We have been rather tough on Florida and its insurer of last resort, Citizens Property Insurance Corporation, over the years (not that they pay any attention to climatelawyers.com). But Citizens has deserved it. Here is what its president, Barry Gilway, has had to say about the current state of affairs:
Citizens is close to being able to cover a major hurricane, the kind that strikes once every 100 years. ... Citizens has the ability to pay $19.5 billion in claims – close to the roughly $22 billion maximum expected damage from a 100-year storm. But more than $5 billion, or about a fourth of the claims-paying funds, are from loans that would have to be paid back.
Close to being able to cover? Close to the maximum expected damage? Loss payments to be covered by loans? Not the most fiscally conservative program on the planet and certainly not one that would be approved by any insurance regulator that wanted to keep her job.
Tough love coming from somewhere though is having an effect. This year continues big fiscal change at Citizens, demonstrated again just this past Thursday, when the Florida Office of Insurance Regulation (OIR) 1) announced a significant depopulation (i.e., transfer of policies) at Citizens, and 2) tentatively approved a proposal for low-interest loans to private insurers. This follows steps by Citizens to pursue a vigorous reinsurance program, cede the largest catastrophe bond ever placed, and restrict its obligations by dropping coverage for carports and screened enclosures, limiting personal liability coverage and raising deductibles. Citizens has also taken a lot of heat for conducting reinspections of homes claiming wind-storm mitigation features qualifying for premium discounts. When the features don’t satisfy the inspectors’ standards, the discounts are removed, an approximately one billion dollar boost to the bottom line.
Depopulation is the Florida Legislature’s term. Under that authority, 150,000 policies were just approved for removal from Citizens, roughly ten percent of the 1.4 million policies provided by Citizens. But depopulation is not mandatory. Instead, the Florida Legislature settled on incentives to convince private insurers to step in. A private insurer can get up to $100 from Citizens’ for each risk the insurer takes on. F.S.A. 627.3511(2). Perhaps more importantly, the insurer can be excluded from assessments for the next three years. F.S.A. 627.3511(3). Mandatory ssessments, for those who don’t recall, are the secret sauces relied upon in Florida to balance the books in the event Citizens’ resources are not sufficient to pay claims. One has to imagine that the reduced coverages and rising rates for Citizens’ policies may be of moment in a policyholder’s decision to shift insurers. And it is the policyholder’s decision; he or she does not have to agree to leave Citizens.
As for the low-interest loans, this alternative route to depopulation is being pushed by insurers and their investors. They seek “surplus notes” (last-to-get-paid instruments) from Citizens and guarantees of premium. In exchange, the companies would commit to:
- Renew the assumed policies for at least 10 years after the expiration of the current policy term.
- Limit rate increases, for renewal offers from January 1, 2013, through January 1, 2016, to no more than 10 % per policy per year (consistent with Citizens' current 10% glidepath).
- Provide substantially the same coverage for the first three years as that provided by Citizens.
All of these may be steps in the right direction but caution is still the word. First, Citizens is subject to a rate increase cap of 10%. Media advisories issued by the OIR indicate that Florida insurers seeking rate increases in 2012 were looking for increases in excess of 17% (Universal – 22%, Cypress – 17.7%, Sunshine State – 17.8%). Even if someone agrees to depopulate himself because rates are better at the new insurer, there is no guarantee they will remain better. One researcher has written: "Over the past five years, indeed, nearly all “depopulated” policies have ended up back in Citizens and as liabilities for Florida’s taxpayers." Second, Florida’s insurance market is substantially a world unto itself. A presentation to the Cabinet by the OIR shows this clearly (at 3). Citizens has 24% of the coverage, other Florida domestic carriers 60% and non-domestic carriers have 16%. That lack of diversity should give one pause. Over 80% of the coverage is written by Florida companies.
Tough love is effecting change in Florida. It remains to be seen whether it will be enough.