Citizens Rate Hearing Report: October 20
Oct 21, 2009
The Florida Office of Insurance Regulation (“OIR”) held a public hearing on October 20, 2009 to discuss various rate filings made by Citizens Property Insurance Corporation (“Citizens”) for its Personal and Commercial Lines Accounts, as well as for its Mobile Homeowners Physical Damage Account (“MHPD”). To view the complete hearing agenda, click here.
For its Personal Lines Account (“PLA”), Citizens requested the following average statewide increases:
For the Commercial Lines Account (“CLA”) and MHPD, the following average statewide increases were:
- MHPD–2.1 percent
- Commercial Residential Properties with Condominium Associations–10.1 percent
- Commercial Residential Properties Ex-Wind Condominium Associations–10.1 percent
These increases include the pass-through amount allowed for the Florida Hurricane Catastrophe Fund’s (“FHCF”) cash build-up requirement and also reflect the statutory rate increase cap of no more than 10 percent per policyholder.
During the hearing, OIR officials questioned Citizens representatives regarding actuarial factors relating to the calculation of the rate filings.
To calculate its PLA rates, Citizens used Florida Public Hurricane Loss Projection Model data, as well as a contingency calculation based upon the ISO Wind Factor in order to account for losses such as food spoilage that are not normally incorporated in catastrophe models.
The contingency percentages include:
- 10 percent for wind policies
- 2 percent for non-wind policies
- 10 percent for sinkholes
These percentages were based upon outside data because Citizens’ actuaries did not feel they had enough historical non-hurricane loss data upon which to base their calculations. OIR Deputy Insurance Commissioner Belinda Miller clarified that the contingency provisions correlate to the expense load of an insurer and that Citizens has used these factors in past rate filings. She also said that the contingency amounts are already part of the requested rate increases and not an addendum to them.
It was explained that a 35 percent increase would have been required to achieve actuarial soundness specifically for the PLA rates, but because any Citizens rate increases are statutorily capped at 10 percent, the average statewide increase was only 5.4 percent.
To ensure the appropriate calculation of wind mitigation premium discounts, Citizens compared the amount by which it discounts policies on mitigated properties to the benchmark amount provided by hurricane models. The resulting data was also used to assist in hurricane loss forecasting.
A representative from Citizens testified that that there appears to be a disconnect between catastrophe modelers and the insurance industry, because it is not known to what extent hurricane models quantify wind mitigation premium discounts.
OIR General Counsel Steve Parton inquired whether agents are required to independently verify mitigation features on properties insured by Citizens. A Citizens representative responded that, while policyholders verify mitigation forms and agents send in photographs of homes, agents are not considered to be qualified to evaluate what mitigation features are eligible for credits.
Mobile Home Rates
For mobile home policies, Citizens requested an average statewide increase of 1.8 percent for MH03 policies and 1.0 percent for MH04 policies. Actuarial rate indications for these types of policies averaged 10.9 percent and 0 percent, respectively, with the latter value signifying that there is no actuarial evidence to support a rate increase. Some Florida counties have rate indications in excess of 10 percent because of the FHCF cash build-up factor, which adds a fraction of a percent over the 10 percent base rate cap.
Dwelling Fire Rates
Citizens has approximately 200,000 dwelling fire policies, which mainly cover non-owner-occupied homes. Initially, the rate increase filed for this policy type was 8.4 percent, but, after direction from the OIR that suggested the use of sinkhole loss cost data as a barometer to predict inflation, the filing was amended to 8.8 percent. Actuarially, the total statewide average indicated rate increase for dwelling fire policies is 59 percent.
Mobile Home Physical Damage Rates
MHPD policies mainly cover non-owner-occupied mobile homes built before 1994. The requested rate increase for MHPDs is 2.1 percent, based on a 12.5 percent rate indication. The requested rates for these policies may be amended, because Citizens recently has changed its operating guidelines to state that policies covering mobile homes built prior to 1994 will afford coverage for actual cash value only, rather than replacement coverage. The new guidelines are expected to limit loss settlement to actual cash value for partial losses. Policyholders will receive notice of this change six months in advance of their scheduled policy renewal date.
In order to more accurately reflect Citizens’ unique book of business in its commercial rate calculations, Citizens actuaries used actual Citizens data, rather than relying on ISO data.
OIR officials inquired about the costs of Citizens’ agent commissions, with the concern expressed that, for each commission dollar paid to agents, a dollar less is available to pay claims, or a dollar more could be added to fund statewide assessments in the event that Citizens was not able pay its claims.
Citizens Senior Vice President of Underwriting Paul Palumbo justified the commission rates, stating that Citizens’ policies are labor-intensive, and that agents provide a high level of service over each policy year.
Scott Johnson from the Florida Association of Insurance Agents testified about agent commission rates. According to Mr. Johnson, agent compensation is not exclusively based upon the amount of work the agent does per policy, but rather on the level of expense incurred. Based on industry studies, he explained that agents typically do not recoup their initial costs for a new policy until its third renewal.
The statewide average for voluntary market agent commissions on homeowners insurance policies is 13 percent of premium. Citizens’ commission rates are lower at 11.7 percent.
Associated Industries of Florida President Barney Bishop testified about the urgency of achieving actuarial soundness for Citizens’ rates. Mr. Bishop stated that it was the Florida Legislature’s intent to increase Citizens rates by 10 percent in order to accomplish this goal, which would have thereby protected both commercial and non-Citizens policyholders from a large catastrophe assessment that would be tantamount to a “hurricane tax” if a large storm hits Florida.
A speaker from Monroe County testified that, by capping both Citizens rate decreases and increases at 10 percent, policyholders who would be entitled to additional decreases are being made to “pay it forward to those who are not.” The speaker said that this policy is inappropriate because the law does not reference a limit on rate decreases.
Mr. Parton asked what would be required to make Citizens’ rates actuarially sound. Citizens representatives responded that this could be accomplished through an average 40 percent statewide rate increase that would include some increases of over 40 percent and some decreases of over 10 percent.
The hearing was then adjourned.
The OIR has scheduled a separate public rate hearing on Tuesday, November 10, 2009 to discuss the rate filings for Citizens’ High-Risk Account.
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