Property Casualty 360
by Gary Fineout
August 2011
Citizens Property Insurance Corp., the state’s largest property insurance carrier, keeps growing and growing. Despite being set up initially as a so-called “insurer of last resort,” Citizens is adding an average of 4,200 policies a week. It now has nearly 1.4 million policyholders, and there is no sign that the number will be going down.
The growth is being blamed on a variety of reasons, many of them tied to the fragile nature of Florida’s property insurance market and rising insurance rates charged by private companies. And that has people like Jim Malone plenty worried.
Malone, the chairman of the board of governors that oversees Citizens, is so frustrated that state lawmakers have been unwilling to make major changes to the state-created company that he wants legislators to consider privatizing part of the company.
His rationale is simple: Citizens is too large and has too much exposure if the state is suddenly hit by a major hurricane. A private company—with the ability to more easily raise rates—could bolster its finances faster than Citizens currently can.
Malone warned that there is a “train wreck” that could hit Citizens—and ultimately the state—if something is not done soon. Currently, Citizens can place an assessment on nearly every insurance premium, including auto insurance, if it does not have enough money to cover losses from a major hurricane.
“It’s not a question of whether we are going to have a hurricane … it’s a question of when, where, and how bad,” said the Naples businessman.
An Idea Born of Frustration
Malone threw out the idea of privatizing Citizens during a July meeting of the Citizens’ board when he sharply criticized legislators for failing to pass a bill this year that would have allowed Citizens to raise its rates as high as 25 percent. That same legislation also would have made it more difficult for Floridians to obtain coverage through Citizens.
Citizens’ rates are capped and cannot be raised more than 10 percent a year. These rate restrictions are in place even though Citizens insures many coastal homeowners and has a total exposure of roughly $460 billion.
The legislation to raise Citizens’ rates was sharply opposed by a coalition of both Republicans and Democrats from coastal areas. They argued that such a rate hike would hurt Florida at a time when its economy is slowly recovering from the recession.
Malone, clearly exasperated, told his fellow board members that if legislators couldn’t pass a Citizens’ bill this year he thinks it would be even harder for a similar bill to pass next year when all 160 legislators will be up for re-election because of redistricting.
He said he did not understand why legislators were willing to make it easier for private companies to raise rates by passing SB 408, but did not do the same for Citizens.
“Why in the world should it be complicated for the Legislature to let us charge what is necessary to be financially responsible,’’ Malone asked. That’s when he suggested that his only remaining idea was to ask legislators to spin off up to 800,000 policies into a new private company.
Scott Likes the Idea
While Malone’s suggestion may have been a bit off-the-cuff, his idea quickly gained support from Gov. Rick Scott and Sen. Garrett Richter, R-Naples, the chairman of the Senate panel that oversees insurance.
Richter, who shares Malone’s frustrations that a Citizens’ bill went nowhere this past year, said he wants to have a “bona fide discussion” about the privatization concept. He called Citizens’ current premiums “artificial” and not “actuarially sound.”
“I would absolutely approach that discussion with an open mind,’’ Richter said.
Scott, who has said he would like to eventually eliminate the ability of Citizens to charge assessments, said he would be willing to look at a privatization proposal if it would ultimately help reduce the cost of insurance in the state.
“The cost of property insurance is a significant problem for our families in the state right now,” Scott said. “So if looking at things like privatizing Citizens is something that would help drive down the cost of insurance in our state, I’d want to look at it very closely.”
Some lawmakers do not share that enthusiasm, however.
Sen. Mike Fasano, R-New Port Richey, said the reason so many people have enrolled with Citizens is because they cannot obtain coverage elsewhere. He pointed out that there is already a program in place that allows insurers to take out policies from Citizens, but right now there are not any carriers doing so.
He voiced concern that privatizing a chunk of Citizens would just harm consumers. “It would only be worse if Citizens would be turned into a private entity,’’ Fasano said.
He also pushed back at Malone’s suggestion that lawmakers lacked the political will to deal with Citizens. “The political will that is needed in Tallahassee is to say no to the private insurance companies,” said Fasano, who opposed SB 408.
Citizens’ Finances Improve
It is not that Citizens lacks a large amount of resources to use if a storm hits the Sunshine State. Because Florida has had five hurricane-free years, the company has built up a decent-sized amount of surplus. The new numbers show that Citizens expects to have a total surplus of more than $5.7 billion by the end of 2011.
The company also has $2.9 billion worth of bond proceeds it can tap into, as well as $575 million worth of private reinsurance coverage and another $6.59 billion worth of reinsurance coverage from the state-created Florida Hurricane Catastrophe Fund.
In July, Citizens borrowed an additional $900 million where for the first time the carrier pushed out the maturity of the bonds as far as nine years to take advantage of low interest rates. The bond issue included $750 million of fixed-rate tax-exempt bonds and $150 million of floating-rate tax-exempt bonds. Interest rates ranged from 0.65 percent for the one-year maturity to 4.75 percent on the nine-year maturity.
“This financing demonstrates Citizens’ continuing commitment to our policyholders, but it does not represent a financial burden on other citizens of the state,’’ Malone said. “The issuance of these bonds does not require an assessment of any type, since all debt service will be paid from internal resources of the company.”
Even with all of its resources, Citizens would find itself in a precarious position if a large enough storm hit the state. An analysis conducted by Citizens shows that the carrier could easily withstand a 1-in-5 year storm similar to Hurricane Frances in 2004 or even a storm of a 1-in-25 year magnitude. That cushion, however, would be lost with a major storm.
A 1-in-50 year storm similar to 1992’s Hurricane Andrew would occasion the need for nearly $3 billion worth of surcharges and assessments on insurance bills in Florida. A 1-in-100 year storm would trigger nearly $12 billion worth of additional charges.
http://www.propertycasualty360.com/2011/07/27/breaking-up-is-hard-to-do
