Miami Herald: Is Citizens Insurance ready for the big one?

Sep 21, 2009

This article was published by the Miami Herald on September 21, 2009


   This home was destroyed by Hurricane Charley in 2004. Citizens Property Insurance, which mainly covers high-risk homes, could run out of money if as 1-in-100-year hurricane  hits Florida.   JOE RIMKUS JR. / MIAMI HERALD FILE, 2004 This home was destroyed by Hurricane Charley in 2004. Citizens Property Insurance, which mainly covers high-risk homes, could run out of money if as 1-in-100-year hurricane hits Florida.  

When it comes to buying windstorm insurance for her home, Mary Ellen Salvatore has two knocks against her: She owns a 35-year-old house and it’s located east of U.S. 1 in South Miami Dade County.

For many insurance companies in Florida, Salvatore’s house is just too old and too close to the water to cover. After her private insurance company dropped her and her search for another carrier was unsuccessful, the Palmetto Bay homeowner’s only alternative was to turn to Citizens Property Insurance. Her $1,200 Citizens premium for windstorm coverage is more than double what she paid previously.

“No insurer wanted to touch my house,” says Salvatore.

Unfortunately, she has plenty of company.

Citizens is the largest insurer in Florida, covering 1,057,829 homes, condos and apartment buildings. The biggest chunk of its policies — $232.1 billion worth — are written on riskier, coastal properties.

Now as forecasters keep an eye out for storms swirling in the Atlantic, this perennial question plagues Citizens: Will the company have enough money this hurricane season to pay claims if that proverbial storm — the massive hurricane that may hit only once in a 100 years — crashes into Florida?

With Citizens’ rates frozen since 2007, the big worry is that the insurer hasn’t been able to accumulate the reserves it needs given its exposure.

“We write wind coverage. That’s why we primarily exist,” says Sharon Binnun, Citizens chief financial officer. “When rates are frozen, that reduces the amount of resources we have to pay claims.”

Insurance regulators, legislators and critics of Citizens say the company’s frozen rates aren’t actuarially sound. In laymen’s terms, that means the insurer is not bringing in enough money through premiums to cover the bulk of the potential losses it could face after a huge storm.

To get Citizens’ rates back on course, a law passed in May requires the insurer to raise rates 10 percent a year over the next five years. The smaller annual increases soften the rate shock for homeowners. But eventually, rates could end up about 60 percent higher.

However, when Citizens’ staff did the analysis for the 2010 rate filing, it found that homeowners in some areas of the state would see rate decreases. Most of those policyholders are inland and live in northern areas of the state, but a fortunate few in South Florida could see a rate cut.

For instance, condo owners and renters in some sections of Miami-Dade and Broward counties — as well as a handful of Key West homeowners — could see decreases of as much as 10 percent because they were paying too much before based on the risk model the Citizens staff used.

The rate changes will kick in on renewals and new policies starting Jan. 1.

But Citizens isn’t totally in dire straits. The insurer should have nearly $3.9 billion in cash in the bank by the end of the year, says Binnun.

Add in a guarantee from the State of Florida to buy $750 million of Citizens bonds, a bank credit line and proceeds from municipal bonds it has already sold and the total of available funds comes to $6.9 billion.


Citizens also buys back-up insurance from the Florida Hurricane Catastrophe Fund to cover some of the losses it might face. This year, it purchased nearly $9.8 billion in coverage.

All that gives Citizens the ability to cover up to $16.8 billion in claims.

But even with all the funds it could tap, Citizens could fall short if “the big one” — that one-in-100-years storm — hits the state. Such a storm could rack up claims totaling about $22 billion, Binnun says.

And it would fall to Florida homeowners to make up the shortfall.

First of all, its policyholders get a surcharge — up to 45 percent of their policy premium in one year. If the insurer needs more cash, then every policy in the state is taxed, up to 18 percent in one year. Medical malpractice and workers compensation policies are the only ones exempt from the Citizens surcharge.

Right now, Florida insurance policies are already carrying a 1.4 percent surcharge that will run through 2017 to cover Citizens’ 2005 deficit.

Homeowners such as Peggy Oliver are worried about future assessments. “There’s not much I can do about it because Citizens is the one company that would insure my house,” says the Cutler Ridge resident.


She lives in the wind-pool region — generally east of I-95 and South Dixie Highway in South Florida — where many private carriers won’t write windstorm coverage. Though she qualified for some mitigation credits, Oliver’s premium rose about $500 to $1,750 this year because she was required to increase the insured value on her policy due to higher replacement costs.

Insurance experts argue that Citizens’ assessments place an unfair burden on Florida residents.


Robert Hartwig, chief economist for the Insurance Information Institute, says private insurers are required to set rates based on potential risk. But for state-run insurers like Citizens, “rates are determined ultimately by political forces rather than market forces or actuarial requirements.”

Indeed in 2007, legislators froze Citizens’ rates to provide policyholders with some relief after insurance prices jumped and coverage became scare after eight storms hit Florida between 2004 and 2005. Then newly elected Gov. Charlie Crist lobbied hard for the freeze.

Citizens and lawmakers are in a vicious circle: The state-run company is needed to cover properties no other company will touch because they’re risky. That means the rate charged should be high to reflect that risk. But then the insurance becomes unaffordable for many of these homeowners.

The result, critics say, is that Citizens’ rates are set too low to reflect the true risk it takes on and are subsidized by the residents of Florida.

Lockwood Burt, who runs Ormond Beach-based Security First Insurance and maintains that Citizens should charge actuarially sound rates, says only 17 percent of Florida’s homes are covered by Citizens. “It’s unfair that 83 percent of the state’s residents are subsidizing just 17 percent.”

Burt acknowledges that some homeowners, such as those on fixed-income, would need assistance to cover their insurance payments. Perhaps vouchers could be the solution rather than subsidizing all Citizens policyholders.

Other critics say Citizens shouldn’t cover expensive waterfront residences or vacation homes for Floridians or snowbirds.

Two years ago, lawmakers passed a law to charge higher rates to non-homesteaded homes, but the provision was removed in 2008.

However, after Jan. 1, homes and condo units valued at more than $2 million are no longer eligible for Citizens windstorm coverage, with one small caveat. They could retain a Citizens policy for three more years if they find no private carrier to provide insurance.

Some insurance executives such as James Graganella, who runs Tallahassee-based Capitol Preferred Insurance, believes a state-run pool such as Citizens should be the insurer of last resort, and not be allowed to compete with private carriers. And, they add, if Citizens rates are low, that depresses their rates as well because they need to compete with the insurance pool.

When formed in 2002, Citizens was required to charge the highest rates in the state to encourage home and business owners to seek out a private insurer. The provision was eliminated in 2007 to allow Citizens to insure properties outside the windstorm zone.

Robert Hunter, director of insurance for the Consumer Federation of America, says it’s good that Citizens can compete with private carriers. He believes private carriers would like to see Citizens charge the highest rates so they can edge their own rates higher as well.


Bruce Douglas, former chairman of Citizens’ board of governors, served on a task force last year that studied ways to reduce the size of the windstorm pool.

One recommendation would have set up a quota system to require insurers to write a number of policies in the riskier coastal areas. Douglas recalls a few lawmakers favored that recommendation, but ultimately it didn’t find enough backers in the state Legislature.

Right now, Citizens Property Insurance has the distinction of being the largest state-run insurance pool in the entire country. Legislators expected the insurer to shrink gradually as private insurance companies provided more coverage to Florida residents.

But after the run of eight-hurricanes that hit the state, many of the national carriers, including Allstate and Nationwide, dropped policies because they wanted to avoid future storm risk.

Plus, Citizens had to take on nearly 300,000 customers after the three Poe Financial insurers failed in 2006.

The ranks of its insured swelled.

But since the start of 2008, a record number of policies — nearly 500,000 — have been taken out of Citizens by newly formed insurance companies based in Florida.

But some homes slip back to coverage by Citizens.

AFFORDABILITY ISSUES “We still have affordability and availability issues,” says Dulce Suarez-Resnick, an agent with Brown & Brown Insurance’s HBA Division in West Miami-Dade County. “Homes have to fit a very specific mold to find coverage outside of Citizens.”

There are a few options. If plumbing, electric, heating and cooling systems have been updated as well as shutters and other mitigation features added, even an older home could get coverage from a private carrier.

Each company has different guidelines. For instance, Tower Hill Insurance companies won’t even consider a home built before 1995, although some older homes whose owners had policies were grandfathered in.

Capitol Preferred, on the other hand, will write policies on older homes.

Graganella says the company now has a 1896 St. Augustine home on its books.

But Suarez–Resnick says in some instances, Citizens may be the best option.

She placed one client in Citizens, which has no limit on the amount of water damage that can be claimed. Some companies, Security First among them, put a $10,000 cap on such claims.

“This home has beautiful hardwood floors that were just refinished. I couldn’t put them in Security First or any company that caps water claims. What happens if a pipe bursts in this home? I had to put them in Citizens,” says Suarez-Resnick.