The Home Insurance Guru

Property Insurance Reform…Where You Stand Depends on Where You Sit.

Posted by Jeff Grady on May 10th, 2011 8:51am

Remember, the goal proclaimed by most policymakers and industry insiders was to restore fiscal health and stability to the private market AND attract new capital to Florida by diminishing the super-competitive stance of Citizens.  Mission accomplished on the first part:  SB 408 is indeed a much stronger version of the two previously vetoed property reform bills and will undoubtedly go a long way toward curing Florida’s newfound sinkhole epidemic that has effectively raided carriers’ claims paying capacity for future storms.  Further, the bill tries to make Florida more like the rule rather than constantly being the exception.  Restoring the RCV holdback provision, reducing the 5 year claims filing window, providing for expedited rate filings to recoup reinsurance costs, etc., represent a good start to making our property insurance market a more sensible place for insurers to do business.  As an added bonus, the FAIA drafted language to exclude agent commissions (acquisition costs) from overzealous regulation also passed as part of SB 408.  No longer will the regulator be able to “directly or indirectly” dictate what a company can pay its agents…not necessarily a problem that exists today, but definitely a solution that should prevent such from occuring again.   

So what about the second part:  Citizens reform?  While FAIA lobbyists were able to assist in the exportation of a few significant provisions from the Citizen’s bill and successfully amend them to SB 408, the truth is the most meaningful language regarding rates and coverage was scrapped and left for another Legislature to tackle.  I believe this adverse development leaves the stated policy goals for property insurance reform unfulfilled.  Said another way, how can Florida expect to attract new capital to its residential homeowners market when the state’s own insurer represents such fierce competition?  How will private companies realistically be able to remove material numbers of Citizens’ approximately 1.4 million policies when every insurance expert (including Citizen own actuaries) publicly acknowledges the company’s rate inadequacy of 40-50%?  Remember, Citizens policyholders have the right to decline a take-out offer.  Couple that with the memory of a horribly failed regulatory experiment which required take-out companies to maintain Citizens rates for up to three years after removal, and the task of depopulating the state-sponsored insurer via new capital formation looks daunting. 

In the meantime, Florida’s homeowners market is going through a reinsurance transformation that once again, will make Citizens a competitor like no other.  Two things are primarily responsible for this recent change:  capacity constraints stemming from Japan’s Earthquake/Tsunami and the new RMS Catastrophe Model which projects much higher potential losses to Florida’s inland counties from hurricanes.  Bottom line…reinsurance rates are headed higher and it will likely take more of it to cover the same portfolio, particularly for those companies that have seemingly done the right thing and balanced their coastal exposure with business from inland parts of our state.  Realize, the use of the RMS model is largely dictated by the reinsurance industry when they offer terms to private insurers.  While Florida’s Hurricane Methodolgy Commission has yet to approve the use of the new RMS model when companies are seeking rate changes, the reinsurance world doesn’t necessarily revolve around Florida…rating agencies also have a very big say here.  Thus, several carriers are already pricing for these factors and setting their rates accordingly.  That fact is evidenced by a bevy of recent announcements from property insurers that limit capacity in inland counties, while also increasing rates for those risks.

Now, consider this…Citizens will experience practically none of the aforementioned problem.  Why?  Because it isn’t required to purchase reinsurance!  Yes, there is indeed another proposal on the table for Citizens to possibly acquire reinsurance for the 2011 storm season.  But (and it’s a big “but”), the proposed coverage is only for the HRA account and would only change Citizens’ storm worthiness to be able to cover the 1 in 34 year event.  This is only a slight increase from its current capability of covering the 1 in 32 year event.  Said another way, the Citizens reinsurance proposal would cost $107 million to provide only $500 million in coverage, and there is no provision for a second event.  This hardly moves the needle in terms of squaring the reinsurance concerns of the private market with those of Citizens.  Thus the “super-competitor” lives on and makes the idea of new capital formation around Citizens takeouts look doubtful.

With all of that said, there is one more noteworthy deterrent to returning Citizens to its original purpose of a residual property market.  That one can best be seen by looking at the constituency Citizens has effectively gained over the years by offering a public subsidy.  Noticeable in that group are consumer groups like FIRM (Fair Insurance Rates for Monroe County), legislators from coastal or sinkhole prone areas, and finally, agents who never wrote a property policy prior to gaining an appointment with Citizens.  Indeed, the appeal of government subsidized insurance is a powerful elixir.  These groups are organized and fight hard for Citizens’ right to exist in its current form.  In doing so, they seem only so happy to burden Florida’s taxpayers with the real cost of the insurance they buy or sell…an eventuality sure to come again without a significant change in course. 

So, what this all means is there is still much work to do to restore Florida’s property market.  This is not to suggest that Citizens should go away.  I do not believe that is possible, as there will always be some portion of our state’s catastrophic wind exposure that private insurers will simply leave uncovered.  But, that fact in no way justifies the footprint Citizens currently lays down in our marketplace.  It’s irresponsible, it could be very costly in the future and thus, I remain faithful that a comprehensive bill to reform Citizens will ultimately occur.