Florida’s Citizens Property Insurance Board Approves Product Changes, Applauds $30 Million Sinkhole Litigation Savings

Mar 12, 2014


News of a class action sinkhole claims settlement anticipated to save $30 million in legal fees, along with changes approved to Florida’s Citizens Property Insurance Corporation’s (“Citizens”) “Glide-Path” Premium Capping policy in both personal and commercial lines were among the highlights of Citizens’ Board of Governors (“Board”) meeting this morning, March 12, 2014.

To access the complete meeting materials, click here.

After recognizing Bruce Meeks as Citizens’ new Inspector General, Citizens’ President and CEO Barry Gilway advised that public comment would be taken during the portion of today’s agenda dealing with procurement.

In his recap of Citizens’ recently launched Clearinghouse and its concurrent depopulation efforts, Mr. Gilway explained that the success achieved so far by these programs has significantly improved Citizens’ financial strength.  During the past year, Citizens’ policy count has decreased by 37 percent, dropping its overall exposure by 41 percent.  Most importantly, within a 21-month period, there has been a 73 percent reduction in the potential for an emergency assessment–thus lowering the cost of Citizens for all Floridians, he noted.

Meanwhile, the Florida Office of Insurance Regulation (“OIR”) has approved another 75,000 Citizens policies to be assumed in May 2014. 

“A May depopulation is almost unprecedented,” Mr. Gilway reminded the Board.

In addition to reducing Citizens’ policy count, risk transfer is another way to accomplish reduction of assessment potential, he explained.  Currently, Citizens is generally insuring for a 1-in-60-year event in all lines of business, except its Personal Lines Account (“PLA”), for which it insures for a 1-in-90-year event.  Florida’s current regulatory standard for domestic insurers is a 1-in-100-year event.

Mr. Gilway interjected that, indicative of Florida’s improving insurance market, is the news that A.M. Best and the American Automobile Association are now working with Demotech, a rating service that mostly rates Florida domestic insurance companies.  Demotech’s increased standards to 1-in-100-year concurrency with the OIR were cited as the reason.

Board member John Wortman asked whether Citizens should consider purchasing “the amount of reinsurance that would be necessary in a normal environment.”  Mr. Gilway responded that, for Citizens to buy coverage for a 1-in-100-year event would be “prohibitively expensive” and would likely add 15 percent to its existing rates.

Described as “a far cry from a few years ago,” rate adequacy has actually been achieved in Citizens’ PLA, but portions of Citizens’ Coastal Account still post rates measured as 70 percent inadequate.  Lack of adequacy in Citizens’ Commercial Lines Account (“CLA”) is still a problem, as are sinkhole rates, which he called “highly inadequate.”

But, given the lower cost of reinsurance, Citizens will aggressively explore increasing its coverage through both capital and traditional markets, and plans to bring a proposal to do so before the Board in April 2014, Mr. Gilway promised.

“We are asking for proposals for aggregate coverage versus single-occurence coverage,” he explained.  “We’re trying to go horizontally, as well as vertically.”

Other signs of Florida’s strengthening insurance market have been the filing of rate decreases by 12 insurers, with the highest adjustment request coming from Security First Insurance.  Mr. Gilway also noted that five new Florida domestic insurers have started up during the past year, bringing $144 million in surplus to the market.  Further, State Farm Florida announced recently that it plans to resume its residential underwriting.  

The number of unaffiliated Florida insurers has grown from 22 percent of the market just a short time ago, to over 55 percent today.  Market share for Florida domestic insurers is expected to grow by 60 to 70 percent over the next two years, Mr. Gilway predicted.


Clearinghouse Update

With the Palm Beach Post having reported this morning that Palm Beach County had the highest number of risks bound by private companies through Citizens’ new Clearinghouse, Board members now were interested to know the number of Clearinghouse applications by county, versus actual takeouts by county.  That information will be reported at a later meeting.  Other counties with high numbers of Clearinghouse submissions include Pinellas, Brevard and Hillsborough.

To date, the Clearinghouse has successful kept $181.5 million in coverage out of Citizens, equating to 403 individual risks bound by participating Clearinghouse private insurers.  In the short time period since the Clearinghouse’s late January 2014 launch, Citizens itself has had an 18 percent decrease in business.  However, it was noted that not all of that business was processed through the Clearinghouse.

Florida Peninsula Insurance has written the highest number of Clearinghouse policies to date, and at least 19 percent of Clearinghouse submissions have received offers from at least one of the participating insurers.  Six additional companies will become Clearinghouse participants by March 30, with additional ones to follow for a total of 20.  

While the Clearinghouse is only processing new HO-3 policy applications at this time, its next step will be to handle policy renewals, with HO-4 and mobile home business being phased in by 2015.  

“With the renewal process coming, a lot of takeout companies are approaching us to do so before these policies get pushed through the Clearinghouse,” Citizens’ Vice President of Consumer and Agent Services Steve Bitar said.

Much of the Clearinghouse processing is being done manually, but soon will be transitioned to Citizens’ operations “warehouse.”  Board members were particularly interested in hearing agent feedback on the process, which revealed that technical issues with the agent of record have caused some Clearinghouse glitches that have since been corrected.


Market Accountability Advisory Committee To Review Citizens’ Commercial Residential Sinkhole Rates With Regulators

Citizens’ Market Accountability Advisory Committee (“MAAC”) Chairman Brian Squires reported on a recent evaluation of Citizens sinkhole rates since a January 2007 OIR Order that premium discounts must be given according to whether or not a policyholder chooses to purchase sinkhole coverage–an option that became effective the same year.

By law, Citizens is required to charge actuarially sound rates.  During its most recent meeting, the MAAC reported that, including the peril of sinkhole, Citizens’ current overall Commercial Residential Multi-Peril (“CRM”) rates are very close to being actuarially sound.  The MAAC has concluded that, in the aggregate, although the portion of Citizens’ base rate allocated to sinkhole seems large, it is actuarially appropriate.  Therefore, it is being proposed that the disparity between sinkhole and non-sinkhole rates could be increased by affording higher mitigation credits and applying the Glide-Path restriction to Citizens’ allowable base rate.

Citizens has agreed to revisit the sinkhole rate issue with the OIR, which had dramatically scaled back Citizens’ requested sinkhole rate increases in 2012.  OIR General Counsel Belinda Miller is a member of the MAAC Committee and listened to the discussion on this topic, the Board was reminded today.

To view an executive summary of the issue, click here.


Sinkhole Settlement to Save $30 Million in Legal Costs 

After a financial report  noting that Citizens sinkhole loss ratio has decreased, along with an update on a recent Citzens enterprise risk management and strategy session, Citizens’ General Counsel Dan Sumner advised that the State-run insurer has reached agreements with 300 of its policyholders to allow them to make critical sinkhole-related repairs to their properties without spending further time in litigation.

The global settlement reached between Citizens and a Florida-based plaintiffs’ law firm representing the policyholders will allow homeowners to receive needed repairs, while enabling Citizens to avoid an estimated $30 million in potential litigation expenses, Mr. Sumner explained.  Negotiations remain outstanding with a second law firm that represents another 600 Citizens policyholders.

“I’m confident this decision represents a new focus by all parties on getting appropriate repairs completed instead of battling in court,” he added.

Under the terms of the settlement, Citizens will pay for underground repairs as recommended by a professional engineer, who will monitor repair work and order any additional underground repairs deemed necessary.  Policyholders will be allowed to choose a contractor from a pre-approved list. Citizens also will pay for any additional above-ground damage caused by the sinkhole repair.

Citizens will pay the plaintiffs’ firm $2 million for legal fees and expenses already incurred. Under the global settlement, Citizens has agreed to pay $10,000 for cases in the early stages of litigation and $5,000 each for cases in which discovery has begun but litigation has not yet been filed.

According to Citizens’ corresponding news release issued this morning after the Board meeting ” . . . the settlement will provide closure to property owners by helping them repair and protect what for many is their most valuable investment.  Local communities and future buyers also will benefit from increased property values and the knowledge that professional repairs have been completed.”

The success of Citizens’ sinkhole managed repair program efforts has led to the consideration of a similar program for water-related claims, most of which emanate from Miami-Dade County.


Competitive Bids Approved, Independent Adjuster Protests Being Evaluated

  • It was announced that Citizens will publish a solicitation for a vendor management estimating software this month.
  • Protests to the recent independent adjuster solicitation have been received and are being evaluated.  Action to determine final vendors will be included on a Board agenda “at a later date.”
  • The second issuance of the sinkhole managed repair program bid resulting in four of the five previously submitted protests being withdrawn.  With the final protest having been withdrawn last week and the Board approved the contract award to 16 vendors today.
  • Also approved was an allocation to contract with a media services provider that would serve to purchase advertising on a more cost effective basis in the aftermath of a named storm or a declared weather-related emergency, among other activities.  Significant cost savings are expected by securing a vendor able to produce and place emergency advertising at the best value and placement for Citizens.
  • In response to finding by Citizens’ Office of Internal Audit, additional funds were approved for an existing vendor to ensure a compliant and secure process for new hire verification and applicant background screening consent.  This involves a transition from manual (paper) I-9, improved online recordkeeping and control of sensitive employee personal information. 


Product Changes, Statutory Updates Approved

Joined by Director of Product Development Karen Holt, Citizens’ Chief Risk Officer John Rollins presented a request for Board approval of changes described as “relat(ing) to the insurance product, as opposed to rates.”

The Board approved all the changes, which consisted of enhancements enabled by the development of the Citizens Insurance Suite (also known as the “CORE project”).  These include Glide-Path premium capping simplification for PLA new and renewal business and the introduction of Commercial Lines capping for renewal business, which will enable Citizens to systematically update various policy rating information, while ensuring that each policy is protected by the Glide Path. Changes that result from a coverage change or to the actual risk specifications will not be subject to capping.  Capping changes will be effective with 2015 annual rates and the release of Citizens’ Personal Lines policy CORE system, which is targeted for January 1, 2015. 

Changes also include implementation of a new “Policyholder Insufficient Funds Fee” of $15 and clarification that mid-term pay plan changes are allowed.

CLA changes will be effective at the earliest possible date.  PLA will be effective with release of CORE personal lines policy system.  


SB 1770 Implementation

The following changes mandated by the 2013 enaction of SB 1770 were also approved by the Board today:

Coastal Construction Control Line:  Applicable to both personal and commercial lines, any major structure for which a permit is applied on or after July 1, 2014, for new construction or substantial improvement, is not eligible for Citizens’ coverage if itis seaward of the coastal construction control line or is within the federal Coastal Barrier Resources System. 

Coverage “A” Maximum Limit Reduction

  • Reduction of maximum insured values that are eligible for coverage with Citizens. 
  • Effective January 1, 2015, any structure that has a dwelling replacement cost of $900,000 or more, or a single condominium unit that has a combined dwelling and contents replacement cost of $900,000 or more, is no longer eligible for coverage. Such dwellings currently insured by Citizens remain eligible until the end of the current term. 
  • Effective January 1, 2016, the maximum limits are further reduced to $800,000. 
  • Effective January 1, 2017, the maximum limits are further reduced to $700,000. 

Florida Insurance Guaranty Association:  Additional filings are required to complete collection efforts for the 2009 and 2012 Florida Insurance Guaranty Association assessments. 

Commercial Underwriters Wind Uplift Rule Clarification:  Minor updates to Commercial Residential Wind and Commercial Non-Residential Wind underwriting rules are necessary to better define wind uplift classification and specifically state that Underwriters’ Laboratories (UL-90)-approved roof decks are required to qualify for superior construction classifications. 

It was noted that when Rules are changed, risk classification is also changed.  A decision must then be made in terms of how to treat the change in calculating premium.


Sinkhole Commercial Inspection Program Adopted

At today’s meeting, the Board also approved inspection requirements recommended by the Actuarial and Underwriting Committee for Citizens’ new commercial sinkhole inspection program developed in 2013 to support Citizens’ Commercial Multi-Peril programs.  The inspection program was part of an effort to introduce “peril-level pricing.”

In addition to requirements that track Citizens’ recently concluded PLA inspection effort, the commercial sinkhole inspection program includes a proposed new Rule stating that any building to be insured that has sustained prior sinkhole loss, or sinkhole damage that was not appropriately repaired or remediated is not eligible for any coverage with Citizens.  Existing policies with sinkhole loss coverage will maintain coverage at renewal.  A policyholder can request the removal of the coverage at any time during the policy cycle. If the policyholder desires to add the sinkhole loss coverage back to the policy, it can be added only at renewal and will be subject to Citizens sinkhole inspection rules and underwriting requirements. 

To read the complete list of requirements, click here.

With the Board’s approval today, updates now will be made to applicable rules and forms, and appropriate filings will be submitted to the OIR.


Legislative Report

Citizens’ Director of Legislative and External Affairs Christine Ashburn provided a legislative update and reviewed Citizens’ 2014 legislative priorities, which include:

  • A mandatory managed repair program for sinkhole stabilization 
  • Creation of a Commercial Residential Clearinghouse 
  • Shifting five percent of the Citizens Policyholder Surcharge from the PLA to the Coastal Account 
  • An increase in the rate cap for commercial non-residential policies 
  • Authority to create a managed repair pilot program for other perils, excluding sinkhole and hurricane losses 
    • Questions have been raised as to whether it makes sense to launch such programs on a pilot basis, as opposed to statewide from their inception.
  • Allowing surplus lines insurers to participate in Citizens’ Clearinghouse under certain circumstances
  • Allowing Citizens to stop writing commercial residential multi-peril policies in the Coastal Account 
    • Suggested as a solution to concerns raised about negative arbitrage


Information Systems Advisory Committee

At its meeting in early March, Citizens’  Information Systems Advisory Committee (“ISAC”) reviewed its purpose, which is to assist the Board in assuring that Citizens’ information technology (“IT”) governance is fully integrated into enterprise governance and is effectively implemented.  The ISAC also ensures the Board is appropriately informed on IT matters and risks and provides timely recommendations on strategic plans and major technology investments. 

During the meeting, Citizens’ Vice President of Enterprise Planning and Project Portfolio Management Kelly Booten provided the Committee with a CORE Program update on personal lines claims and billing, schedule review and the information technology budget.  She stated this is the final year of a three-year project to implement IT structure relating to claims and policy billing.  Citizens’ CORE Insurance Suite, including the ClaimsCenter, was deployed on January 27, 2014–one week ahead of schedule.  

Citizens currently has infrastructure preparation in place for Catastrophe Testing to start March 15, 2014.  This configuration will continue through March and April, which allows an additional two months to address 2015 and Clearinghouse requirements.  The personal lines policy and billing phase is scheduled for release on November 2014.  Ms. Booten added that the impact of the 2014 Legislative Session is still to be determined.  

Citizens 2013 IT budget through December was $41,307,678, which included a salary allocation that is 10.7 percent under budget, allowing for $2.7 million to carry over to 2014. 

Citizens’ Chief Information Officer Curt Overpeck presented Citizens’ 2014 IT plans and related budget/staffing benchmarks, noting that Citizens’ total IT budget is $54.6 million, which includes $32.7 million or 60 percent of the total budget just to maintain Citizens’ current IT functions.  He added that the Citizens’ IT budget is 2.3 percent of its $2.4 billion direct written premium, which meets industry benchmarks.  

Additionally, Citizens IT staffing makes up 13.8 percent of the total full-time employees which is also conforms to the private sector.  Mr. Overpeck addressed IT cost-effectiveness moving forward, which he explained is achieved by various complex drivers, including the consolidation, standardization and integration of all systems.  Citizens’ consolidation of data centers from five to two is scheduled for completion by the end of 2014. 

Citizens’ IT Audit Manager Karen Wittlinger reported on Citizens’ data privacy, an  audit of which was conducted in 2012 to evaluate the adequacy and effectiveness of controls over the governance of data privacy in the organization, as well as the security of non-public personal information in Citizens’ business environment.  

Citizens’ Director of IT Risk and Security Mitch Brockbank addressed Citizens’ new Corporate Information Security, Privacy and Data Classification Policies, which were distributed to Citizens’ Executive Leadership Team or review and approvals.  An overall plan is being developed for implementation of a Privacy Framework and Security Policy.


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