Citizens Actuarial and Underwriting Committee Reviews ‘Dramatic’ Mitigation Credit Inspection Pilot Program Results

Feb 20, 2010

 

The results of a pilot study designed to test the effectiveness of a full-scale wind mitigation credit re-inspection program were reported to Citizens Property Insurance Corporation (“Citizens”) Actuarial and Underwriting Committee (“Committee”) at its February 17, 2010 meeting.  

While a quorum was not present, Citizens Senior Vice President Paul Palumbo indicated that updating those in attendance was appropriate, nevertheless, because no Board recommendation on the project yet was being sought.  Florida Deputy Insurance Commissioner Belinda Miller attended the meeting.

Describing the results of the pilot program study as “dramatic” and “very successful,” Mr. Palumbo said that the effort has served to both validate Citizens’ mitigation credit standards and identify areas of improvement.  The pilot consisted of re-inspecting 645 personal residential and 80 commercial risks that currently receive wind mitigation credits on their Citizens policies.  To date, inspections on 452 of the personal residences have been completed and processed.

Specifically, Mr. Palumbo indicated that the results of the study will assist in improving Citizens’ description of variances from originally reported building characteristics that were found as a result of the re-inspection.   Information about the impact of those variances now will have to be communicated to both agents and policyholders.  This will include the estimated premium difference, as well as how the correction of identified deficiencies or disputed information can be accomplished.

Citizens’ risks selected for the pilot study met the following criteria:

  • Constructed prior to 2002
  • Non-hip roof
  • Non-mobile home
  • Policy receives a mitigation credit higher than $150
  • Average property value is $250,000
  • Average Citizens premium is $2,500

The highest concentration of inspected homes was in South Florida, since this area represents the highest concentration of Citizens policies. 

Mr. Palumbo reviewed the pilot study statistics based on the 452 inspections completed to date:

  • 422 policies were altered as a result of the inspections
  • Over 93 percent of those inspections resulted in a change of mitigation feature documentation, while over 77 percent resulted in a premium change
  • Opening protection, roof-to-wall attachment, roof cover and roof type represented the top four construction features that contributed to changes in policy and premium.
    • In regard to roof type (shingle versus tile), Mr. Palumbo noted that, while this feature is not used to develop premium and doesn’t impact rates, it is important to ensure its documentation on policies for the purpose of tracking whether roofs of certain types are operational and in good condition. Roof type is also an important factor in the loss modeling process.
  • Large disparities in mitigation feature reporting were discovered. For example, 252 policies were receiving credits for hurricane impact glass, whereas only 66 of the covered properties actually incorporated it.

The Committee discussed the lack of a cap on wind mitigation credits in the personal residential rating structure potentially resulting in the modification of policyholder mitigation credits not ultimately having any impact on premium.   The Committee is proceeding with a plan to address the lack of a mitigation credit cap.

Mr. Palumbo added that, as more inspections are completed, statistical trends will help to indicate how mitigation features were recorded on original policies, versus how they changed once the inspections were performed.  This statistic is expected to assist in targeting mitigation inspection industry fraud.

As a result of policy changes that were effected based upon information yielded by the pilot study, 311 of the 452 total inspected residences sustained an average increase in premium of $1,410.41.  This equates to a total of $438,637 in premium revenue that Citizens has been losing on these policies per year.    The largest of these inspection-based premium increases was $14,596. 

Any policyholders who refused to participate in the re-inspection pilot program now face the loss of their mitigation credits upon policy renewal. 

Mr. Palumbo related that 3,164 mitigation features were ascertained during the 452 re-inspections, with 909 (29 percent) of those leading to a change in the policy as a result of the re-inspection.  A typical example of one of these changes involved homeowners who were unaware that all openings must be protected in order to qualify for the opening protection mitigation credit.   In instances where window shutters were deployed, homeowners may not have considered standardized protection for the front door or garage door. 

He added that, as the pilot program has progressed, non-mitigation-related variances also have been found, such as frame versus masonry construction.

Committee Member Tom Lynch remarked that mitigation inspectors should know the requirement for protecting all openings.  It was voiced by others during this discussion that inspectors should be liable for the unpaid premium as a result of a faulty inspection.

Citizens’ Director of Consumer Service Steve Bitar cautioned that, before Citizens pursues this type of action, the study data must be compiled, after which decisions must be made about how to proceed with recovery and appropriate action.  It was noted that information on original residential inspectors is usually part of policy records.  

Whether the pilot program re-inspection firm is incorporating the consideration, documentation and calculation of appraised values and estimated replacement costs of structural components as it proceeds through its work also was discussed.  Doing so will eliminate the need to perform duplicate future re-inspections for these purposes.

Committee Member Carol Everhart mentioned that she is aware of many re-inspections being documented on different mitigation forms.  She also felt that contractors should be notified when their work is being re-inspected, with a stated caveat that they could be held liable if they are not truthfully completing the inspection form.  

Mr. Bitar reiterated that caution is needed in regard to approaching issues such as subrogation and proof of intent to deceive.  The methodology for doing this is expected to evolve over the coming months as fraud trends may be identified and inspection firms contacted as a result.

The Committee discussed how criteria for the assignment of mitigation credits was originally established.  In Broward and Palm Beach counties, for example, the study upon which mitigation credits are based indicates that the first three floors of large buildings must have “large missile” opening protection, while the next 30 feet must have “small missile” protection.  This leaves the upper stories of these buildings completely unprotected. 

It was discussed that commissioning a new study would be costly and require another overhaul of the Florida Office of Insurance Regulation (“OIR”) mitigation-related forms.   Further, it was conjectured that any such expenditure and the resultant modification of credits could be nullified by Florida’s statutory cap on Citizens’ rates, inasmuch as a change in a premium credit is considered to be a rate change.   However, if it is determined that a mitigation feature upgrade has been handled incorrectly, any resultant premium increase would not be considered to be a rate change. 

Committee Chairman Earl Horton said that the results of the pilot mitigation credit study clearly indicate that Citizens could be collecting more premium if mitigation features were indicated accurately on policies.  He inquired about the process for amending the policies in question so that premium can be collected, and what type of assistance must be provided to property owners so they can make the changes necessary to bring their residences into compliance.

Mr. Palumbo explained that policyholders with inspection discrepancies can either agree with the inspection report and take remedial action to correct the deficiencies, or proceed with dispute resolution action.

However, affected policyholders first should receive an estimate of what their premium would be with applicable adjusted mitigation credit.  Then, time must be allowed for policyholders to resolve their individual situations. 

Mr. Palumbo advised that Citizens is recommending that the premium change should be effected upon policy renewal, as opposed to immediately adjusting it upon discovery of the mitigation credit discrepancy.  He insisted that policyholders can’t be expected to have the technical skill to recognize whether or not the information they received on their mitigation inspection forms was accurate or not. 

While there could be “364 theoretical days” that these policyholders continue to receive undue credits, Citizens has recognized that it does not have the resources to re-inspect all of its risks simultaneously.  Therefore, it must determine an appropriate time frame in which to accomplish the re-inspections and adjust the premium accordingly.  Chairman Horton calculated that Citizens would lose an average of $1,400 per policy if it applied a 180-day time span in which to correct mitigation credit issues.

Mr. Palumbo cautioned that relying on averages may not provide an accurate indicator of what Citizens’ actual revenue increases would be after the re-inspections were completed.  Mr. Lynch added that doing so also could affect Citizens’ calculation of assessments.

Committee members debated what should be done about erroneous inspection reports in preparation for 2011.  Chairman Horton mused that falsifying mitigation credits would be analogous to applying for an auto policy without revealing a bad driving record.   Mr. Palumbo disagreed with the analogy because, he explained, homeowners are typically unaware of whether they have gable end bracing in their roofs and thus, rely upon paid inspectors to provide this type of information accurately.

Citizens has calculated that, after the completion of its mitigation credit validation pilot program, over 77 percent of its policies will have a change in premium. 

The commercial property inspection phase of the pilot study, which has just started, requires consideration of factors such as the difference in appraised value per square foot.  Notwithstanding, the commercial property study is expected to yield a similarly dramatic report to the personal property version in several weeks. 

Although approximately 500 re-inspections are projected to be completed by the next scheduled Board of Governors (“Board”) meeting in March, this number is not considered to be statistically viable enough to produce a significant opinion. 

The Committee decided that the pilot program results to date would be shared with the Board in March, but would be presented in a manner that accurately frames the small sample size and reinforces the fact that the statistics presented will not necessarily represent Citizens entire book of business.

Committee members expressed a strong desire to shorten the time taken to effect policy premium adjustments in the event of mitigation credit discrepancy determinations.  Chairman Horton indicated that he would prefer 90, versus 180 days, unless this causes logistical problems.  It was explained that the process of notifying the policyholder, scheduling the inspection appointment and performing the inspection likely would take longer than 30 days. 

After it was explained that retroactive credits would be given to a previously-uncredited policyholder if a mitigation feature is observed as part of the risk’s original construction, as well as added on during a policy term if documentation is provided, Chairman Horton insisted that the reverse should be done in the case of a need to debit.    The Committee agreed that this was an issue that warranted legal consideration. 

It also was agreed that every new Citizens policy should be inspected within 45 days and enough evidence should be gathered during that process to prevent a re-inspection from being required.

Currently, Citizens is still required to use the OIR-1802 Form to document mitigation credits, which is essentially considered to be third-party information. 

A request for proposal to hire a permanent inspection company will be ready for publication during the second quarter of 2010. 

The meeting then concluded.

To view the meeting materials, which include complete statistics on the pilot mitigation study, click here.

 

Should you have any questions or comments, please contact Colodny Fass.

 

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