Florida’s Citizens Property Insurance Approves Rate Increases; Water and Fire Mitigation Program

Jun 28, 2013


Punctuated by its approval of an increase in 2014 statewide rates averaging seven percent, Florida’s Citizens Property Insurance Corporation’s (“Citizens”) Board of Governors (“Board”) held a six-hour meeting in Miami this week on June 26, 2013.

To view the meeting materials, click here.

Following is a summary of the discussions and actions that took place:


Appeal of Award of ITN No.: 12-0025, Learning Management System and Software-As-A-Service Model

The Board began the meeting by hearing the appeal of Invitation to Negotiate (“ITN”) No: 12-0025, which had been requested by Elogic Learning (“Elogic”), a would-be vendor.   Citizens had issued the ITN to select a vendor capable of providing an on-line Learning Management System to deliver and track the training of about 30,000 individuals, including Citizens’ agents, agency staff and independent adjusters.

On November 7, 2012, Citizens’ four-person Negotiation Team met and unanimously recommended SuccessFactors for the award of a three-year contract.  Team members specifically determined that SuccessFactors was the vendor that would provide the best value to Citizens. 

In its appeal, Elogic asserted that SuccessFactors did not agree to all mandatory requirements of the ITN.  Specifically, ELogic contended that it was announced at the November 7, 2012 meeting of the Negotiation Team that SuccessFactors in its Best and Final Offer (“BAFO”) did not accept the requirement in the ITN that Citizens would not agree to indemnify any vendor in connection with the contract. 

Elogic further questioned whether it had been appropriate for Citizens to continue to negotiate with SuccessFactors after the BAFOs were submitted, even though SuccessFactors had not agreed to the indemnification provision in the ITN.  ELogic also reminded that its price was lower than SuccessFactors’ price and that ELogic should have received more points when prices were evaluated. 

Citizens’ counsel stated that, at the November 7 meeting, Negotiation Team members were advised by legal counsel that Citizens could not enter into a contract with SuccessFactors unless Successfactors agreed to withdraw its objection to the ITN’s mandatory indemnification prohibition.  After determining that SuccessFactors offered the best value to Citizens, the Team voted to continue negotiating the issue with SuccessFactors.  At a meeting several weeks later, team members were advised that SuccessFactors had agreed to remove the noncompliant indemnification language that had been included in its BAFO and would adhere to the mandatory ITN requirements.

Having found no evidence of illegality, fraud, oppression or misconduct by Citizens in connection with this procurement and the award of the contract to SuccessFactors, the Board voted for Citizens’ staff recommendation to deny ELogic’s appeal.


Chairman’s Report

In his report, Board Chairman Carlos Lacasa described insurance is the “third rail” of politics in Florida.  In his opinion, the Board and staff have done an incredible job balancing the “delicate” interests involved in the management of Citizens-difficult recommendations and decisions that have guided Citizens through difficult times, he added.


President’s Report

Citizens’ President and CEO Barry Gilway reported to the Board that the State-run insurer has continued to see successes in its depopulation and risk-transfer effort, which he described as having benefited the entire Florida insurance market.   He also praised the Board for their efforts to improve Citizens’ internal controls through means such as examining its expenses.

Further discussing the growth of Florida domestic insurance carriers, Mr. Gilway stated that they currently represent 50 percent of the market.  Saying he can envision a market comprising as many as 75 percent domestic carriers, he believes they are the key to Citizens’ depopulation. 

Currently, Citizens is updating its strategic plan, as well as preparing a re-organization plan to include a recommendation for replacing Chief Financial Officer Sharon Binnun and hiring an internal auditor.  These plans will be presented to the Board in August. 

Explaining that Citizens is approaching “uncharted territory” as it creates the Clearinghouse to find private market coverage for would-be Citizens risks, it is also focused on combining this effort with continued “aggressive and thoughtful” depopulation.  Mr. Gilway believes that combined, these programs should be successful in substantially reducing Citizens’ exposure. 

State Representative Frank Artiles also addressed the Board, saying that he is proud of the work the Legislature has done as it relates to Citizens.   However, he expressed concern that Citizens has not yet examined the full costs of litigation related to mitigation issues. 

Representative Artiles said he would like to see Citizens increase the number of attorneys it employs, while reducing the use of outside counsel.  He also indicated he will introduce a bill in 2014 to license appraisers and umpires for mitigation inspection purposes. 

Requesting the Board’s sensitivity, Representative Artiles added that the rate increase under consideration would be disproportionately felt in Miami-Dade County due to already high rates.


Chief Insurance Officer’s Report

In his report to the Board, Citizens’ Chief Insurance Officer Yong Gilroy discussed Citizens’ impending rate filing.  At that time, Chairman Lacasa read a letter from Florida Chief Financial Officer Jeff Atwater, in which the CFO encouraged the Board to recognize that many areas in the state should receive rate decreases.  He further requested that the Board include an appropriate negative rate indication in Citizens’ filing to the Florida Office of Insurance Regluation (“OIR”) and encouraged the consideration of placing a dollar limit all premium increases.

Two Board members, Carol Everhart and Tom Lynch, abstained from voting on Citizens’ rates because they are active Citizens’ agents. 

Mr. Rollins led discussion on the filing.  Exclusive of sinkhole coverage, the personal lines statewide indicated rate change is approximately 11 percent.  Citizens’ staff members said they were extremely encouraged that the actuarial rate indication was very close to the statutory 10 percent glide path-a sign that Citizens’ rates are closer to actuarial soundness. 

The overall recommended capped rate change was 7.5 percent.  The statewide indicated rate change for sinkhole coverage was approximately 200 percent; however, Citizens’ staff recommended phasing-in this increase over time. 

The greatest increases recommended for sinkhole coverage contained in Citizens’ proposed rate filings were 25 percent for Pasco and Hernando Counties and 50 percent for Hillsborough County.  In discussing the sinkhole rate increase, Citizens’ staff reminded that catastrophic ground collapse coverage is included in all Citizens’ policies and covered by the 10 percent glide path.  They specified that the rate increase being sought is for sinkhole coverage, which covers lesser damage than that caused by catastrophic ground collapse. 

The Board discussed in great detail CFO Atwater’s request to place a dollar cap on rate increases.  Several Board members voiced their apprehension about the impact on policyholders, particularly those of rates attributable to sinkhole coverage.  There was also great concern expressed with any rates that would further exacerbate current unfunded liabilities. 

The Board’s statutory mandate to file actuarially sound rates (subject to the glide path) was discussed.   Florida Insurance Consumer Advocate Robin Westcott stated that the Board should also be cognizant of Citizens’ mandate to provide affordable insurance.   She added that she believes the post-SB 408 sinkhole claims environment has changed; therefore the Board should begin to view the sinkhole issue in light of the new law.  Ms. Westcott recommended capping sinkhole coverage rate increases. 

The previous day, Citizens Actuarial and Underwriting Committee had considered 2014 rate recommendations presented by Citizens’ Actuary Brian Donovan and outgoing CFO Binnun.  

Based on Citizens’ calculated risk load, the overall indicated rate need is 28 percent across all lines of business.  This translates to an indicated premium increase of $724 million.  After applying the 10 percent policy level caps, the proposed rate change results in a rate increase of 8.8 percent. This translates to a $226 million premium increase.

Based upon the risk load promulgated by the OIR, the overall indicated rate need across all lines of business is 19.6 percent.  This translates to an indicated premium increase of $505 million.  After applying the 10 percent policy level caps, the proposed rate change results in a rate increase of 7 percent, translating to a $178 million premium increase.

Filing of the OIR’s actuarial indications for the 2014 rate increase was approved for Board consideration, along with including Citizens’ calculated risk load for informational purposes only. 

At the Board meeting, Mr. Rollins moved to cap the rate increases for sinkhole coverage in Pasco and Hernando Counties at 20 percent.  His motion maintained Hillsborough County’s 50 percent increase and adoption of phased-in actuarial indications for all other territories.  He did not include capping Hillsborough County in his motion, due to the fact that the real dollar impact caused by a 50 percent sinkhole coverage rate increase is substantially less than the impact of a 25 percent increase in Pasco and Hernando Counties.  The motion was adopted by the Board.

A motion was made and adopted to submit OIR’s risk load methodology for Citizens’ rate filing, with the exception of sinkhole coverage, which will utilize the Actuarial and Underwriting Committee recommendation.

The Board then addressed a legislatively mandated modification to Citizens’ current policyholder assessment notice.  The following language must be added to the notice:


The Board approved the change.


Sinkhole Rule Revisions

Based on direction provided by the Board in March 2013, Citizens’ staff has been developing new underwriting rules that expand eligibility for properties that have experienced a sinkhole loss. 

On May 15, 2013, the OIR approved an exception for Citizens to provide coverage under an HO-3 policy form for properties that have experienced a sinkhole loss resulting in a full policy limit claim payment.  The exception specifies that property that suffered a full policy limit sinkhole loss would be eligible for an HO-3 All Other Perils (“AOP”) policy form if the sinkhole loss had been fully remediated in accordance with the insurer’s professional engineer’s recommendations.

Citizens’ staff also has been working on a filing with the OIR to implement a rule change approved by the Board that would allow the issuance of a DP-1 policy on properties that experienced a total or partial sinkhole claim, but used alternate repair methods that were not in accordance with the insurer’s professional engineer’s recommendations.  The following issues have been raised with this proposed change:

  • Concerns expressed by legislators and realtors suggest the revised rules do not go far enough and could adversely affect the Florida real estate market.
  • There is no significant data suggesting properties with prior sinkhole losses that were repaired with alternate repair methods have any increased likelihood of future AOP losses.
  • It is believed that some sinkhole losses prior to the enactment of SB 408 were not, in fact, sinkhole losses, but the result of normal structural settling or inappropriate claim settlement practices.

Based on feedback, Citizens’ staff recommended and the Committee adopted additional changes to the Sinkhole Eligibility Rules.  Those changes include:

1. Provision of an HO-3 and other available policy forms on properties that experienced a total or partial sinkhole loss but utilized alternate repair methods to repair the damage.  While eligible for an HO-3, these risks would not be eligible for Sinkhole Loss Coverage.  These properties would be subject to the same inspection and documentation requirements as properties where the sinkhole was fully remediated to ensure:

  • The property has been stabilized;
  • No existing damage; and
  • No evidence of current sinkhole activity

2.  Provide a DP-1 (without Sinkhole loss Coverage) on properties with acknowledged prior sinkhole claim activity, but no documentation of the repairs.

The Board approved all of these recommendations.


Claims Committee Report

Citizens’ claims operation received 12,169 new First Notice of Loss claims through March 31, 2013, representing a 20.2 percent decrease from 2012.  The primary drivers of this decrease are:

  • Sinkhole-related new reported losses were down 52.5 percent from 2013
  • Reduced frequency and severity of weather events impacting Florida
  • Policies in-force for the Personal Lines Account (“PLA”) were reduced by approximately 14 percent at the end of 2012
    • The PLA primarily drives non-catastrophe claims volume
  • The overall frequency of claims for the PLA decreased from 5.9 percent in 2011 to 5.2 percent in 2012

    Jimmy Johnson, Citizens’ Director of Claims Operations, provided an update on Citizens’ preparations for the 2013 Hurricane Season.  Although Citizens is well-prepared to respond to catastrophes, its Strategic Risk Summary has been updated to reflect the potential for response delays due to:

    • Infrastructure for system and vendors
    • Complete dependency on vendors (independent adjusters)
    • Multiple events occurring in Florida and prior catastrophic events occurring in other parts of the country resulting in shortages in adjuster resources
    • Increased costs
    • Delays in adjusting and paying claims.

    A new solicitation for satellite systems has been initiated, incorporating the parameters provided by the Claims Committee in its March 2013 meeting.  The Board approved the recommendation for approximately $250,000 in spending authority to procure on-demand response services for generators in the event of a storm and just over $800,000 in spending authority to procure two 800-kilowatt generators.


    CFO’s Report

    It was reported that Citizens claims-paying capacity from surplus and risk transfer sources increased by over $2 billion with 2012 surplus build-up and $1.5 billion in risk transfer through a combination of $750 million in traditional reinsurance and $750 million of catastrophe bonds.

    The 2012 $1.5 billion pre-event financing was completed at Citizens lowest-ever cost, with a true interest cost of 3.075 percent and over $3.7 billion in total investor orders.  During 2012, Citizens had strong investment performance relative to the market in both tax-exempt and taxable managed portfolios, resulting in a total investment return of approximately $182 million (excluding $49 million of net unrealized gains).  As of December 2012, Citizens’ total portfolio market value was $15.2 billion, with an average duration of two years and average credit ratings of “Aa3/AA-/AA-“. 

    In addition, Citizens invested approximately $160 million in excess Emergency Assessments to defease a portion of its Series 2007A Bonds’ 2016 and 2017 maturities.  During a review of Citizens’ investment performance and compliance, Ms. Binnun recommended that Citizens begin to explore the sale of its legacy assets-meaning assets that were severely devalued by the 2007-2008 financial crisis.  A recommendation had been made to hold these assets until market conditions improved. 

    In 2013, Citizens executed a $250 million risk transfer issuance that provides three years of coverage for the Coastal Account (formerly the High-Risk Account).  In 2013, Citizens placed $604 million of traditional reinsurance for the Coastal Account at a substantial reduction in both attachment level and risk-adjusted pricing compared with the 2012 reinsurance program. 

    Citizens’ 2013 claims-paying resources from surplus and private reinsurance are projected to increase by approximately $710 million.  For 2013, projected Citizens’ assessments needed for a 1-in-100 year event has decreased by approximately $209 million.  Additionally, Citizens has $4.35 billion in pre-event bond proceeds that can be drawn upon to pay valid claims in a timely manner.  Citizens’ 2013 total 1-in-100 year probable maximum loss (“PML”) has decreased by approximately 4 percent or $872 million. 

    The 1-in-100 PML in the PLA/Commercial Lines Account for Citizens is approximately $7.7 billion.  A 1-in-74 year event with a PML of approximately $6 billion would be required to trigger policyholder surcharges, while a 1-in-89 year event with a PML of $7 billion would be necessary to trigger emergency assessments. 

    The PML of a 1-in-100 year event in the Coastal Account is approximately $12.7 billion.  For the Coastal Account, a 1-in-49 year event with a PML of $7.9 billion would be necessary to trigger policyholder surcharges, a 1-in-53 year event with a PML of approximately $8.4 billion to trigger regular assessments, and a 1-in-59 year event with a PML of approximately $9 billion to trigger emergency assessments. 


    Chief of Internal Audit’s Report

    In line with Citizens’ new Complaints Handling Process and the related complaints triage procedure, Citizens’ Office of Internal Audit (“OIA”) was assigned a number of reports received through the “Tell Citizens” Ethics Line. The following 2013 reports were presented to the Audit Committee:

    • Alleged misuse of resources:  On February 4, a verbal submission was received by Tell Citizens from a Citizens policyholder alleging attempted abuse by a Citizens staff member. This report was triaged and assigned on February 8 to the OIA, which began a review. The policyholder followed up with an additional complaint on March 3, 2013.  The complaints allege that Citizens employees attempted to abuse the policyholder because he or she is elderly and that employees requested that the policyholder provide false information about his 2011 insurance claim in order to receive a larger settlement.  Based on the results of Citizens’ inquiries and review of the facts, as well as the work done by Citizens Special Investigative Unit (“SIU”), no evidence was found to substantiate the allegation that Citizens’ employees had abused the complainant or colluded with the complainant in an attempt to secure additional funds for this claim.
    • Alleged falsification of information:  On February 28, an e-mail was received through an anonymous source addressed to the Citizens’ Careers general mailbox stating that, “Citizens is knowingly or unknowingly hiring employees who don’t have any real-time experience and are putting out fake profiles to make more money in a shorter period of time.”  The email identified a specific individual and OIA Forensics researched the claim related to this individual.

    Based a review of documentation and other related results from third-party service providers, the allegation that the subject provided false information on his or her resume and did not possess the requisite skills and/or knowledge necessary for their current assignment are unsubstantiated.

    • Alleged misuse of resources: On March 27, OIA Forensics was notified of a potential conflict of interest concerning a Tampa-based Claims Assistant, who is currently on a temporary assignment with Citizens. The concern was that the Claims Assistant has access to confidential Citizens claim information for claims to which the individual may be a party. Based on a review, no evidence was found to substantiate the allegation that the Claims Assistant accessed personal claim information in the Claims Tracking System.
    • Alleged inappropriate conduct:  In or around March, Citizens’ SIU became suspicious of a law firm contracted by Citizens to assist in claims defense.  SIU had been informed by external contacts that the law firm has “accessed data from the computer system of a plumbing company” inappropriately and used it in its defense of a claim on behalf of Citizens.  The law firm owner explained and later documented that the former plumbing company employee being questioned accessed plumbing company data on the law firm’s computer; however, this was not at the attorney’s request nor was the information utilized in defense of the claim. The law firm owner informed Citizens that he has issued a subpoena for the records. Through subsequent review, it is Citizens’ understanding that the methods employed by the law firm do not violate law.


      Water and Fire Mitigation Pilot Program

      During a lengthy action item agenda, the Board approved two resolutions. 

      The first, a resolution to encourage the participation of minority-owned bond underwriting firms to compete for Citizens’ competitive solicitations through collaborative arrangements, also defined the term “minority-owned firm” as one that is at least 51-percent owned by minority persons as defined in s.288.703 F.S., among other conditions.

      The second resolution calls for Citizens to research, prepare and propose legislation in 2014 that would establish a water and fire mitigation pilot program in designated geographic areas.  Modeled on an “innovating development in property insurance claims,” the program would directly provide mitigation and remediation of covered non-catastrophe losses such as water losses, kitchen fires and other covered incidents that may occur around a home.

      The program would offer Citizens policyholders the option-at a reduced premium– for non-catastrophe claims to be mitigated and remediated by Citizens Corporation in lieu of receiving indemnity payments for claim losses.


      Market Accountability Advisory Committee

      During the Market Accountability Advisory Committee meeting on June 25, 2013, Citizens’ Director of Legislative and External Affairs Christine Ashburn updated the Committee on the implementation of recent legislation affecting Citizens.

      Provisions in SB 1770 include coverage eligibility of new construction seaward of the Coastal Construction Control Line; the step down in coverage from $1 million to $700,000 over the next three years; allowing takeout companies to use Citizens’ forms and endorsements for up to three years; and Citizens’ new Clearinghouse. 

      Ms. Ashburn also advised that a search committee has been formed to expedite filling the newly created position of Citizens’ Inspector General.  She pointed out that this position will be appointed by Florida’s Financial Services Commission.

      She also reviewed HB 573, which requires Citizens to provide coverage for manufactured or mobile homes, including certain attached structures such as screen enclosures, carports and patios.

      Citizens’ Director of Claims Operations Jimmy Johnson discussed the State-run insurer’s catastrophe preparedness, emphasizing that Citizens is better prepared today than ever before.  Further, it has implemented enterprise-wide catastrophe planning wherein it performs simulated events involving catastrophe coordinators from each business unit.  On a continuous basis, Citizens conducts training and annually tests its resources to ensure the operation is prepared for the next catastrophic event.

      Mr. Johnson outlined Citizens’ workflow for potential catastrophe claims.  Smaller claims are fast-tracked and handled by desk adjusters.  Larger claims are handled through a managed claim model.  Citizens has five vendors with established plans and procedures to service catastrophe claims. 

      He also reviewed how Citizens projects a storm’s potential impact in order to identify where to deploy resources.  This is done with a model that was built in-house.  He also outlined Citizens’ efforts to credential and manage its independent agents and how Citizens prepares for an event.  Citizens maintains substantial emergency operations equipment, including its mobile emergency response vehicles, satellite trailers and generators, he said.

      Citizens also has a “financial catastrophe” plan in place, Ms. Binnun noted in her presentation on depopulation.  In the last 18 months, over 437,000 policies have been removed from Citizens.  She expressed her hope that the new Clearinghouse would escalate that effort.

      Citizens’ Senior Director of Consumer and Agent Services Steve Bitar delved into the status of Clearinghouse implementation, relating that a project steering committee has been formed and meets regularly.  A formal solicitation for Clearinghouse software was released on May 21, 2013 and the Question and Answer forum with vendors was completed on June 5, 2013.  Mr. Bitar listed the target milestones for the second, third and fourth quarters of 2013 and noted that Citizens is on track for the Clearinghouse to be operational in January 2014.

      A representative from Citizens’ Agent Roundtable reviewed the major topics discussed at the group’s most recent meeting in May 2013.  Those topics included the ongoing development of Citizens’ CORE system for commercial lines, agent performance standards and an overview of the 2013 Legislative Session. 

      To view the Committee meeting materials, click here.


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