Ever since state lawmakers recognized the need for a residual market to provide Florida residents in high-risk areas with homeowners' coverage, the guiding public policy position has been that major losses would be subsidized after the fact in exchange for keeping rates affordable today. In establishing Citizens Property Insurance Corporation — and its predecessors — lawmakers created a catastrophic funding plan that depended heavily on policyholder assessments to pay claims and fund bonds and other debt instruments to pay off long-term deficits. Due to a confluence of events, namely a lack of major hurricane losses, the use of assessments remained a theoretical proposition that lawmakers and the public could largely ignore. However, after the 2004 and 2005 hurricane seasons, the need for Citizens' assessments has become a financial reality and what seemed like a good idea yesterday has become today's crisis.

Losses and Assessments

The possibility that Citizens would require a major assessment to fund 2005 hurricane losses was almost guaranteed after the 2004 hurricane season. Hurricanes Charley, Frances, Ivan, and Jeanne by far represented the largest financial hit sustained by residual insurers. All told, the four hurricanes accounted for an estimated total of $2.4 billion in losses. Of that amount, $1.8 billion was attributed to losses in Citizens' high-risk account, which provides wind-only coverage to residences built along the state's coastline. The high-risk account has some 450,000 policies in force with 280,000 of those policies located in Palm Beach, Broward, and Miami-Dade counties. As of June 2005, those three counties accounted for 47 percent of Citizens' total policies, and represented 56 percent of its total exposure.

At the beginning of the 2004 hurricane season, Citizens had a total surplus of $1.8 billion, of which $1.1 billion was reserved for losses in the high-risk account. Citizens, however, calculated its high-risk losses at an estimated $1.6 billion, leaving it with a deficit some $500 million. There also was a minor deficit in the other accounts. To make up for the shortfall, Citizens recently approved a $515 million assessment, which roughly equaled a 6.8 percent surcharge on all Florida homeowners' policies. By comparison, the residual market's last assessment was levied in 1998 after Hurricane George and Tropical Storm Mitch. At the time, the $100 million assessment was the largest levied by the residual market until the need for an assessment to fund the 2004 deficit.

The degree to which the 2004 hurricane season took a toll on Citizens became clear at a recent Senate Banking and Insurance Committee meeting. John Forney, with Raymond James and Associates serving as Citizens' financial advisor, explained in stark terms for lawmakers just how under-funded the high-risk account has become. The high-risk account had a 2005 net underwriting surplus of $500 million before incurring any hurricane losses. Of that amount, $326 million had to be used to pay additional losses for 2004 claims. Hurricane Dennis accounted for another $47 million in losses and Hurricane Katrina $64 million. Therefore, the high-risk was basically depleted before taking into account any other losses. "Pre-Wilma, the high-risk account only had a $60 million surplus as opposed to the $1.1 billion in surplus before any losses last year," Forney said.

Forney also told lawmakers that Citizens is not at risk of being unable to pay claims, since the residual insurer has access to $2 billion in pre-event notes that were issued in 1997 and 1999. "Citizens has ample financial liquidity to pay losses this year," he said. "Its financial integrity remains intact." While Forney offered some comfort to lawmakers, it did not take away from the main message that assessments will be needed to pay losses in the high-risk account. That exact amount will not be known until sometime next year, but taking a look at the average of three computer models, it is readily apparent that Citizens will need more than a billion dollars to pay losses.

Bob Ricker, Citizens' executive director, said the computer models predicted losses in the high-risk account from between $625 million to $2 billion. Based on the average of the three computers, Citizens is projecting losses of $1.158 billion. The commercial lines account is expected to suffer losses of $60 million and the personal lines accounts for $180 million. If those numbers hold, Citizens would need to levy the full 10 percent regular assessment allowed under the law. The assessment would produce $830 million based on an $8.3 billion assessment base. Additionally, the insurer would need to levy its first-ever emergency assessment, which would be around 1.1 percent or 1.2 percent. The emergency assessment would raise around $100 million and would include a market equalization surcharge on Citizens' policyholders.

Lawmakers Balk at Bottom Line

Lawmakers showed little willingness to pass over the reality of Citizens' assessments in silence. Instead, the subject raised an underlying schism between lawmakers over who should bear the brunt of such costs; those individuals living in high-risk areas or all the state's policyholders. Senator J.D. Alexander (R-Lake Wales), who has long been a critic of Citizens, pointed out that the insurer's annual premium in the high-risk account is around $800 million. "You want to assess in one-year the whole premium you collected in two years," he told Forney. "How much are people who get no benefit from this going to pay?"

Senator Bill Posey (R-Rockledge) had a similar line of questioning, although he pointed out the entire state benefited from having a homeowners' residual market. What worries Posey is the fact that, if meteorologists are correct, the state can expect to see a cycle of intense hurricane activity. What, then, will become of the long-term funding solution? "If in the next decade or two hurricanes are going to be a factor, how do we stop this from being the crisis du jour every year?" he questioned.

Ricker noted that Citizens has no choice when it comes to accepting policies. Currently, the residual insurer has over 850,000 policies in force and serves as the safety-net for homeowners who cannot find coverage in the private market. However, he acknowledged that, unless there are public policy changes, it is highly likely that the state has not seen the last of Citizens' assessments. "Small storms eat away at surplus," he said. "Without access to private reinsurance or more money from the cat fund, we are going to be in an assessment mode."

The only other method for Citizens to raise cash is to increase rates. Citizens' spokesperson Justin Glover said the insurer plans to implement rate increases in February 2006, based on the statutory formula that requires Citizens' rates to be no lower than the private insurer with the highest average rates among the top 20 carriers providing coverage in a county. As a result, personal lines policyholders will see average rate increases of 15.4 percent and policyholders in the high-risk account will see average increases of 16.2 percent. In December, Citizens also is going to start evaluating future rate increases based on actuary analysis of its funding needs.

General Revenue: A Funding Option

The financial reality of the cost increases Florida policyholders are facing is not escaping CFO Tom Gallagher or Governor Jeb Bush. Florida policyholders are facing a 19 percent assessment to fund the deficit in Citizens' high-risk account. Additionally, there may be another assessment if the Florida Hurricane Catastrophe Fund has to issue debt, a prospect that is still in the air. Citizens' policyholders also are bracing for higher rates, as are policyholders covered by private insurers.

In the search for answers, Gallagher and Bush are turning to a proposition first floated last year, which called for general revenue dollars to be used to pay Citizens' deficits. Specifically, Gallagher said he will ask the legislature next year to appropriate sales-tax dollars to pay the 11.1 percent high-risk deficit. He pointed out the state's sales-tax revenue is higher than expected due to monies spent on hurricane preparedness and home repairs. "I have asked the legislature to dedicate increased sales-tax revenue collected from hurricane recovery to help offset assessments," he said. "Floridians pay millions in sales tax to recover from catastrophes; they should not be taxed twice and forced to pay billions of dollars in hurricane damages in the form of assessments."

Getting lawmakers to agree to that proposition, however, is another battle. When the idea of using sales-tax money to cover Citizens' deficits came up last year, lawmakers shot it down on the basis that they didn't want to set a precedent. Whether or not that same reasoning holds under the pressure constituents are bound to place on lawmakers in an election year remains to be seen.

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