Florida Citizens Property Insurance To Consider First Commercial Residential Wind-Only (Coastal Account) Depopulation In History
Feb 8, 2013
Citizens Property Insurance Corporation (“Citizens”) advised that, on January 31, 2013, the Florida Office of Insurance Regulation (“OIR”) issued a consent order approving a depopulation plan for Weston Insurance Company (“Weston”). The plan must be approved by Citizens Board of Governors (“Board”) in order for it to proceed.
In a news release issued today, February 8, 2013, Citizens explained that the depopulation plan under consideration is significant for two reasons:
- Commercial Residential Wind-Only policies comprise a majority of the total exposure removed (approximately $22 billion worth of exposure).
- No depopulation of Commercial Residential Wind-Only policies from the Coastal Account has occurred in Citizens’ history.
Citizens noted that it has not been advised of any other parties that wish to remove Commercial Wind-Only policies from its Coastal Account, and that this indicates that there is little or no other interest in removing these high exposure wind-only policies.
The Board is scheduled to meet on February 11, 2013 at 9:00 a.m. (ET) Public teleconference participation is available by calling 1-888-942-8686, Participant Code: 5743735657#
Citizens’ staff has recommended the approval and execution of a quota share reinsurance treaty between Citizens and Weston.
To access the materials for this meeting, click here, or click on a hyperlink below.
Under the OIR’s consent order, Weston and Citizens will enter into a depopulation agreement. Under this and subsequent orders to be approved by OIR, Weston will remove approximately 23,000 Personal Residential Wind-Only policies, 3,000 Commercial Residential Wind-Only policies and 5,000 Commercial Nonresidential Wind-Only policies from Citizens’ Coastal Account.
The Weston takeout will remove approximately $30 billion in exposure from Citizens’ Coastal Account, resulting in an $840 million decrease in Citizens’ Coastal Account’s probable maximum loss (“PML”) in the event of a 1 in 100-year storm.
The remainder of Citizens’ Weston announcement reads:
In order to provide rate stability and encourage participating policyholders to remain with Weston following the assumption, Weston will:
- Maintain Citizens’ statutorily mandated rate Glide Path (increases of no more than 10 percent per year) for three years for all assumed policies.
- Retain (not cancel or non-renew for underwriting reasons) all assumed policies for at least three years.
- Replace any assumed policies that leave Weston within the first three years with similar policies from Citizens, if available.
The proposed depopulation will take place in two phases, each of which is critical and necessary for the plan to proceed:
1. Quota Share Insurance Agreement
Weston and Citizens will enter into a quota share reinsurance agreement under which Weston will reinsure and pay all claims (100 percent of the risk) for the wind-only policies it plans to assume, effective December 21, 2012, and continuing through May 31, 2013. During this period, Citizens will pay Weston a reinsurance premium for the policies covered under the reinsurance agreement. The reinsurance phase of the Weston takeout will enable both Citizens and Weston to receive the benefits of a takeout that ordinarily would have taken place in November or December. This provides the following advantages:
- Citizens will receive the full benefit of exposure and PML reductions, effective December 21, 2012, with no liability for claims resulting from policies covered under the reinsurance agreement.
- Weston will earn premiums in advance of hurricane season for the exposure it plans to assume.
2. Assumption of Wind-Only Policies from Coastal Account
Weston will assume approximately 31,000 wind-only policies over several separate assumptions. The assumptions will occur between March and June 2013. As policies are assumed by Weston pursuant to its assumption agreement, these policies will transition from being covered under the reinsurance agreement to being covered directly by Weston under the terms of its assumption agreement.
The final assumption should be completed by May 31, 2013.
Frequently Asked Questions (Prepared by Citizens)
1. Why is this depopulation plan coming before the Citizens Board of Governors?
The Citizens Board of Governors must approve all reinsurance contracts. Because the depopulation plan approved by the Office of Insurance Regulation (OIR) includes a reinsurance component (the quota share reinsurance agreement), approval by Citizens’ Board is necessary for the plan to proceed. If the depopulation plan did not include a reinsurance component, the takeout would have needed only OIR’s approval.
2. How does the Weston agreement benefit policyholders?
Policyholders will receive private market coverage with rate increases of no more than 10 percent per year (the Citizens’ rate glide path) for three years. This commitment is unique to the Weston takeout.
Citizens’ policyholders removed by Weston will not be subject to Citizens’ substantial policyholder assessments, which can total as much as 45 percent of premium for one year, if a storm or series of storms makes assessments necessary.
3. How does the Weston agreement benefit Florida taxpayers?
Citizens will return approximately 31,000 policies to the private market, resulting in a $30 billion reduction in exposure and an $840 million reduction in losses should Florida experience a 1 in 100-year storm. Returning these policies to the private market will reduce the risk of potential assessments for all Floridians by approximately $500 million dollars.
In addition, we hope that this first ever depopulation of commercial wind-only policies from Citizens’ Coastal Account will pave the way for future depopulation efforts.
4. What does the quota share reinsurance treaty cover?
During the quota share reinsurance treaty’s effective period, Weston will bear 100 percent of the wind-only risk, which ordinarily would be covered by Citizens, for the policies subject to the agreement.
5. Why is the reinsurance treaty a part of this transaction?
In early 2012, Weston expressed to Citizens its intent to engage in a Coastal Account depopulation. Because of the time needed to fulfill the requirements necessary to obtain its Certificate of Authority (COA) from OIR, Weston will be unable to begin its first assumption of policies until March 2013.
Although the time lag for the first assumption until March is necessary to provide eligible policyholders and agents with the opportunity to opt-out of the assumption, it also impedes the assumption as depopulation agreements typically hinge on the assuming company’s ability to collect premiums for several months prior to hurricane season. (This requirement is why most large assumptions typically occur between November and January.)
Given these delays and the high priority Citizens’ Board and other stakeholders place on reducing Citizens’ exposure, Weston proposed the quota share reinsurance treaty as a way to make the proposed depopulation viable for the 2013 storm season. The reinsurance treaty will enable Weston to earn premium for the policies it plans to assume, serving as a bridge until the actual removal of the wind-only policies can occur. In turn, Citizens will have no financial liability for claims resulting from policies covered under the quota share reinsurance treaty as they will be covered by Weston.
6. Does the reinsurance element of this agreement duplicate reinsurance already in place through May 31, 2013?
Although Citizens has reinsurance in place through May 31, 2013, it covers only losses from named hurricanes in which Citizens’ losses in a single event exceed $6.35 billion. Under the Weston quota share reinsurance treaty, Weston will pay all covered losses for policies covered under the reinsurance treaty.
Should you have any questions or comments, please contact Colodny Fass& Webb.
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