Citizens Property Insurance Depopulation Committee Recommends Elimination of Ceding Commissions Retroactive to Fourth Quarter 2011

Feb 22, 2012


With its members in agreement that everything possible must be done to promote depopulation, Citizens Property Insurance Corporation (“Citizens”) Depopulation Committee (“Committee”) voted at its meeting today, February 22, 2012, to recommend that Citizens’ Board of Governors (“Board”) eliminate all ceding commissions retroactive to the fourth quarter of 2011.

Under the recommendation, ceding commissions would no longer be paid on either the Commercial or Personal Residential Non-Bonus Takeout Plans.  To further ensure that policies could be assumed from any Citizens’ account and for any type of business, the Committee also recommended that the word “Residential” be removed from the term “Commercial Residential Non-Bonus Takeout Plan,” thus making it applicable to all commercial policies.

A ceding commission is a percentage of unearned premium for assumed policies that Citizens retains to service those policies during the period of time from the assumption date to the policy term expiration date.  Ceding commissions have historically ranged from as high as 16 percent of unearned premium to as low as 6 percent of unearned premium.

The intent behind the elimination of ceding commissions is to provide an incentive to encourage the removal of risks from Citizens.

It was noted that the 2012 budget did not include provisions for ceding commissions.

Susanne Murphy, Citizens’ Executive Vice President for Corporate Operations, gave a brief history of the issue for the benefit of the Committee, which was meeting for the first time with its new members.

Using charts illustrating the number and types of policies removed from Citizens since 2003, Ms. Murphy explained that the vast number of takeouts since then have been from the personal residential multi-peril account.  In fact, she said, the number of policies removed during that time period is “strikingly similar” to what the Florida Residential Property Casualty Joint Underwriting Association (“FRPCJUA”) had removed during its era immediately prior to that. 

“This tells us that the market is cyclical, and based on the capacity and willingness of the voluntary market to write business,” Ms. Murphy reasoned.

Notwithstanding, statutory factors also have resulted in a diminishment of depopulations in recent years; principally, the “opt-out” provision that allows policyholders to decline the takeout offer, as well as the “agent decline” provision.  From 2008 through 2011, these two factors have resulted in nearly 200,000 and 100,000 policies remaining with Citizens that would have otherwise been removed for each respective reason.

Also during that time period, eight Florida domestic insurers became insolvent, further exacerbating the number of policies that wound up in Florida’s “insurer of last resort.”

Typically, Florida domestic insurers have assumed the bulk of Citizens’ policies through takeouts.  In contrast, assumptions from the FRPCJUA were done by companies that already had a presence in the state, Ms. Murphy explained.  To incentivize insurers to remove policies, the FRPCJUA also availed itself of “10 or 12” programs that were created specifically for that purpose.  The result was a drastic reduction in policy count from around 1 million policies in 1996 to approximately 65,000 policies in 2001. 

After the 2006 Florida Legislature limited the incentive dollar amount that Citizens could pay to insurers, as well as increased the policy holding period to five years, Citizens’ Board adopted the two non-bonus depopulation plans that were amended today in order to provide a policy removal mechanism. 

However, it was noted that because of an order issued by the Florida Office of Insurance Regulation several years ago to address the potential solvency problems created by the “opt-out” and “agent decline” provisions, a takeout insurer’s portfolio could wind up looking quite different than what it was modeled to be.

After this discussion, the Committee voted to amend Citizens’ Personal and Commercial Non-Bonus Takeout Plans to remove reference to the payment of ceding commissions, retroactive to the fourth quarter of 2011. 

To view the proposed amendments, click on the hyperlinks below:

The Committee also agreed to rename the Commercial Residential Non-Bonus Takeout Plan as the “Commercial Non-Bonus Takeout Plan” in order to be applicable to all types of commercial risks.

The Board will be asked to ratify the changes during its meeting tomorrow, February 23.


Depopulation Survey Results Questioned

In an effort to identify barriers that discourage Florida voluntary market insurers from participating in Citizens’ depopulation programs, a survey was administered to 587 licensed property and casualty insurers in Florida. The survey was prepared by Citizens and administered via e-mail by the Florida Office of Insurance Regulation on behalf of Citizens. The insurers were provided 13 business days to respond and were given the option to remain anonymous.  At today’s meeting, Citizens reported that 89 (15.2 percent) of insurers contacted actually completed the survey. To view the survey and accompanying materials, click here.

With discussion prompted by Florida Association of Insurance Agents President and CEO Jeff Grady about the “lackadaisical response,” the Committee discussed whether to correlate the number of respondents to the results of the survey and whether the insurers that responded were actually 89 personal residential insurers. 

Saying that “it’s not just the company that decides whether or not to remove the policy,” Mr. Grady also suggested that Citizens should incorporate feedback from agents about why they choose to allow a takeout or not.

The concept of “cherry picking” policies and what happens when two companies vie for the same policy also was discussed.

Board Member John Rollins said he felt the issues raised by the survey could be grouped into three categories:  rate adequacy, data quality, and the opt-out provision. 

Citizens’ upcoming rate filings affect future depopulation efforts, he said, explaining that the problem of rate adequacy remains because of the mandated ‘Glide-Path.’

“I cannot emphasize enough how important those data sets are as to whether to fund the takeout,” Mr. Rollins said.  “It’s much more sexy to talk about agents opting out.”

“Takeouts are the single largest unmodeled risk,” he continued in his urging for Citizens to provide insurers with better quality data.  “It’s not an analytical issue, it’s an economic and transactional issue.”

In an effort to convene depopulation stakeholders and discuss issues such as data quality, it was suggested that a “depopulation summit” be held in conjunction with the April 2012 Board meeting.  Clarification was made that this would focus on both takeout and “keep-out” strategy.

A “depopulation outreach” campaign also will be created to promote a concentrated effort for Citizens to stimulate interest in takeouts by interacting with insurers, as well as reinsurers and agent groups.

The meeting then was concluded.


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