Citizens Property Insurance Depopulation Committee Approves Surplus Notes Loan Program; Board of Governors to Review Measure Friday, September 7

Sep 6, 2012


At its meeting today, September 6, 2012, Citizens Property Insurance Corporation (“Citizens”) Depopulation Committee (“Committee”) approved a surplus notes loan program that would cost Florida’s insurer-of-last-resort $300 million in incentives to coax private insurers to assume as many as 350,000 policies.

To view the meeting materials, click here.

The Committee will recommend the program to Citizens’ Board of Governors (“Board”) at its meeting tomorrow, September 7.  Citizens covers approximately 1.4 million policies in some of the hardest-to-insure areas of Florida.

Under the plan, Citizens would invest $300 million–20 percent of its Personal Lines Account surplus and a maximum of $50 million from the Coastal Account–in a risk-based loan program to private insurers that is generally based on the gap in Citizens’ rates.  The program would apply only to personal residential policies, which would be assumed by other insurers that would get 20 years to pay back the surplus notes loans. 

Citizens’ Chief Financial Officer Sharon Binnun said the program could “meaningfully reduce the potential for assessments to taxpayers” after a major event.  She cited statistics that showed emergency assessments could decrease by $1.2 billion or 38 percent after a 1-in-100 year storm under the surplus notes program.

The loan amount would be tied to Florida Hurricane Catastrophe Fund (“FHCF”) premiums, which are linked to a property’s risk.

She said a recent review of the approximate million policies in the Personal Lines Account showed that only 230,000 policies (20 percent of the book of business) are priced right.

“If only 20 percent of the book is priced right, that means about 80 percent of the book will not leave until it is priced right,” Ms. Binnun stated.  Citizens’ staff concluded that the best way to spur more assumptions is through an incentive program to make the price more equitable, she said.

It would cost Citizens approximately $240 million each year to reduce its Probable Maximum Loss (“PML”) by the same amount through private reinsurance, Ms. Binnun noted.

However, Ms. Binnun conceded the program is not without risk and said several requirements were outlined to address this issue.  Key risks include Citizens possibly having to credit 100 percent of principal if a catastrophic event occurred in each of the five years after the note is issued.  There is also a credit risk because the note term is lengthy (20 years), she stated.

A summary of the program’s key points follow:

  • Applies only to personal residential policies
  • Rate increases would be capped at 10 percent for three renewal cycles to encourage retention
  • Polices must be retained for 10 years
  • Minimum initial and continuing financial requirements for participants
  • Surplus notes will be limited to $50 million per assuming insurer
  • Surplus note principal may be credited in an amount not to exceed 20 percent per year for the first five years in the event of a PCS (Property Claim Services)-named Florida hurricane
  • Citizens will hold-back five percent of initial surplus note proceeds in consideration of opt-outs
  • Minimum total insurable value removal of $5.5 billion per assumption
  • The surplus note is equal to the estimated FHCF premium, multiplied by four

Financial requirements for participants include the following:

  • Must have actively been writing property business in Florida for the preceding two years
  • Actual 2011 or projected 2012 Risk Based Capital ratio of at least 300 and minimum surplus of $25 million, OR
  • Actual 2011 Risk Based Capital ratio of at least 400 and minimum surplus of $20 million
  • Must have Florida direct written property premium in 2010 and 2011 of at least $50 million
  • Reinsurance protection up to the 1-in-100 year and two 1-in-10 year PML levels, including a factor for Loss Adjustment Expense (“LAE”)
  • Liabilities-to-surplus ratio of no more than 3 to 1

Florida State Representative Frank Artiles voiced concern that the proposal had not been vetted adequately and was being pushed through too quickly.  He suggested a two to three month delay to research the matter further.

“This rushed process is by design,” said Representative Artiles, who urged Citizens to delay a decision on the measure. 

“I think we are faced with almost an unprecedented opportunity,” said Citizens President and CEO Barry Gilway.  “I think delaying, in my opinion, is a massive mistake.”

Approximately 20 groups of companies would be eligible to participate, it was noted.

Traditional programs are basically are attracted to risks that are rate adequate, Mr. Gilway noted, adding that the surplus notes program goes far beyond that.  The program will attract companies that are willing to take policies that are a more under-priced risk.

Noting that timing can be everything, Board member John Rollins pointed out that the OIR approved the removal of 150,000 policies from Citizens today by four private-sector companies.  According to the OIR, the takeout is scheduled to being on November 6, 2012.  If approved, the surplus notes program would start in early December.

Mr. Rollins wondered if the timing of the surplus notes program might conflict with the newly-approved takeout program.

“Depending on when existing policies are ready to go,  does it make sense to approve or refine the surplus notes program at such a pace that companies who are lined up to take policies now-should they be allowed to do that prior to the first participants in the surplus program?” Mr. Rollins asked.  “I would like to hear your view on how these two programs need to interact.”

President Gilway said all of these considerations should be brought to the table at the same time.

“We select a date, and as of that date everyone participates,” Mr. Gilway said.

Florida Insurance Consumer Advocate Robin Westcott urged Citizens to proceed with caution, noting that the risk with the surplus notes program could be considerable.  She pointed out that with the elimination of ceding commissions, conditions are proving favorable for private insurers to operate more efficiently and take over policies without loans.

“You have a new dynamic that has happened.  I think this is a different circumstance,” Ms. Westcott said.

With no further business before the Committee, the meeting was adjourned.


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