Surplus Lines Could Be Entering Florida Citizens Property Insurance Take-Out Mix

Oct 25, 2011

The following article was published in Property Casualty360º on October 25, 2011:

Surplus lines could be entering Florida-Citizens take-out mix

By Chad Hemenway

Companion bills introduced in the Florida House and Senate would allow surplus-lines insurers to participate in a program to depopulate the state’s supposed insurer of last resort.

The bills, sponsored by Rep. Jim Boyd, R-Bradenton, and Sen. Garrett Richter, R-Naples, are once again rippling the waters of the yearly debate about Florida’s Citizens Property Insurance Corp., which long ago eclipsed its intended purpose of being the last-resort insurer in the Sunshine State due to several factors in the Florida property-insurance market.

Legislation several years ago established a depopulation, or “take-out,” program and numerous domestic insurers sprung up, establishing their books based on policies taken from Citizens.

However, the take-outs have slowed and Citizens is growing again at an alarming rate—about 1,000 policies per day, the industry says.

Samuel Miller, executive vice president of the Florida Insurance Council, says the FIC has yet to develop a formal position on the legislation but “something has to be done” to stop Citizens’ growth.

“There has been very little take-out activity,” Miller says. “The depopulation of Citizens needs to be rejuvenated. Most primary insurers are not interested in taking out right now.”

There are a number of factors that are to blame, Miller says. Four years ago Florida lawmakers tried freezing Citizens rates after an outcry for property insurance affordability. The move had consequences—mainly the ballooning of Citizens because, under Florida law, more residents qualified to enter the state-run insurer.

Laws have been passed to allow Citizens to again increase rates—albeit gradually—but it’s a losing game of catch-up, the industry says. Primary insurers still consider Citizens a competitor.

Additionally, approved take-out companies must maintain the Citizens’ rate on a policy for three years after removing it—rate that have been proven to be far below actuarial soundness.

“It’s a conundrum,” says Lisa Miller, former state deputy insurance commissioner and owner of lobbying firm Lisa Miller & Associates. “Primary insurers might look at removing policies but they can’t change the rate they need to do that. It is not good business practice.”

The bills to allow surplus-lines insurers into a Citizens depopulation plan “creates and unleveled playing field,” she adds, due to the discrepancy in regulation between primary and surplus insurers, which have more freedom of rate and form.

Nevertheless, primary insurers are “anxious to find ways to depopulate Citizens and keep it less competitive with the market,” Lisa Miller says.

The industry appears to commend lawmakers for trying, but is not sure this measure is the right fix. Its potential effectiveness is being questioned. As in, will policyholders chose (they have the choice under law to stay with Citizens) to link with a surplus-lines insurer knowing there is a possibility their rates could increase significantly?

The bills do have people talking. The Florida Property Casualty Association had a meeting scheduled to discuss the legislation, as did the board of the Florida Surplus Lines Assoc.

Under the bills, surplus-lines carriers looking to participate in the depopulation program would need to carry at least $50 million in surplus, reinsurance for a 1-in-100-year probably maximum hurricane loss, and maintain an “A-minus” rating from insurance rating agency A.M. Best Co.

Also, notice must be given to policyholders to inform them that surplus -lines policies are not provided coverage by the Florida Guaranty Assoc. In other words, if the surplus-lines insurer folds, the policyholder will be left with unpaid claims and no recourse.

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