From the February 27, 2012 issue of National Underwriter Property & Casualty • Subscribe!

A Measure of ‘Last Resort’

Proposed law would allow surplus carriers to pick up policies in the Florida homeowner’s market

Desperate to shrink its dangerously overexposed state-run insurer, Florida is floating legislation to allow eligible surplus-lines insurers to take policies from Citizens Property Insurance Corp., the state’s ostensible last-resort underwriter.

As last-resort options go, “it’s sort of an out-of-the-box approach,” says Don Brown, an insurance agent and former state legislator, about the proposal being debated by state lawmakers. “But something has to be done.” 

Surplus-lines insurers could provide “one more option homeowners don’t currently have,” Brown adds. “And this state needs as many options as possible.”

“We have a mess here, and it’s essential that we fix what has been going on,” agrees Samuel Miller, executive vice president of trade association Florida Insurance Council, which supports the measure. “The state needs to pursue this.”

In truth, Citizens isn’t the state’s insurer of “last resort” by any real definition of that term. Florida’s property-insurance market is backward—with the residual market often the first option, competing with a private market when it shouldn’t, because its prices are lower.

As a result, Citizens has become what last-resort providers are not meant to be: the state’s largest insurer of property. It has more than 1.4 million policies extending more than $508 billion of coverage.

And Citizens is heavily backed by the state-created reinsurance provider, the Florida Hurricane Catastrophe Fund, which itself has some well-documented financial issues.

Under the terms of the bill being considered, a surplus-lines provider looking to take policies from the last-resort insurer would have to offer coverage similar to that provided by Citizens and would have to notify the policyholder of any and all differences.

Policyholders selected by a surplus carrier would have the option to remain with Citizens if they choose.

POLICYHOLDERS INCREASINGLY AWARE OF LAST-RESORT RISKS

Like any last-resort carrier, Citizens was established to provide insurance for those unable to secure it in the admitted market—and admitted-market takers became a lot harder to find when insurers in the hurricane-prone state began pulling out or pulling back coverage in Florida to reduce their risk exposure.

Homeowners must first look to the private market and can only go to Citizens if rates found in the private, or admitted, market are 15 percent higher.

Meeting that rate-differential threshold became much easier when, after an outcry from consumers, state mandates froze the last-resort insurer’s rates—allowing more residents to tap coverage and to get cheaper premiums than those found in the private market. Citizens’ policy count has ballooned since then.

While, on the surface, this may seem like a great deal for consumers, more and more policyholders are becoming aware of the risks.

One is that insureds might have to wait a long time after a disaster to receive payment of a claim.

The other is that should Citizens face a deficit after a storm, it can charge up to a 45 percent surcharge on its own policyholders. If that still doesn’t fill the gap, it can then levy assessments on nearly every policyholder in the state in order to pay claims.

This increasing realization among Citizens’ policyholders of the potential impact on their wallets is nurturing hope among the insurance industry that the surplus-lines bill will get to the governor’s desk (Gov. Rick Scott has indicated he wants Citizens to be smaller).

Thus far, the House bill, sponsored by Rep. Jim Boyd, R-Bradenton (an insurance agent), was passed 66-48. The Senate version, sponsored by Sen. Garrett Richter, R-Naples, has yet to have a hearing.

ONLY THE SOLVENT NEED APPLY

“The way the bill is written, consumers are protected,” Miller says. “Only good, strong [surplus] companies are allowed to play.”

Amy Bogner, spokeswoman for the Florida Office of Insurance Regulation, says, “It is important to understand that the surplus-lines companies would have to be highly rated by a reputable rate organization” (maintaining an “A-minus” or better financial-strength rating from A.M. Best Co.), “and have the financial capacity and/or reinsurance to pay for two 1-in-100-year storms.”

Surplus carriers looking to depopulate Citizens also must maintain $50 million in surplus.

“This is a very high threshold,” adds Bogner. Current law requires insurers maintain $15 million in surplus.

But that’s not all. Even after surplus-lines carriers meet these requirements, they would have to deposit 50 percent of unearned premium with the Department of Financial Services in case of insolvency, since surplus-lines carriers aren’t covered by the Florida Insurance Guaranty Association (FIGA) because they aren’t licensed in the state.

Unearned premium amounts would depend on at what point in the policy term a policy is removed from Citizens, says Bogner.

BEST SOLUTION OR BAIT-AND-SWITCH?

The bill has its opponents. Former Florida Insurance Consumer Advocate Sean Shaw, now an attorney with the Merlin Law Group, tells NU he believes the surplus-lines bill is “shortsighted” and potentially dangerous for consumers.

“People are hearing all these bad things about Citizens, and I believe they will just go with the flow if one of these companies comes and offers them a policy,” says Shaw. “But I believe there will be a big problem if one of these companies goes insolvent. This isn’t the solution.”

Shaw isn’t comfortable with the fact that surplus carriers are not covered by FIGA, and he doesn’t trust the freedom of rate and form they enjoy.

“Upon renewal, rates are going up—and no one has any say about it,” he says.

Instead of giving homeowners the option of opting out once approached with an offer from a surplus carrier, “why not give homeowners the option to opt in?” Shaw asks.

In other words, Shaw suggests that policyholders should have to proactively indicate they are willing to leave Citizens before a surplus carrier could approach them.

‘NO ONE WILL BE FORCED’

GeoVera Insurance, currently one of the top writers of surplus homeowner’s insurance in Florida (primarily insuring homes whose value exceeds the $750,000 cutoff that Citizens imposes), is supportive of the bills, says Tim Meenan, the carrier’s lobbyist and an attorney with Blank and Meenan in Tallahassee.

The Fairfield, Calif.-based company, with an “A” rating from A.M. Best, specializes in providing stand-alone residential earthquake policies in its home state, Oregon and Washington, as well as residential windstorm-hurricane policies in Hawaii.

GeoVera’s policy count in Florida swelled to about 80,000 after the active hurricane seasons of 2004 and 2005, but it is now at about 30,000, Meenan says.

Like all surplus carriers, the insurer is “used to the accordion effect—expanding and contracting along with market conditions,” he adds.

The bill’s critics say unregulated surplus carriers like GeoVera will shock homeowners with rate increases.

“Rate increases are part of insurance, in Florida or anywhere,” Meenan responds, pointing out that private insurers have been getting approval for double-digit rate increases.

“No one will be forced; you don’t have to [leave Citizens],” Meenan notes. “Competition will regulate the rates.”

Allowing surplus carriers to take Citizens policies, he contends, will not disrupt the market. The law “won’t bring the residential insurance market to its knees.”

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