Citizens Actuarial and Underwriting Committee Reviews New Appraisal Guidelines, Rating Plan, Wind Boundary Changes

Jan 24, 2010


The Citizens Property Insurance Corporation (“Citizens”) Actuarial and Underwriting Committee (“Committee”) met via teleconference on January 19, 2010.  To view the complete meeting agenda, click here

The following is a summary of discussions and related actions taken by the Committee during the meeting:

High-Risk Account (“HRA”) Boundary Reduction Deadlines Pending

Because Citizens’ 2010 Probably Maximum Loss Report (“PML Report”) is not expected to reflect the mandated minimum reduction of 25 percent, Citizens likely will be making certain reductions to its HRA boundaries.  The annual statutory PML Report documents any changes in the 100-year PML of Citizens’ wind-only eligible area relative to a 2001 benchmark.  Further reductions to the HRA boundaries will be required in the future if the PML minimum is not met again. 

In the past, Florida’s Legislature has extended the HRA boundary reduction deadlines twice.  However, the development of recommendations on boundary reductions is pending in the event the deadlines are not extended this year, although it was reported to the Committee that an extension is expected to be passed.

After discussion on whether Citizens should advocate a deadline extension or the elimination of certain wind boundary-related provisions of the law, the Committee decided to conduct further research on the issue and draft a proposal for the Board. 

To view a summary of the HRA boundary issue, click here

New Rating Plan In Progress

Although its rates recently were increased, Citizens initially had intended to revise its personal residential policy rating structure from one that was additive, to a multiplicative format with multiple multi-peril base rates.  Since this change would have required significant revision to the current rating structure, it was deemed unachievable under the parameters of the most recent rating revision. 

It was reported to the Committee that Citizens’ rate-related goals include:

  • Eliminating the artificial cap on mitigation credits;
  • Introducing multiple multi-peril base rates; and
  • Ensuring wind rate consistency between wind-only and multi-peril policies in the high-risk areas.

Revised, revenue-neutral rating algorithms will be filed with the Florida Office of Insurance Regulation in the near future. 

Mitigation Credit Inspection and Outreach Program

Citizens’ pilot program to re-inspect between 500 and 1,500 homes that are currently receiving wind mitigation credits has yielded 175 completed inspections to date, with 145 inspections still pending.  

Valuation criteria are being added to the scope of commercial lines policies in the mitigation credit inspection pilot program.  This will require the development of valuation techniques for the inspectors.

Citizens currently provides over $7 million in wind mitigation credits on approximately 400,000 policies. 

To view a summary of the pilot program, click here.

Chinese Drywall

Citizens’ Assistant Director of Product Development and Compliance Kim Chaney reported on how Citizens handles risks such as Chinese drywall and other improperly manufactured building materials. 

Currently, Citizens is monitoring the Chinese drywall situation and has received over 30 claims alleging damage from it.  Each has been investigated, and since Citizens’ policies specifically exclude damage due to corrosion, no covered loss causes have been found in any of the claims.

The Committee was reminded that Citizens:

  • Does not cover defective and/or improperly manufactured materials;
  • Is not taking adverse underwriting action on policies based solely on the presence of Chinese drywall;
  • Is unaware of any causal relationship between the presence of Chinese drywall and covered losses such as fire or water.

Further, while “corrosion” has been the most commonly claimed damage resulting from Chinese drywall, Citizens policies specifically exclude corrosion coverage.  Additionally, inspections to date have not revealed corrosion of sufficient quantities to increase the risk of covered loss.

Citizens’ policyholders can continue their coverage if a home is temporarily vacated for the purpose of remediation of any defective and/or incorrectly manufactured materials, which include Chinese drywall.

Homes permanently vacated or abandoned are ineligible for coverage with Citizens.  However, during discussion, Committee members indicated that there may be a potential exception for certain unoccupied homes.

New Appraisal Standards Recommended

Because marked variations have been noted in the quality and completeness of commercial and personal lines property appraisals that have been recently submitted to Citizens, it was reported that a slate of minimum and specific appraisal standards has been developed that would require all appraisals to include specific valuation data and the method used to determine the estimated building replacement cost valuation.

The Committee agreed that minimum information standards for property appraisals be approved for use as quickly as possible.  These would include:

  • The appraiser’s name and license number, if applicable;
  • The year the property was built;
  • Total square footage of the property;
  • Number of stories; and
  • Construction type.

Additional specific requirements for appraisals of personal lines properties would include:

  • An estimate of the replacement cost for every structure to be insured, including ancillary structures;
  • The method used to determine the cost of rebuilding the structures, which would be generated from the most current valuation tool designed for insurance replacement cost purposes;
    • Examples of widely-used tools include:
      • Marshall & Swift / Boeckh “Replacement Cost Technology” (“RCT”) or RCT High Value (Note: When the dwelling exceeds 4,000 square feet of living area or Coverage “A” limit exceeds $500,000, the RCT High Value would be used
      • E2Value/RS Means
        • Mainstreet
  • Documentation of customized features and materials, such as custom countertops or marble tile;
  • Valuation reports based on the entire building square footage; and
  • Construction type used to generate the valuation that is based on ISO construction definitions.

Requirements for appraisals of commercial lines properties would include:

  • Replacement cost estimates as described above;
  • Use of replacement cost valuation tools as described above;
    • The “occupancy” used to generate the valuation in the software must be the most accurate selection available. 
  • Valuation reports that would be based upon a building’s entire square footage and include all components of the structure in their entirety, such as balconies, walkways and common areas;
  • Construction analysis, including details for the walls, floors and roof;
  • The construction type used to generate the valuation that is based on the actual ISO construction definitions of the structure(s);
  • A copy of the system generated report or worksheet with any appraisal/valuation;
  • A full, detailed version of the report (as opposed to a summary)

Further, it was specified that, in appraisals, no adjustments could be made to architect’s fees, labor, material costs, overhead, or profit or construction quality.  Any adjustments to individual line items would be done on an addendum to the appraisal report and would include a detailed explanation of why the adjustment was made and how the adjusted value was developed.

The above outline and the immediate implementation of the minimum standards were considered by Committee members as an initial step in solving the problem of incomplete or inconsistent appraisals.

To view the appraisal standards recommendation report, click here.

The meeting was then adjourned.

The above Committee items are not scheduled for consideration at Citizens’ Board of Governors January 25 meeting.  To view the January 25 meeting agenda, materials and teleconference participation information, click here.


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



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