BY FRANK ARTILES
This year the Legislature is considering proposals that, if passed, would give massive subsidies to the private reinsurance industry, paid for by significantly higher rates for policy holders.
These unregulated, largely offshore reinsurers operate with no rate controls or consumer oversight. In stable markets, reinsurance is insurance for insurance companies, policies bought in relatively small amounts to protect carriers from the remote chance of a very large disaster.
The departure from Florida of national brand carriers like State Farm has led to an unstable market. Since 2005, over 2.5 million policies have been cancelled, resulting not only in the growth of Citizens Property Insurance Company but also of private insurance companies.
These Florida carriers now serve over half the homeowner’s insurance market and they are the only remaining private market carriers writing new business. Regulators and rating agencies require companies to annually demonstrate strict financial claims paying ability designed to ensure that they can pay claims from catastrophic storms.
In order to meet these financial requirements, they must purchase reinsurance every year. This additional annual expense for reinsurance is the biggest cause for the explosion in the cost of homeowner’s insurance.
The two sources for this reinsurance are private reinsurance companies and the Florida Hurricane Catastrophic Fund (Cat Fund), a state agency. Private reinsurance is extremely expensive, taking as much as half or more of every premium dollar collected from policyholders.
If there is no major storm, reinsurers pocket the premium. On average, reinsurers charge five times more than the actuarial risk of loss, meaning that 80 percent of the premium charged is pure profit.
The very same national brand carriers that have fled Florida own some of them. State Farm, which has shed hundreds of thousands of Florida policies and continues to write lucrative auto coverage in Florida, is the largest shareholder in Da Vinci Reinsurance, a company specializing in selling reinsurance to start-up Florida-based carriers.
By contrast, reinsurance coverage from the Cat Fund costs much less, as little as 10 percent of the cost of private reinsurance. Also, unlike private reinsurance, unused premiums paid to the Cat Fund are available to pay claims in future seasons.
The reinsurance lobby understandably hates the existence of the Florida Cat Fund. Every dollar of reinsurance purchased from the Cat Fund costs private reinsurers nearly $1 billion in lost profits per year. In an effort to regain lost profits, the reinsurance lobby insists the Cat Fund won’t be able to raise enough bonding money to pay its bills, which they say would result in mass failures of insurance carriers, followed by general disaster and mayhem.
Bonding estimates prepared by market experts show that the Cat Fund has nearly $4.5 billion in excess bonding capacity over two years. But, according to state loss models, a 1:100 year storm (1 percent probability each year) would result in a less than 2 percent Cat Fund assessment on policyholders, about $60 per year for the average household.
A proposal recently debated in the Senate would have raised rates an estimated 5 to 10 percent by reducing the capacity of the Cat Fund by as much as $5 billion per year, coverage that would then have to be purchased from the private reinsurers.
In other words they want policy holders to accept a 100 percent chance of paying on average $150 to $300 per year to avoid a 1 percent chance of paying $60.
This nonsensical approach has already dug a deep hole. Florida carriers have paid $26 billion for private reinsurance over the last seven storm-free years, premiums that could have strengthened cash reserves in the Cat Fund, paid for a repeat of the 2004-2005 storms, and lowered rates by 20 percent, but instead left Florida forever as unregulated payments line the pockets of private reinsurers.
It’s time to stop digging. The consumer group, FAIR (Florida Association for Insurance Reform) has offered a modest alternative, which would expand the Cat Fund by $2 billion. This alone would reduce private carrier property insurance rates by at least 7 percent, making them more competitive with Citizens and giving a boost to Florida’s economy.
State Rep. Frank Artiles, R-Miami, has a Master of Law in Real Property Development from the University of Miami Law School and is a general contractor and public adjuster & appraiser.
In his guest editorial in the Herald Tribune, “If Citizens Loses We Will All Pay,” former Rep. Thomas Danson misstated key facts. The Citizens regular assessment levied on ratepayers with private companies after a major catastrophe is limited to 2% for one year, not a maximum of 18% as he stated. He also refers to over $500 billion of “hurricane risk.” That is actually the total insured value of all properties insured by Citizens. A series of storms would have to strike everywhere in the state all at once and literally level every insured building for that number to have any relevance.
The reality is that if the “big one” hits (a 1:100 year storm), Citizens rate payers are by far the hardest hit. They could see a one-time 45% surcharge on their property insurance bill at their next renewal. Private ratepayers would see a maximum one-time 2% surcharge. Virtually all ratepayers would see assessments from the Florida Hurricane Cat Fund (which backs all property insurers including Citizens) and the Florida Insurance Guarantee Association (FIGA) (which pays claims after private carriers go bust). Using 1:100 year projected total losses from Citizens and the Florida Insurance Consumer Advocate, starting at the second renewal after the storm, total assessments from the three entities would be about 5% a year for 30 years, hardly a scary number. In fact, Citizen’s ratepayers would actually pay more to subsidize losses from private companies than private rate payers to subsidize Citizens losses. Also, Citizens also has more surplus than all of the private carriers combined and is the only company other than USAA that has an A+ rating with the Weiss rating agency. Citizens had one assessment from the 2004-5 storm seasons which expires in a couple of years. FIGA just had an assessment last year when a private carrier went bust. Look for it on your next policy renewal.
Former Rep. Danson’s column is part of an orchestrated effort, a “chicken little” chorus of opinion columns from politicians, right-wing “free market” think tanks, and reinsurance industry shills designed to scare the legislature (about to start session in March) into raising property insurance rates. Already one powerful Senate committee has released a draft bill that would force private carriers to buy more expensive reinsurance, an extra cost that would be passed on to policyholders. Their logic goes something like this: Policyholders should pay 10 or 15% more in ‘reinsurance taxes’ every year (100% chance) to avoid a less than 1% chance of paying 5% more a year in assessments.
A rival proposal from FAIR would lower the rates paid by policyholders by at least 7% by replacing expensive private reinsurance with much cheaper Cat Fund reinsurance, helping to spur the real estate market and the Florida economy in general. It would also make the private carriers much more competitive with Citizens meaning more policies would move into the private market.
Take a moment to contact your legislators as to whether you would rather have a 7% rate cut or pay as much as 15% more in reinsurance taxes:
click here: CONTACT YOUR LEGISLATORS
To The Editor:
In the wake of a report from Governor Scott’s Inspector General criticizing Citizen’s travel expenses, some have called for the removal of the entire Citizens Property Insurance Corporation Board of Governors. This would be a huge mistake for Citizens policyholders and impede progress toward restoring Florida’s private property insurance market. Whatever its size or future, while it exists, Citizens needs to be a good property insurance company, not a political football.
Service on the Citizens Board is no cake walk. An equivalent position in the private sector would provide a six figure compensation package. The Citizens Board members work for free. The considerable time these Board members are required to spend could be spent earning money in the private sector, meaning that in terms of opportunity costs, it actually costs them to serve. They do not serve to pad resumes. They have already reached the pinnacle of their professional lives.
Consider the two appointees of Governor Scott: John Wortman, now in retirement age, once presided over Louisiana’s version of Citizens and offers decades of experience. John Rollins is a brilliant actuary, Duke University graduate, and a leading expert in his field. Although we have often disagreed on policy issues, I know them both to be conscientious and honorable public servants.
The other Board members are no less qualified, conscientious, or honorable in their service. That Florida taxpayers receive the benefit of their combined service for free is an exceptional value that should be preserved.
There are other challenges to service on the Citizen’s Board. The eight members are appointed two each by four state officials—the Governor, CFO, Senate President, and House Speaker. As political appointees they are subject to Sunshine laws, meaning that they cannot talk company business to each other outside of public meetings. For a new Board, most appointed less than two years ago, this means that getting a grasp on the culture and operations of a large complex company requires time and a steep learning curve. It also means that staff has an advantage in what information they choose to share or withhold—power that can be used to manipulate Board decisions. As a result, mistakes have been made. The Board harmed consumers by agreeing to staff proposals for reductions in coverage levels and to an ill-fated surplus notes program that was eventually abandoned. But other decisions have been both tough and prudent. Within the first year of their tenure, the majority of the Board realized that new leadership was needed. Just seven months ago, they appointed an outsider and seasoned industry veteran as CEO, Barry Gilway. He has no easy job. Reforming a large bureaucracy, like turning around an aircraft carrier, doesn’t happen on a dime. The Board and Mr. Gilway have also now come to recognize that reducing policy coverage is not a solution for depopulation of policies, rejecting an unwise staff proposal to set a $15,000 sub limit for water damage. They immediately got it right when news of excessive travel expenses came to light in the press. Governor Carol Everhart presented a motion to conform Citizens travel policies to those followed by the rest of state government. Governor Don Glisson strongly advised abolishing company credit cards, which was promptly done.
We must also consider the cloud removal of this Board would cast over future Board recruitment. The best and brightest will simply decline to serve rather than risk public embarrassment in such a toxic political environment.
Individuals who violated policy should be disciplined, consistent with sound human resource practices and due process, not out of concern for how it will look in the newspapers. The problem for everyone else has already been solved. You can bet that all at Citizens will now think twice before every spending decision.
Florida Association for Insurance Reform
Editor’s Note: The Citizens Board followed FAIR’s recommendation voting Friday to authorize staff to withdraw the HO8 rate filing if OIR refuses to budge.
December 14, 2012The Honorable Kevin McCarty Florida Insurance Commissioner 200 E. Gaines Street Tallahassee, FL 32399
Dear Commissioner McCarty:
Citizens Property Insurance Corporation was mandated by 2012 legislation (House Bill 1101) to offer a scaled down homeowner’s insurance policy known as a Homeowners 8 (HO8). Citizens recently filed this policy language with the Office of Insurance Regulation for review and approval with the applicable insurance rate to be charged to consumers at approximately 7% less than their standard homeowner’s policy. From testimony at the Citizens Market Accountability Advisory and Consumer Services Committees yesterday, it appears that the Office of Insurance Regulation (OIR) wants to require that Citizens offer the HO8 policy at nearly 30% less than the standard HO3.
There are several negative public policy implications that could result if the OIR position is implemented. 1) On its face, this significantly less expensive rate may sound like an attractive alternative for consumers seeking to reduce their homeowner’s insurance costs. But the much more limited coverage would ultimately harm consumers who incur losses from non-covered events. HO8 policies were designed to be a niche product for homes with conditions or characteristics that made them an unacceptable HO3 risk, not as a mainstream pricing alternative. In addition, at least one form of the HO8 coverage is not acceptable to lenders under Fannie Mae/Freddie Mac guidelines. Ultimately, lenders facing losses from uninsured and unrepaired damage could resort to force place coverage to protect collateral. 2) Agents will be placed in a difficult position of placing these low cost low coverage policies for their clients or losing business to agents who would use the HO8 price point to poach business. Inadequate disclosure issues, real or perceived, would be rampant. 3) A Citizens HO8 policy with such a significant pricing differential would threaten Florida’s consensus public policy objective to downsize Citizens. Policies currently secured by the private market could flood back into the corporation at the lower price point. Private companies would be pressured to develop their own HO8 to complete.
Citizen’s rate filing is actuarially sound, in complete compliance with applicable statutes, and should be approved by your office. We applaud the Insurance Consumer Advocate, and responsible insurance agents’ groups and associations for their support of the Citizens filing and join them in opposition to the OIR position. If your office continues to insist on the 30% rate differential, we further urge the Citizens Board of Governors to withdraw the filing until a reasonable agreement can be made.
Jay Neal, Executive Director
The Florida Office of Insurance Regulation (OIR) will make a decision next week on whether to approve an 11.2% average rate increase for policy holders of the Citizens Property Insurance Corporation. FAIR strongly recommends that this decision be temporarily delayed. In 2009, the Florida legislature faced two competing policy goals: 1) to bring Citizens rates up to actuarially sound levels at which the private market could compete and 2) to protect policyholders from large and sudden premium increases. The policy balance they struck was to establish a “glide path” within which rates would increase to actuarially sound levels, but do so gradually, by no more than 10% annually. Citizens has been accused of using “backdoor” rate increases to sidestep both the glide path and also OIR review. Before approving the current rate request, OIR should fully review the impact that at least three Citizens initiatives have already had on increasing rates. The three areas that should be reviewed include: replacement value calculation methods, reductions in coverage levels and limits, and the highly controversial wind mitigation reinspection program.
In 2010, Citizens began to use a computer software program called 360Value to estimate the replacement values of insured homes. In 2011, that contract was renewed without competitive bid because “no other company provider has the ability to facilitate software modifications…” FAIR has reviewed hundreds of cases for which this software as much as doubled the actual replacement cost as determined by certified residential appraisers for the subject properties. Where policy limits are doubled, premiums follow. And because both wind and sinkhole deductibles are calculated as a percentage of stated replacement value, those amounts were doubled as well, meaning policyholders would be faced with twice the amount out of pocket if faced with a claim. Despite complaints from policyholders who had no other home insurance options, Citizens initially refused to accept other appraisal methods. The legislature responded this year by mandating that Citizens accept these alternative appraisals. Still, the 360Value software continues to be widely used. The evidence suggests that not only are thousands of policyholders still paying inflated premiums for excess coverage they can probably never use, but also that Citizens loss exposure may be exaggerated, possibly causing private carriers to shy away from assuming these policies.
Citizens has also reduced what is covered under insurance policies, without reducing rates. Personal liability limits were reduced from $300,000 to $100,000, coverage for carports, pool and patio enclosures, and other external structures was eliminated, and some deductibles increased. Simple logic dictates that selling less of something for the same price is no different than increasing the price.
Finally the legislature established a wind mitigation discount program to incentivize homeowners to make improvements proven to reduce damages from tropical storms and hurricanes. Thousands of homeowners hired licensed home inspectors to complete inspection forms certifying that they had invested in those mitigation features and qualified for discounts. Citizens instituted a reinspection program to verify those mitigation features. To date, of the over a quarter of a million homes reinspected by Citizens, nearly 74% or close to 200,000 homeowners were stripped of discounts. On average this increased premiums for these homeowners by 23% or $600 annually. These statistics strongly indicate that this program should be subject to close scrutiny byindependent parties. If legitimate wind mitigation features are being understated, this will also make these policies less attractive to private carriers. In fact, there is a legitimate question as to whether the Citizens reinspection program is legal. The statute allows insurers to review inspection forms before granting credits, not after. And inspection forms are supposed to be good for up to five years as long as no material changes are made to the home.
There is relentless political pressure to increase Citizen’s rates so that the private market will assume more business. But in fact, there is increasing evidence is that the glide path is working. The CEO of one Florida private insurance carrier stated that over 2/3rds of Citizens policies are already actuarially sound. Consumer Advocate Robin Westcott testified last week that the policy was working and that some areas, like Broward County, were already on average above actuarially sound levels.
Still, the law is the law and legislative intent should be followed. During a three to six month delay, OIR could easily evaluate these initiatives. A reasonable sample size of both replacement values and reinspection reports should be reviewed by independent auditors. An actuarial analysis of Citizen’s claims files should be made to evaluate the reduction in exposure provided by lower policy levels. And an independent legal opinion on the legality of the reinspection program must be made. If aspects of these initiatives are found to be working, these audits will help to reestablish the legitimacy of Citizen’s actions with both policy holders and policy makers. By taking these reasonable actions, the OIR has an opportunity to do real service to the policyholders they protect and make sure that the transition from Citizens to private market alternatives is both orderly and fair.
FAIR The Florida Association for Insurance Reform