Recently, the Florida Association of Insurance Agents released awhite paper to inform consumers of the risk of assessments theyface as a result of legislative changes to Citizens PropertyInsurance Corporation. The paper is not designed to address aCitizens' deficit that may or may not occur; rather, it emphasizeshow such deficits could affect consumers and the privatemarket.

Citizens has been given a high profile of late and is now anoption to the standard market, but there are differences incoverage and a potential for policyholder assessments, which needsto be taken seriously by all consumers. While other governmententities, such as the Florida Hurricane Catastrophe Fund and theFlorida Insurance Guaranty Association, are also subsidized withconsumer assessments, Citizens' assessments are given more emphasisbecause recent legislative and regulatory changes make potentialpolicyholder assessments more likely and more substantial.Conversely, these same changes that impact Citizens' policyholdersnegatively reduce both the likelihood and amount of any assessmentfor consumers who purchase their insurance in the standard market.The purpose of this paper is to bring that difference to light sothat consumers can make a fully informed choice before purchasing apolicy from Citizens.

Citizens' Background

Many states have established residual markets, which aregovernment or quasi-governmental insurance facilities that providecoverage to individuals and businesses that cannot find it in theprivate market. These facilities can be for any type of risk orexposure. However, they are most commonly established to addressneeds in the automobile or high-risk property markets. Medicalmalpractice, flood, workers' compensation, and earthquakes areexamples of the type of residual market coverage provided inFlorida and other states. Residual markets can be referred to asFAIR plans, windstorm pools, joint underwriting associations, oreven have names styled after private carriers, such asCitizens.

Florida established the Florida Windstorm UnderwritingAssociation in 1970 to cover the wind-only risks in Monroe Countyand the Florida Keys. Over time, the FWUA was expanded to includeall or parts of 29 of Florida's 35 coastal counties. The tri-countyarea was expanded to cover Dade, Broward, and Palm Beach countiesin the wake of Hurricane Andrew in 1992.

Like many residual markets, whenever losses exceed fundscreating a deficit, the FWUA would assess insurance companies, whoin turn recouped the assessments from their policyholders. As aresult, many policyholders paying for wind pool deficits were notinsured by the FWUA.

After Hurricane Andrew, there was a need to create anotherresidual market for coastal wind exposures that would provide anall-perils policy. The Florida Residential Property Casualty JointUnderwriting Association was created in 1992 and was structuredsimilarly to the FWUA. Deficits were paid off by levyingassessments on insurance companies, who again pass them on to theirpolicyholders. In 1995, the association absorbed another propertyresidual market that insured commercial residential, condominiums,and apartment buildings.

In August 2002, the Florida legislature merged the FWUA with theFRPCJUA to create Citizens. Under the law, Citizens retained theright to levy regular assessments on insurers based on deficits inany one of its three accounts. It also maintained the existingauthority so that the residual market could levy emergencyassessments if the regular assessments failed to retire thedeficit. Emergency assessments are used as a surcharge onpolicyholders and are used as collateral for loans in the form ofbonds and other financing instruments to pay down the deficits. Atthe time, Citizens had to calculate each deficit separately and theassessments were levied per account. Those accounts are asfollows:

High-Risk Account. It provides wind-only policies in limitedcoastal areas of the state formerly covered by the FWUA.

Personal Lines Account. It provides multi-peril policiesthroughout the state incorporating the policies formerly covered bythe FRPCJUA.

Commercial Lines Account. This account includes commercialresidential policies throughout the state including condominium andapartment building coverage.

Before looking at the 2004 and 2005 hurricane seasons, it helpsto review the factors that caused or resulted in no assessmentsbeing levied by the FWUA and FRPCUA.

The FWUA did not provide coverage in Dade, Broward, and PalmBeach counties when Hurricane Andrews hit the state in 1992.Therefore, the association didn't incur a deficit that would havetriggered an assessment. Afterwards, the association was expandedto include Dade and Broward counties east of I-95, and parts ofPalm Beach, Pasco, and Hernando counties. Those areas make upCitizens' high-risk account.

The last FWUA assessment was for $100 million in 1998, due tolosses sustained by a hurricane making landfall outside thetri-county area in southeast Florida.

There were no assessments needed by the FWUA, FRPCJUA after1998, and until 2004, Citizens didn't incur a deficit.

Legislature and Assessment Changes

In 2004, four major hurricanes made landfall in Florida,resulting in more than 1.7 million claims spread out over thestate's 67 counties. Citizens incurred a $516 million deficit,which meant, on average, that every non-Citizens' policyholder waslevied a 6.8 percent assessment. The exact amount varied bycompany, and a few decided not to immediately assess theirpolicyholders in the hopes that they could cover the assessment infuture rate increases.

But in 2005, the attention turned to Hurricane Katrina and thedamage it brought to New Orleans and neighboring Gulf Coast states.At the same time, however, another four hurricanes made landfall inFlorida that year including Hurricane Wilma, which produced thethird-highest losses in history. More importantly, Wilma hitsoutheast Florida where Citizens had significant exposure, causingdeficits in all three accounts (including a $1.7 billion deficit inthe high-risk account). At the end of the 16-month period, whichincluded the parts of two hurricane seasons, Florida averaged onehurricane every 60 days. The legislature later appropriated $715million to help pay down the deficits in Citizens' personal linesand commercial lines accounts, with the remaining monies being usedto help lower the deficit in the high-risk account. The high-riskdeficit resulted in Citizens levying a regular assessment of morethan two percent and an emergency assessment of 1.4 percent thatwill be spread out over 10 years.

In 2006, the legislature made significant changes to thestructure of Citizens' assessments. In particular, instead of onlyassessing those in the standard marketplace, then having tosurcharge Citizens' rates to keep it non-competitive, lawmakersbrought Citizens' policyholders into the overall assessmentformula, which were divided into a homestead and non-homesteadcategory. The former are those with a homestead exemption asdefined for purposes of Citizens' assessments, and the latterincluded everybody else such as non-homestead residentialpolicyholders and commercial policyholders.

Lawmakers established an assessment payment priority, with somegroups of Citizens' policies having to pay assessments beforeothers. For example, subject to a maximum of 10 percent ofpremiums, Citizens non-homestead policyholders are first in line topay deficits in any of the insurer's three accounts. Then, everyelse in Citizens is required to help fund the deficits. Finally, ifthere is still a deficit in any account, a regular assessment islevied on all assessable policyholders, including those in thevoluntary market and those Citizens policyholders in both thehomestead and non-homestead categories.

In 2007, the legislature continued this assessment formula,clarifying that it applied to all deficits occurring in 2008.Lawmakers also sought to reduce the assessment that mightultimately accrue in the voluntary market by expanding theassessment base to include auto and other lines, with the exceptionof medical malpractice and workers' compensation policyholders.

Other Possible Assessments

The Cat Fund is a form of state-sponsored reinsurance in whichall property insurers providing homeowners' coverage mustparticipate. The Cat Fund's rates are substantially lower than theglobal reinsurance market. As a result, if the fund has a deficit,it has the authority to levy assessments that are passed ontopolicyholders, including those in Citizens. As a result of previoushurricanes, the Cat Fund is currently levying an emergency onepercent assessment that started as of Jan. 1, 2007, which is beingspread out over several years. The Cat Fund could also levy anotheremergency assessment if there are any major losses from hurricanesthis year. The Cat Fund is permitted to levy emergency assessmentsup to six percent annually, but is subject to a 10-percent cap. Inthe event of a major storm, Citizens and policyholders in theprivate market would likely be assessed by the Cat Fund as well,putting an extra burden on Citizens.

The Florida Insurance Guaranty Association (FIGA) handles theclaims of insolvent property and casualty insurance companies.While insurer insolvencies are not certain to occur in the event ofa major hurricane, some companies could be at risk. In June 2006,FIGA certified that losses from the liquidation of the Poe Group ofcompanies would exceed FIGA's balance by more than $200 million,making it the largest insolvency in Florida's history. FIGArequested a two-percent assessment to be levied on insurers, whichis being passed on to all policyholders. After Vanguard Ins. Co.,and Florida Select Ins. Co., went under, FIGA levied a specialassessment to cover those losses. Policyholders are now paying fourpercent in FIGA assessments.

It must be stressed that this paper does not address thelikelihood of deficits that may or may not occur. Nor does itattempt to predict the size of such a deficit. It only describesthe results of a loss scenario that could generate assessments inall three of Citizens' accounts that would be substantial enough topenetrate through to the voluntary market. Some of the 2007legislative changes could reduce or increase the amount orlikelihood of a deficit in any of Citizens' three accounts. This isespecially true given lawmakers' decision to reduce Citizens' ratesand implement a rate freeze. As a result, all Citizens'policyholders must be aware of two points.

First, if there is a deficit in any of Citizens' accounts, thecompany's policyholders will pay substantially more in assessmentsthat those insured in the voluntary market. Second, since theassessment base was expanded to include other lines of insurance,including auto and excess surplus lines, any potential assessmentswould pale compared to those levied against a Citizens'policyholder.