Limits on Citizens Could Leave Some Homes Uninsured

Apr 8, 2011

The following article was published in the Sarasota Herald Tribune on April 8, 2011:

Limits on Citizens Could Leave Some Homes Uninsured

By Paige St. John

TALLAHASSEE – Even before the Legislature convened last month, Gov. Rick Scott’s office signed off on legislation requiring sharp rate hikes at Citizens Property Insurance, an open door for private carriers to follow suit.

Records obtained by the Herald-Tribune show Scott’s office in late February met with private lobbyists who crafted most of the bill. The governor’s office not only concurred with the legislation, but added language that would force thousands of homeowners out of the state-run carrier.

The bill presented to Scott’s office called for annual rate increases as high as 15 percent, though Sen. Alan Hays later raised that ceiling to 25 percent.

On Thursday, the cap in the House version was trimmed back to 15 percent.

The provisions added by Scott’s staff would, as of January, deny coverage to coastal properties and condominium units that, including the contents, cost $1 million or more to replace.

Inland homeowners face much greater restrictions. By 2014, the added language would exclude all inland homes or condominium units that cost $750,000 or more to replace, including contents. The current inland limit is $1 million.

By 2016, that limit would drop down to $500,000 — even if there is no private insurer offering alternative coverage at any price. Citizens staff have said the language would exclude 11,500 homes currently insured by the state.

Lawmakers contend the exclusions are part of the overall strategy to shrink the state carrier and reduce the potential for public bailouts after a catastrophic hurricane. They also want to stop Citizens from holding down prices in the private market.

Citizens has grown to 1.3 million policies, the bulk of the increase tied to the collapse of half a dozen Florida insurers.

Scott’s press office did not comment on the rationale for the exclusions. As a pro-business candidate, the Republican governor called for major revisions to Citizens, but he has never provided details.

Though there may be no private market for such homes now, the bill’s sponsors contend one will emerge.

“That gives plenty of time for the market to react” and the “free-market system to show we’re open for business,” said Rep. Jim Boyd, the Bradenton insurance agent who filed the work group’s consensus bill.

The actual excluded homes are likely to be appraised at much less than $500,000.

The insured replacement cost of a house is usually higher than its actual market value, and is generated by Citizens using a software program based on square footage. Adding in contents coverage raises the insured value another 10 to 25 percent.

No evidence presented indicates high-value homes are a poor bet for Citizens. State regulators have testified those homes tend to have better construction and suffer fewer losses from a storm, helping subsidize the public company.

In both the House and Senate, the exclusions are raising protests from coastal lawmakers, particularly those from Miami-Dade County.

“All those high-rises won’t be sold because you won’t be able to mortgage it because you won’t be able to get insurance,” Sen. Gwen Margolis, D-Miami, warned this week.

Under the proposed law, all homeowners are barred from Citizens if they can find coverage on the private market for 125 percent of what the state charges. The current “escape hatch” is 115 percent.

Documents obtained under Florida’s public records laws show the exclusions were added following a Feb. 25 meeting between staff in the governor’s office and Kyle Ulrich, a lobbyist for the Florida Association of Insurance Agents. Ulrich was the lead organizer of an informal “work group” consisting of insurance lobbyists, regulators and the Florida Chamber of Commerce that drafted the bill.

Scott was in Washington, D.C., that day.

Ulrich said he did not recall the specific meeting in Scott’s office. “There were lots of meetings,” the lobbyist said.

But according to legislative emails, the meeting was touted as a final blessing as Ulrich handed the draft over to Boyd, a freshman legislator, and Hays, R-Umatilla, to file. After Scott’s office added the exclusions, Ulrich then sought and received agreement by the bill sponsors.

Boyd and Hays have spoken openly of the industry’s key role in creating the bill. On Thursday, Boyd publicly thanked “our industry friends” for help in drafting what he called a “job-creating bill.”

A House committee on Thursday approved the legislation with little resistance. It has one more public hearing before reaching the House floor.

Boyd said the bill is meant to return Citizens, now Florida’s largest insurer, to the carrier of last resort for homeowners unable to find coverage elsewhere. He contends the rates are inadequate, though lawmakers want Citizens to raise its rates not just to cover hurricane risk but to include margins for the profits, taxes and reinsurance private insurers buy. The estimated increase needed is 48 percent.

Nearly one of five insured homes in Florida get that coverage from the state — leaving all Florida property, auto and business owners liable for assessments if a storm wipes out the company’s assets. Over the past five storm-free years, Citizens has accumulated enough capital to weather a 25-year hurricane without triggering those assessments.

The House Economic Affairs Committee on Thursday also approved, without debate or discussion, a bill that expedites 15 percent rate increases to cover insurers’ reinsurance purchases, even if bought from companies they own or control. It also expands carriers’ ability to add their own profit charges to those bills.

Brokers warn the cost for reinsurance is rising for Florida insurers, and the market shrinking, in response to new catastrophe risk models released in February. The new software sharply increases the risk of hurricane losses inland — more than doubling the amount of reinsurance required to cover homes insured by some carriers.

Reinsurers price those treaties based not only on the hurricane risk a carrier takes on, but the profit demands of reinsurers’ investors. As a result, Florida insurers, and their policyholders, may take a second hit and be asked to help buffer the earthquake losses reinsurers experienced in Japan and New Zealand.

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