Florida Citizens Board of Governors Meeting Recap–September 24, 2014

Sep 30, 2014


Florida’s Citizens Property Insurance Corporation (“Citizens”) Board of Governors (“Board”) met on September 24, 2014, preceeded by five Citizens committees on September 23–all of which convened in Winter Park, Florida.  

During the Chairman’s report at the Board meeting, Citizens’ General Counsel Dan Sumner discussed the need for a streamlined procurement procedure that recognizes the existence of two different stages of Citizens’ contractual processes.  The first, to be known as “Action Items,” would cover situations in which the Board has not yet taken action on a contract, but the contract has been discussed at the committee level.  Under this scenario, each contract would be voted on individually by the Board.  

The second, “Consent Items,” would involve contracts that have already been approved by the Board, but need to be re-approved.  In this situation, the contract would be discussed at the Committee level, and the Board would then vote on it via a consent agenda.  

The Board accepted the new streamlined structure and immediately approved a consent agenda that contained contracts for a Citizens financial advisor, an information technology (“IT”) infrastructure provider, Special Investigative Unit services, claims estimating software and an extension of Citizens’ existing independent adjusting services contract.

In his report, Citizens’ President and CEO Barry Gilway said that the State-run insurer’s assessment risk has decreased from $11 billion in 2011 to approximately $3 billion in 2014.  Citizens will continue efforts to reduce it through means of risk transfer.  

The Florida Office of Insurance Regulation (“OIR”) has approved additional takeouts from Citizens.  Given this news, it is anticipated that Citizens’ total policy count will be reduced to around 825,000 by year-end.  

Citizens’ Office of Internal Audit (“OIA”) reported that, during the past year, the OIA has engaged in over 16,000 audit hours and expects a similar amount of activity this year.  

Meanwhile, the Florida Auditor General recently released its audit of Citizens’ IT Operations–a regular occurrence on a three-year cycle.  To view the audit, click here.  

Notably, the Florida Auditor General disclosed areas in which improvements in Citizens’ IT controls and operational processes were needed.

  • Two users were found to have inappropriate user access privileges to selected Citizens’ IT resources without a valid business purpose.
  • As of the dates of the review, in excess of 19,000 user accounts had not been deactivated after a specified time frame of inactivity, indicating that Citizens’ periodic reviews of user access privileges needed improvement.
  • Certain security controls related to selected Citizens IT systems’ user authentication and logging were determined to be in need of improvement.

The OIA is also tracking two high-risk items relating to Citizens’ legal billing system, which has been determined to be incapable of providing regular standardized reporting to aid in the monitoring of legal expenses, as well as in the follow-up and possible recovery of funds from recent overbilling by attorneys.  Rather, only a limited number of production reports are available for use upon request.  It was during the Audit Committee meeting that Citizens should have the capability of generating such in-house reports.  

Meanwhile, temporary suspensions of law firm contracts have been issued to those that may employ an attorney who was determined to have billed Citizens improperly.  Additionally, certain firms identified in the audit have already had their agreements terminated.  Citizens is reviewing the firms’ responses to the situation, as well as designing a plan to obtain recovery, where possible.  

The OIA reminded the Board that Citizens maintains a 24-hour hotline on which employees can report alleged lapses in ethics or compliance.  During the second quarter of 2014, four complaints were filed via the hotline.  The average length of time necessary to address these complaints was 43 days.  Of the four complaints, three were related to Citizens’ Claims Department and one was related to the Underwriting Department.  The investigation of those four complaints revealed no ethical or compliance lapses.  

Next year’s goals for Citizens were reviewed.  Those include:

  • Implementation of Citizens’ CORE software system
  • Corporate control mechanisms
  • Claims litigation management
  • Clearinghouse expansion
  • Cyber-risk and data privacy
  • Underwriting data quality
  • Utility of Citizens’ Web site
  • Fraud analytics
  • Producer management platform
  • Vendor management program

In discussing the financial stability of takeout companies, Mr. Gilway reminded the Board that Citizens is not a rating agency.  The responsibility of determining the financial stability of insurance carriers belongs to the OIR, or rating agencies such as Demotech, he said, adding that Florida domestic carrier surplus is increasing.   Referring to a Demotech presentation that was part of the Board’s meeting materials, he also explained that, in order to receive an acceptable rating from Demotech, carriers must demonstrate a comprehensive risk transfer program and sound financial management.  To view the Demotech presentation, click here.

In her report, Citizens’ Chief Financial Officer Jennifer Montero announced that quarterly financial analyses will now replace Citizens’ mid-year financial report.  Through June 30, 2014, Citizens’ direct written premium decreased by approximately 27 percent compared with the same period a year ago ($1.1 billion versus $1.5 billion). Total ceded premiums written at June 30 decreased 18 percent, as compared with one year ago, despite an increase in total private reinsurance coverage placed ($3.269 billion versus $1.854 billion).  During that same time, net premiums earned decreased by $285.7 million, or 23 percent.  Decreases in net loss and loss adjustment expense ratios of 7 percent and 2 percent, respectively, were observed through June 30, compared with the same period last year. 

A decrease of 83 percent has been realized over this same period for sinkhole losses, Ms. Montero pointed out.

Citizens’ administrative expenses decreased approximately 9 percent, or $9.3 million when comparing the first six months of 2014 to that of 2013, while its overall expense ratio has increased moderately (1 percent) as a result of a declining written premium base.

Ms. Montero also addressed Citizens’ 2005 emergency assessment.  Due to Hurricane Wilma, Citizens had a 2005 Plan Year Deficit of approximately $1.7 billion, which was financed with a post-event bond issued for $1.063 billion.  To service the debt, Citizens levied an emergency assessment of 1.4 percent of direct written premium beginning July 1, 2007.   On July 1, 2011, this was reduced to 1 percent.  

Given her explanation that Citizens is expected to have sufficient resources in place by June 2015 to satisfy the bond balance, the Board approved Ms. Montero’s recommendation to defease the bond and eliminate the assessment two years early, effective July 1, 2015.  

It was announced that the OIR has approved rate filings for Citizens’ personal and commercial lines accounts.  With a few notable exceptions, the Personal Lines rates were approved as filed.  The average (across all Personal Lines) filed recommended rate change was -3.4 percent, whereas the approved rate change was -3.7 percent. 

To explain the differences between the filed and approved rates, four drivers were cited:

Sinkhole Issues–The filed rates included a recommendation for a 10 percent increase for optional sinkhole loss coverage in Hernando County, whereas the approved rates included a zero percent change. This slightly lowered the rate impact for Citizens’ Homeowners (HO-3) and Dwelling Fire (DP-3 and DP-1) multi-peril rate changes. 

Non-Hurricane Catastrophe–This provision in the rate indication was mainly to reflect the risk of tropical storms.  The mobile home filed rate changes included a provision that was based on a blend of industry-wide and Citizens’ historical storm data, whereas the approved rate change included a provision that was based solely on Citizens’ data.  This actually caused the indicated rate changes for the mobile home lines to increase slightly. 

Loss Trend Selection–For Citizens’ mobile home lines of business, the OIR selected lower loss trends than what were recommended, causing a slight decrease in the indicated rate change. 

Selected Wind Rate Indication–For its DP-3 coverage, Citizens’ selected wind rate indication was 1.5 percent, however the OIR allowed zero change.  For HO-4 policies, Citizens’ selected wind rate indication was -10 percent.  The OIR selected -20 percent.

Citizens recommended a policy level cap on annual rate changes of +/-10 percent for each line of business, which the OIR approved in all lines except Renters (HO-4).  For HO-4, the upper cap is still 10 percent; however, the lower cap for 2015 will be -15 percent.  All approved rate changes for Citizens’ Personal Lines Account will be effective February 1, 2015.  

Only recently did the OIR release the order for Citizens’ commercial rate filing, in which an average statewide rate increase of 4.9 percent was requested.  Ultimately, the OIR an increase of 4.6 percent, also effective February 1, 2015. 

Also discussed was the “Market Analysis,” a new initiative aligned with Citizens’ strategic plan of operating as an efficient residual market.  As part of this project, products offered in the property insurance market will be evaluated, followed by the adjustment of Citizens’ products to fill pinpointed voids in compliance with Florida law.  The effort is designed to produce a quarterly report of the Florida insurance market based on a “Watch Group” of private insurers based on market share, amount of takeouts and Clearinghouse participants.  Market Watch Group insurers will be updated semi-annually.  

The most recent “Market Analysis” report provided several key observations:  Citizens is still the largest admitted Florida residential insurer, whether measured by insured value (10 percent), policy count (15 percent) or premium (16 percent).  However, Citizens is shrinking.  Specifically, its personal residential market share measured by exposure has declined from 19 percent in 2011 to 10 percent in 2014.  The private market is expanding largely due to a return to rate adequacy.   The report indicates that private insurers prefer to cover higher value homes, those in less risky areas, or where Citizens’ pricing is not competitive.  

The Board was advised that Citizens is re-organizing its non-litigated claims department to more closely align with that of the litigated claims process.  This is intended to establish better continuity of claims handling in litigated claims.  Citizens has created a “Triage Unit” to determine which claims should be settled, which require more information prior to making a decision, or which should be litigated.  

Insofar as Citizens’ Clearinghouse, it was reported that there are currently 11 insurers quoting HO-3 business through this mechanism.  The Clearinghouse has processed over 117,000 unique requests for new coverage this year–a 10 percent increase from applications for Citizens coverage during same period in 2013.  Of those unique requests, over 7,000 were deemed ineligible for Citizens coverage.  Almost 3,000 of these were bound by insurers participating in the Clearinghouse.  Almost 4,000 requests for renewal were submitted to the Clearinghouse, with 48 of those being deemed ineligible.  

During, 2014, almost 400 of the renewal requests received additional offers from Clearinghouse participants.  Clearinghouse activity has led to a 40 percent decrease in Citizens’ HO-3 policies bound when compared with the same period in 2013.  

Meanwhile, the OIR has approved over 530,000 Citizens’ policies for takeout by private carriers, with projections that 144,000 policies actually will be removed from Citizens.  Through March 2014, 32 percent of policies taken out have remained with the assuming private carrier.  From a historical perspective, an analysis of depopulation efforts from 2007 to 2011 showed that 29 percent of depopulated policies returned to Citizens.  The analysis also showed that policies from the South Florida tri-county area (Palm Beach, Broward and Miami-Dade) and sinkhole-prone locations have the highest likelihood of returning.  

Citizens’ 2012 depopulation audit covered all takeout contracts with an assumption date in the calendar year of 2012, with the intention of evaluating compliance with Citizens’ takeout requirements.  Each executed assumption contract included a provision whereby the takeout company agreed to make available all records associated with the performance of compliance audits. 

In 2012, there were seven participating carriers and a total of 277,002 policies removed at the various dates.  A sample of 400 policies were reviewed for each of the seven takeout carriers, with testing covering post-assumption opt-outs, policies in-force on the date of the sample, and policies cancelled or non-renewed.  

It was reported that Citizens is also examining performance standards of premium-financed policies.   Year-to-date, only 148 agents have received warnings for late submissions and binding violations.  Only 12 agents have been suspended for 30 days, and no agents have been terminated or suspended for 90 days.  Changing new agent training is being considered in order to provide a better introduction to Citizens’ performance standards and compliance assistance resources. Citizens is also currently developing proposed standards related to administrative issues that may present significant risk to itself, as well as to consumers, such as premium finance company utilization and agent utilization of Automated Clearinghouse (also known as ACH–not related to Citizens’ Clearinghouse) payments.  

It was revealed that agents are concerned about inconsistency in Citizens’ new agent agreement and the Florida Market Assistance Program’s ability to share policy data with other agents.  Concerns over operational issues with takeouts that impact customers have been brought up at Citizens’ Agent Roundtable (“ART”).  For example, beginning in October 2014, policyholders who have been depopulated from Citizens will receive a letter offering a method to receive a premium offer from the takeout company.  

The ART also has assisted Citizens in understanding operational challenges presented by renewals through the Clearinghouse. At their meeting on September 23, Citizens’ Market Accountability Advisory Committee members expressed interest in the development of an “Agents Bill of Rights” relating to Citizens’ depopulation efforts.

It was reported that Citizens has established the Clearinghouse Consumer Service Committee to ensure agents and consumers have the information and training needed to understand how the Citizens Clearinghouse works, with the expectation they will use it to make educated decisions about their options.  Many have limited access to the full array of companies writing homeowners insurance in Florida.

At its September 23 meeting, Citizens’ Financial and Investment Committee heard a report on the State-run insurer’s total portfolio market value as of July 2014, which was $14.69 billion.  Investments therein have an average duration of 1.7 years and average credit ratings of “AA-/Aa3/AA-“.  Of the total portfolio, 67 percent is taxable, with a market value of $9.9 billion, while 33 percent of the portfolio is tax-exempt with a market value of $4.8 billion.  Citizens’ gross total return for June 2014 was -0.01 percent–down from 1.32 percent for the preceding year.  All but 10 percent of Citizens’ portfolio is managed by outside investment managers.  

Citizens’ contract with Raymond James & Associates was renewed for providing financial advisory and investment consulting services in the amount of $930,000.  The renewal term will be from November 1, 2014 through October 31, 2016, representing two one-year renewal periods, exercisable at Citizens’ discretion.

It was reported that Citizens’ Underwriting Department has engaged in Business Process Outsourcing (“BPO”) to allow for rapid adaptation to changes in volume of transactions.  Citizens Personal Lines underwriting currently utilizes a single vendor partner to assist in underwriting and phone support.  Additional BPO vendors have been selected through a competitive process, but contract execution is still pending.  A commercial lines BPO strategy is currently under development.  

To access the materials from both the Board meeting and the September 23 committee meetings, click on the hyperlinks below:

Board of Governors Meeting 

Actuarial and Underwriting Committee Meeting 

Finance and Investment Committee Meeting 

Depopulation Committee Meeting 

Audit Committee Meeting 

Market Accountability Advisory Committee Meeting 


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