With nearly a decade since Florida experienced any major hurricanes, it is easy to lose sight of how our insurance market evolved from the post-Hurricane Andrew flight of private insurers from the state to the 2002 birth of nonprofit Citizens Property Insurance Corp. as the state-run “insurer of last resort.”
Today, with nearly a quarter of Florida homeowner policies underwritten by Citizens, its explosive growth over the years has become a potential financial albatross for the state. Citizens could become responsible for the payment of billions of dollars in claims if a major hurricane strikes Florida, causing a depletion of the insurer’s cash and resources built up over the years without a major storm.
If Citizens cannot pay its claims based on available resources, it is permitted to assess all types of Florida property and casualty insurance—except workers’ compensation and medical malpractice policies—in order to finance its liabilities, including residential and commercial property policies, auto, renters and even pet insurance.
Some label these assessments “taxes” that can endure for years if Citizens’ shortfall is large enough. Should additional storms strike—even relatively minor ones—more assessments could be levied atop existing ones. According to Citizens, the potential total assessment for a 1-in-100-year storm is approximately $4 billion.
What does that mean for the average policyholder? While assessments are levied on a three-tier basis against private market and Citizens policyholders alike, Citizens’ policyholders face much higher exposure given the Tier 1 assessment is an up to 45 percent surcharge on each policy. Should this revenue prove insufficient, Citizens may then add the Tier 2 surcharge of up to 2 percent on private market policyholders. If this still isn’t enough, Citizens can add to that the Tier 3 surcharge of up to 30 percent on all policyholders. In a worst-case scenario, a Citizens policyholder could face annual policy assessment “taxes” of up to 75 percent of their policy premium while private market policyholders would pay a maximum of 32 percent.
Thus, from a public policy perspective, it is in the best interests of all Florida property and casualty insurance policyholders to reduce Citizens’ policy count and ultimate exposure.
Exacerbated by 2007 legislation that rolled back and froze rates at 2006 levels, Citizens’ premiums became unreasonably low for the risk assumed. Meanwhile, many private insurers have been unable to compete with Citizens’ artificially low rates.
Consequently, as the only remaining alternative for many homeowners, particularly in South Florida where hurricane risk is greatest, Citizens has become Florida’s “insurer of choice,” rather than the “insurer of last resort” as it was originally intended to be.
Because Citizens’ exposure has ballooned in recent years, it should be welcome news that efforts have been underway for private insurers to take policies out of the state-run insurer through several measures, including a new, statutory “Clearinghouse,” structured “takeouts” and an unprecedented risk transfer program leveraging capital markets—all of which have reduced Citizens’ exposure, improved Florida’s private market capacity and reduced the probability of assessments.
Citizens’ recent depopulation has been rapid. Its policy count is now below 1 million for the first time since 2006 and stands at less than 940,000 policies as of May from an all-time high of nearly 1.48 million in 2012. Its aggregate exposure peaked in 2011 at $515 billion and is now below $300 billion, a decrease of over 40 percent.
Created by the Florida Legislature in 2013, Citizens’ clearinghouse is intended to expand the state’s private insurance market. With participation expected to grow throughout 2014, the clearinghouse enables private insurers to bid on residential insurance business that would otherwise further burden Citizens.
If a clearinghouse offer falls within 15 percent of Citizens’ rate, the homeowner becomes ineligible for Citizens coverage. Private insurers must then compete for that homeowner’s business. Currently only applicable to new policies, clearinghouse participation will soon be extended to renewals of current Citizens policies as well. This is a positive development because it encourages private market investment in the Florida property insurance market.
To help manage exposure, Citizens recently approved the “largest catastrophe bond in history”—a $3.1 billion risk transfer program for the 2014 hurricane season that is forecast to reduce the risk of assessments by more than $9 billion—or 80 percent—and supplement Citizens’ purchase of both private reinsurance and statutory coverage through the Florida Hurricane Catastrophe Fund. Using this strategy, Citizens estimates that its 2014 claims-paying capacity will cover up to a 1-in-70-year storm without the need for assessments.
With Florida statistically more likely to sustain a hurricane strike than any other state and the likelihood that Citizens assessments would follow, after a catastrophe is the wrong time to find out the hard way that Citizens is truly not a less expensive alternative to the private market.
By continuing to reduce Citizens’ exposure, Florida remains on course to restore its private insurance market by ensuring that the “insurer of last resort” is returned to its original purpose.