Florida, insurance leaders seek ways to lessen risk posed by Citizens

Jan 5, 2009

Florida, industry leaders try to lower risk insurer poses to state

By Julie Patel

South Florida Sun-Sentinel–January 4, 2009

Since three hurricane seasons have come and gone without a major storm, many residents might need a reminder that the state is Florida’s biggest property insurer. And that means virtually all Floridians would be on the hook again should future storm seasons not be so gentle.

A task force of insurance executives, state officials and business leaders had several meetings last year to explore how to shrink Citizens Property Insurance Corp. and reinstate its original role as a home insurer of last resort. The group will make recommendations to the state legislature later this month.

Questions persist about whether the state would be able to borrow enough money to pay claims if a major storm strikes.

A catastrophic hurricane “could bankrupt, truly bankrupt, the state,” which is already $2.3 billion in the red, said Chip Merlin, an attorney appointed to the group by Gov. Charlie Crist.

Many task force members and state leaders think Citizens – with more than 1 million homeowner policies – should raise its rates as much as 10 percent a year to build its reserves and encourage policyholders to consider switching to a private insurer. An idea with less support is forcing Citizens policyholders to switch to a private insurer if they’re offered a policy, even if the annual premium is a lot more money.

But it’s uncertain how many policies private insurers are willing to take from Citizens and efforts to make the state-run insurer smaller may increase, not reduce, the risk the insurer poses to state residents. All Florida automobile and property insurance policyholders could be required to pay fees to offset Citizens deficits. Already, homeowners will continue paying an annual fee of 1.4 percent of premiums until 2017 for shortfalls Citizens incurred in 2005.

The legislature rescinded planned rate hikes of 21 percent and 56 percent for Citizens in 2007 to help homeowners whose insurers dropped them or whose rates doubled and tripled in some cases after the 2004 and 2005 hurricanes. Lawmakers extended the rate freeze last year until the end of 2009.Citizens estimates it would have to pay up to $23 billion in claims for a major storm, the kind that strikes every 100 years. Citizens would be able to pay $17.5 billion using its $3.4 billion in net assets plus backup coverage and loans, Citizens Chief Financial Officer Sharon Binnun said.

Some state legislators are torn about raising Citizens prices dramatically because many Florida residents are facing foreclosures and job losses. That’s why Senate President Jeff Atwater said he supports state insurance regulators’ idea to increase Citizens rates by no more than 5 percent to 10 percent each year. Atwater, R- North Palm Beach, said after the first year, all future increases could be reviewed annually to see if they’re needed and to account for the diminished risk of homes newly fortified against hurricanes.

The task force, created earlier this year by the state legislature, meets Tuesday to start making recommendations that are due to Crist, Atwater and House Speaker Ray Sansom by Jan. 31.

Private insurers have taken more than 670,000 policies from Citizens the past few years in part because of incentive programs.

The problem is they cherry-picked the policies with the least storm risk and left Citizens mostly with policies for older, coastal or mobile homes that “just don’t fit with any insurer’s underwriting guidelines,” Deputy Insurance Commissioner Belinda Miller said.

The growth of Citizens probable maximum loss from a major storm has outpaced its policy growth by more than threefold since 2005. More and more Florida residents have been pushed into Citizens property policies as State Farm, Allstate and other private insurers have canceled policies. The age and durability of homes covered by Citizens are just a few of many factors that contribute to projected losses.

If Citizens truly returns to being the last-ditch insurer its predecessor was formed as after Hurricane Andrew in 1992, it would be barred from practicing a key tenet of property insurance: to spread risk, Jim Malone, Citizens board chairman said.

Sen. Dan Gelber, D- Miami Beach, a leading Senate Democrat, likens the fundamental problem of Citizens’ purpose to a health insurance pool that weeds out the healthy customers and ends up solely with cancer patients, driving up both the risk and policy rates needed to offer adequate coverage.Solutions floated so far by the task force to reduce Citizens’ risk include eliminating the option of people buying policies from the insurer that only cover hurricanes. Many private insurers no longer offer the windstorm coverage because it’s considered one of the riskiest and least profitable insurance perils. About 400,000 Citizens policyholders with so-called “wind-only” policies buy coverage for fire, theft and other perils from private insurers.

Atwater, who co-authored a sweeping property insurance law in 2008, said he supports requiring insurers to offer coverage statewide, not just in areas deemed the most profitable risks.

“If [an insurer] benefits from the chance to serve Florida, they should do so in all geographies,” he said.

Citizens’ growth

Citizens Property Insurance Corp. policies in Florida

Year policies
2003 820,276
2004 873,996
2005 810,017
2006 1,298,922*
2007 1,304,949
2008 1,076,626**

*Citizens assumed more than 300,000 policies from the insolvent Poe Financial Group in July 2006.

**Through Sept. 30.

Source: Citizens Property Insurance Corp.