Herald-Tribune
By Zac Anderson
April 24, 2012
Stymied by lawmakers who have balked at larger premium increases for Citizens Property Insurance Corp., advocates for higher rates at the state-run insurer are proposing a backdoor plan that skips legislative approval.
A proposal to stop capping rates for new policies will go before the Citizens board Thursday, setting the stage for a potential political “firestorm,” one expert predicted.
If approved, the plan would leave Florida’s largest property insurer with a multi-tiered rate structure. Price increases would still be capped at 10 percent for existing customers, but new policies could jump substantially.
Proponents contend that increasing Citizens’ rates could make private insurers more competitive, potentially luring companies back to Florida’s beleaguered insurance market.
But critics say the proposal is legally questionable and likely to be challenged in court. They worry the plan would hurt the real estate industry in areas such as Sarasota County, where Citizens is a dominant carrier.
Homeowners might be hesitant to move if it means a big spike in insurance costs. Buyers from outside the region could also think twice if insurance becomes too expensive, said Sen. Mike Fasano, R-New Port Richey, a frequent Citizens critic.
“You will see future home buyers that will not be able to afford a home if they put these new rates in place,” Fasano said Tuesday. “How does that help our economy?”
Fasano successfully rallied his colleagues in recent years against legislation backed by Gov. Rick Scott and many top lawmakers designed to allow larger rate increases than the 10 percent cap established in 2009 and to move customers out of Citizens.
As a result, Scott has urged a Citizens board that includes a number of his appointees to make administrative changes that shrink the company without legislative approval.
During a visit to Sarasota earlier this month, Scott told local business leaders that “we are focused on depopulating Citizens.”
Questioning the legality
Even some insurance industry experts who generally support efforts to reduce Citizens’ market influence say the latest proposal goes too far.
Jeff Grady, president of the Florida Association of Insurance Agents, said Citizens’ rates need to more realistically reflect the company’s liabilities after a major disaster. But he questioned the legality of lifting a rate cap without legislative approval.
State laws says Citizens’ annual rate increases shall “not exceed 10 percent for any single policy issued by the corporation.”
Citizens lawyers are now making the case that the language applies only to existing policies and that the company can charge higher rates to new customers. But that is not how Citizens has operated since the rate cap was passed.
“It’s going to be questioned whether this interpretation is the right one, particularly if Citizens has a precedent of acting one way and then starting to act another,” Grady said.
Insurance agents already are angry with Citizens because “they don’t understand why the consumer who has been put into the situation of having no other choice but Citizens is being beat up,” Grady said.
Removing the rate cap for new policies could breed more resentment and create a backlash if it appears the agency is skirting the proper legal channels and “doing things some might think are not in the light of day.”
“People start to question your motives and develop constituencies that make something that might be a problem before an even bigger one,” Grady said. “I worry that if people start to challenge these things the real progress that might be made could be stunted.”
Citizens board member John Rollins said in a brief email that the proposal to uncap rates and other new efforts to shrink the company’s exposure “have been vetted by Citizens general counsel as not requiring legislative actions.”
Rollins did not offer his thoughts on the policies, noting “we’ll all have more to say” on Thursday. Citizens spokeswoman Christine Ashburn did not return a phone message.
The latest round of “exposure reduction initiatives” also includes a requirement that insurance agents submit documentation to Citizens certifying that no private carriers were willing to write a policy. There also is a proposal to increase minimum deductibles, meaning customers could be paying more for less coverage.
“The idea is just to make the policy really ugly,” so people will find another insurer, Grady said. “I kind of like it. I think it’s a clever idea except where there is really no other choice but Citizens.”
If Citizens is truly the only option, higher deductibles do not seem fair, Grady added.
A financial risk?
Citizens was created as the state’s insurer of last resort. It has become the largest property insurer in Florida with more than 1.4 million policies.
The company has the power to levy a tax on insurance policies throughout Florida if it runs out of cash to pay claims after a major disaster, leading Scott and many lawmakers to argue Citizens is a huge financial risk for Florida residents.
But with nearly $6 billion in reserves and a strong backstop of cash from the Florida Hurricane Catastrophe Fund, Citizens has the resources to pay claims without resorting to assessments in all but the most catastrophic hurricane.
Sarasota real estate broker Dave Beachy said the state should consider incentives for private insurers that take policies away from Citizens, but he worries about raising rates during a fragile economic recovery.
Beachy wrote in an email that most of his clients have no other option but Citizens and there could be fewer home sales if they are faced with larger insurance bills.
“Real estate is still trying to rebound from the bubble burst and raising the rates could slow down our recovery,” Beachy wrote.
Advocates for a Citizens rate hike say the company artificially holds down prices, stifling competition. As Citizens becomes more expensive, they say, private companies will become more attractive in markets currently dominated by Citizens.
But Sean Shaw, the former consumer advocate in the state Office of Insurance Regulation, said there is little evidence of that so far.
“That’s the great promise,” Shaw said, noting such theories “sound great in a textbook” but may not play out as expected in Florida’s complicated insurance market.
Insurers have collected unprecedented sums in premiums while Florida has gone a record six consecutive years without a direct hurricane strike. Yet rates continue to rise.
Shaw predicted a political “firestorm” over uncapped rates.
“There’s actuarially what you can charge and then there’s what people can actually stand,” he said. “There’s just a question of fairness that is a lot of times missing in these discussions when you’re reducing people to actuarial figures.”
Fasano believes consumers are at a breaking point with insurance costs. He expects a court challenge if Citizens’ board approves lifting the rate cap.
“The law is clear; they are not to raise rates as they are suggesting or moving towards,” he said. “They need to hold off until the Legislature takes action.”
