Citizens Board Determines Reinsurance Options at May 7 Special Meeting

May 7, 2009

On Thursday, May 7, 2009, Citizens Property Insurance Corporation (“Citizens”) Board of Governors (“Board”) held a special meeting  to discuss whether to purchase approximately $173 million in Temporary Increase in Coverage Limits (“TICL”) coverage from the Florida Hurricane Catastrophe Fund (“FHCF”), or private reinsurance, for which Citizens had budgeted $150 million in 2009. 

The meeting also included an update on the 2009 Florida Regular Legislative Session.  To view the meeting agenda, click here.

The meeting was called to order by Board Chairman Jim Malone, with Vice-Chairman Earl Horton, and Board members William Corry, Carol Everhart, Sherrill Hudson, Allan Katz, Carlos Lacasa and Tom Lynch in attendance.


Coverage Recommendations

Citizens’ Chief Financial Officer (“CFO”) Sharon Binnun presented Staff recommendations on Citizens’  purchase of reinsurance for the 2009 hurricane season. 

Because the provisions of recently-passed HB 1495 provide for the reduction of the TICL over a period of five years, and because purchase of the maximum TICL coverage affords Citizens an opportunity to transfer a significant amount of risk at a much lower cost than comparable private reinsurance, the Citizens Staff recommendation was made to purchase the maximum amount of FHCF coverage available, and that no private reinsurance should be purchased for the 2009 hurricane season. 

Citizens Staff recommended the purchase of the FHCF mandatory and optional TICL coverage for the personal and commercial lines accounts (“PLA/CLA”) as well as for the high-risk account (“HRA”), which is consistent with the coverage purchased for the 2008 hurricane season.  Mandatory FHCF coverage is approximately $5.9 billion, at 90 percent of covered losses after retention, for a premium of approximately $373 million. Optional TICL layer coverages (all of the layers above mandatory coverage) amount to approximately $3.5 billion, at 90 percent of covered losses, for a premium of approximately $173 million. (FHCF reinsurance is only available for residential coverages (personal and commercial residential lines). Commercial non-residential policies are not covered by the FHCF.  This amount of TICL coverage could significantly reduce the magnitude and likelihood of Citizens’ assessments should losses approach that level.

By purchasing the optional TICL layer coverage, Citizens would not have to levy any assessments unless a 1-in-65-year storm occurred that causes over $6.5 billion in losses to the PLA/CLA.  The probability of a storm of that magnitude hitting Florida during the 2009 hurricane season is 1.5 percent. 

Mr. Katz inquired whether the assessment wouldn’t essentially be changed from Citizens to the FHCF in the event of a catastrophic storm if Citizens were to purchase TICL layer coverage.

CFO Binnun explained that, if a catastrophic storm causes enough damage to pierce the TICL layer, the FHCF would levy emergency assessments to support its post-event bonding.  FHCF emergency assessments likely would be levied over a number of years, whereas, if Citizens does not purchase TICL layer coverage and has to charge an assessment, this would be levied as a one-time charge.  This one-time charge likely would be higher than a multi-year assessment from the FHCF.  By purchasing TICL layer coverage, the likelihood that Citizens will need to issue post-event bonds is reduced, as is the likelihood that Citizens would have to compete with the FHCF for potentially limited post-event financial market capacity. 

It was noted that the $10 billion of TICL coverage for the 2009 hurricane season represents a reduction of $2 billion from 2007 & 2008 seasons. TICL coverage will continue to decrease by $2 billion annually through 2013.

To view the Staff FHCF Reinsurance analysis, click here.   To view a summary of the Staff recommendations on purchasing reinsurance, click here.

Citizens’ Staff does not recommend purchasing private reinsurance for the 2009 hurricane season due to increased costs and the limited impact of private reinsurance on any potential assessments.  To view the Staff private reinsurance analysis, click here

According to Staff analysis, the cost of private market reinsurance has risen more than 20 percent over the past year due to increased demand, cost of capital and an increase in global catastrophes, combined with depressed financial markets.   

Because Citizens’ rates are still frozen, it would not be able to pass the increased cost through to policyholders, therefore the assessment potential would not be impacted.

Chairman Malone inquired whether Citizens would be able to purchase private reinsurance during the hurricane season if the Board decides not to buy it now, or if financial markets improve drastically over the next few months.  A representative from AonBenfield stated that Citizens’ reinsurance brokerage team (AonBenfield and Guy Carpenter) will continue to search the private reinsurance market for opportunities and, if any reinsurance coverage with an acceptable price is found later in the season, the option will be presented to Citizens.  According to the brokerage team, as long as the total amount of private market capacity allotted to Florida is not exhausted, reinsurers will offer quotes on coverage.

The Board approved not purchasing private reinsurance for the 2009 hurricane season, with the condition that CFO Binnun and Citizens’ President Scott Wallace bring any appropriate reinsurance opportunities arising at a later date before the Board.


2009 Florida Regular Legislative Session Summary

Citizens’ Executive Vice President Susanne Murphy gave a summary of Citizens-related legislation that passed during the 2009 Florida Regular Legislative Session as part of House Bill 1495.

HB 1495 contains two provisions specifically related to Citizens:  a “glide-path” to actuarially-sound rates and a restructuring of Board Members’ term limits. 

If HB 1495 becomes law, Citizens’ rates will increase by no more than 10 percent per policyholder, per year until they are actuarially sound.  Citizens’ Staff will continue to work with the OIR to complete its filings for all lines of business by July 15, 2009.  The new rates will be implemented no earlier than January 1, 2010.

If HB 1495 becomes law, term limits for Citizens’ Board Members will change from three-year terms for every Member to variable two-to-three year terms to ensure that all terms do not expire on the same date.  The Board approved amending Citizens’ Plan of Operation to include the language from the new statute, should it become law.

Other provisions of HB 1495 that would affect Citizens include:

  • A cash build-up for the FHCF, the cost of which Citizens would be able to pass-through once the rate freeze is over;
  • A reduction and eventual elimination of the FHCF’s TICL layer; and
  • Insurance agents will now be allowed to inform policyholders of the Florida Insurance Guaranty Association.

The next Board meeting will be held on Friday, June 26, in Jacksonville, Florida.

The meeting was then adjourned.


Should you have any questions or comments, please do not hesitate to contact Colodny Fass.


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