Citizens' customers getting such a nice surprise through the re-inspection process may do well to figure out a way to spread the word.

Policyholders also may like to know how regulators underestimated the impact that mitigation discounts would have on insurers' income. Insurers use a variety of pricing models to establish base rates; the state used just one model to calculate mitigation discounts. That's only part of the problem. The bigger disconnect occurred because pricing models for base rates reflect expected loss costs averaged over both strong and weak buildings, while the mitigation discounts were calculated only on the weakest structure, which distorts the actuarial risk.

A mitigation credit study by Florida State University suggested that mitigation discounts may have been over-applied in another way, too. The discounts currently apply to the entire wind premium, but only loss costs are reduced through hardening a home, not the fixed expense portion of the premium. The FSU study also suggested that mitigation discounts overlap with the state's Building Code Effectiveness Grading System, which recognizes the quality and effectiveness of structures built to the newest building codes.

Why should anyone care about someone with a Citizens' policy getting an undeserved insurance discount? The key word here is subsidization. We have subsidizers and subsidizees — and how you feel about the issue depends on where you fall on the balance sheet. Subsidizees, who were getting undeserved mitigation discounts, will rant about the take-away. They will question the accuracy of the re-inspections and lament the absence of an appeal process. Their stories will be picked up in the media because this seems the more interesting angle, giving reporters a chance to use loaded buzzwords and to mention struggling policyholders who cannot afford rate hikes and heavy hits to the wallet.

However, mainstream media may overlook the subsidizers. Some 3.2 million strong, these are the people who pay more so that others can pay less. These policyholders are the silent majority. The reason the subsidizers do not complain about supplementing Citizens' policyholders is because most of them don't know they are doing so. However, the tide may be turning.

I've noted a few small voices chastising news articles that play only to disaffected policyholders. This is positive — and rare. One of the online comments from a reader of a South Florida newspaper stated that “little lies” that people tell about their property risk means others have to chip in more than their share to defray the liars' costs. Little lies were costing Citizens a lot of money, and the expectation is that after 2012, the company will be able to charge $143 million more in annual premium due to re-inspection findings. Matching the rate to the risk means policyholders who are not in Citizens have less chance of subsidizing those who are. It makes sense. It is the “true” rate that will help erase the lie, and while we cannot make anyone like the truth about the cost of property insurance in the country's most disaster-prone state, we must never hesitate to explain the reality.