The announcement that four private insurers were willing to snatch tens of thousands of policies out of the state-run Citizens Property Insurance Corporation is being greeted as wonderful news within the insurance industry. After all, the private marketplace is supposed to be where consumers could get a better price instead of relying on the insurer of last resort. The companies' decision is also being seen as a sign of an improving market because insurers are willing to take a chance in writing policies in some riskier geographic areas of the state. Such was the response when the four companies recently stepped forward with proposals to take out 175,000 policies from Citizens.

Insurance Commissioner Kevin McCarty wasted little time in calling the companies' actions great news. “It is proof that the private insurance industry believes it can succeed and be profitable in Florida,” he said. “Consumers will be offered policies at rates that are at or below Citizens' current rates.”

While there are many who are lined up in agreement with McCarty, and see the latest development as the first sign that the private market is rebounding despite all the rhetoric to the contrary, the latest “take-out” companies are being greeted in other quarters with a measure of skepticism and caution. After all, two years without a hurricane does not a trend make. And besides, there are two other reasons to be wary, namely price and security. Agents are quick to point out that neither is guaranteed with the new companies.

“Be careful,” Jeff Grady, president and CEO of the Florida Association of Insurance Agents, advises those deciding whether to jump to the new companies. Grady noted that one of the companies, Argus Fire & Casualty Inc has a C- rating from A.M. Best & Co. “That's causing some of our folks to pause and raise questions. This is no longer an automatic decision,” he said.

Citizens' Trends

Since November, four insurers have been contacting Citizens' policyholders to offer coverage. The Tampa-based American Integrity Insurance Co. of Florida is proposing to take on 75,000 policies over six months. Landmark One Insurance Co. of Miami says it can assume 50,000 Citizens policies over the next 18 months. First Home Insurance Co. of Jacksonville states it can assume 30,000 policies immediately and the North Miami Beach-based Argus Fire & Casualty Co. is looking to assume 18,000 policies over 18 months.

If the carriers meet their goals it would substantially increase their market share in the state. For example, American Integrity currently has more than 32,000 policies in Florida, a number that would more than double based on its take-out plan. Landmark, a subsidiary of the Miami-based Northern Capital Insurance Company, is also poised to expand by more than half. Northern Capital just started issuing policies in August with its target market being homeowners in South Florida. First Home's takeouts also represent substantial growth with the company and company officials are projecting that its take-out plan will increase the insurers' market share by about five times its current level. Lastly, the Argus Fire & Casualty will more than double from 7,200 policies to roughly 14,000 after adding Citizens' policyholders.

Citizens' Spokesperson Rocky Scott said all the policies sought by the four companies are west of Interstate 95, which is considered Citizens' high-risk coastal zone and where few private insurers are willing to offer homeowners or commercial residential coverage of any form.

The new take-out plans represent good news for Citizens even though they won't substantially alter the insurer's position in the market. The state-run insurer is the state's largest homeowners' carrier with 1.4 million policies, which represents about one-third of the state's total property insurance market. Even though Citizens' goal is to reduce its market share, the new takeouts will only slow its current expansion trend. Scott said Citizens has been gaining an average of 50,000 new policies each month this year. One major factor that could affect the proposed take outs is a change in a state law, which now allows any policyholder to reject an offer of coverage from a private carrier and retain their Citizens' policy. It remains to be seen how many policyholders will be willing to accept the offers of coverage. Lawmakers instituted the law change several years ago at the urging of policyholders who complained that take-out company rates were higher than those in Citizens. Agents also supported the law change as a means of preserving their business relationships with consumers.

Still, the insurer's trends are bucking the predictions that many experts made last January. At the start of the year, some industry followers had projected Citizens could reach as high as two million policyholders by the end of the year, especially given signs that many major companies were willing to retreat from the state following the property reforms. But barring some unforeseen development, Citizens is unlikely to reach anywhere near that two million mark in 2008. Regulators have approved at least eight new companies to write residential and commercial property coverage this year.

OIR Spokesperson Tom Zutell said more companies may step forward and remove more Citizens' policies before the end of the year. FAIA's Executive Vice President Scott Johnson said that the possibility of more companies entering the market bodes well for the state's insurance industry. “Everybody is in better financial shape as a result of having no storms in 2006 and 2007,” he said. “We hope there will be more take outs.”

By year's end, about 200,000 policies will have been removed from Citizens by private insurers. By comparison, only 68,000 Citizens' policyholders accepted offers of coverage by private insurers in 2006. Since 2003, some 500,000 homeowners shifted their coverage from the state-run insurer and into the voluntary market. Even with those improved numbers, there remains a concern that the insurer is still treading water due to moves by other carriers. For example, State Farm Florida, the state's largest private property insurer, recently announced that it plans to drop 74,000 policyholders, including 12,650 in Brevard County alone. Regulators thought State Farm would only drop around 50,000 policyholders. The insurer's action comes after it implements a new underwriting rule whereby the company will not renew any homeowner within one mile of the coast unless they shed their hurricane coverage. Additionally, State Farm will no longer issue policies to homeowners with two miles of any coastal waterway. As a result, most of those policyholders will likely end up at Citizens.

A New Market

In many ways the new companies represent a potential shift in the makeup of the homeowners' markets. The new carriers are small and newly formed in Florida and rely heavily on getting reinsurance from the Florida Hurricane Catastrophe Fund. Lawmakers approved a $250 million appropriation to help investors start up the small companies.

Florida Insurance Council Vice President Sam Miller said the creation of the new carriers could signal the beginning of a new profile in the market. “Florida is in the midst of a major transformation in the residential property insurance market,” he said. “There is a shift from large multi-state companies such as State Farm, to smaller and newer companies and the market for small, domestic insurers is thriving.”

There is no doubt that the timing of the takeouts owes much to the fact that Florida is completing a second consecutive year without any hurricanes. This of course, after prognosticators predicted that storms would hit the state almost every year–projections made after the 2004 hurricane season. As a result, the new companies have yet to be tested, a fact not lost on agents or consumers.

There's risk with the take-out companies: The upstart carriers are susceptible to failure if severe storms hit Florida. In the most prominent example, the Tampa-based “take-out” carrier Poe Financial Group collapsed under the weight of claims from the 2004 and 2005 hurricane seasons. Poe became the largest insurer to go bankrupt in the state and all policyholders in the state are paying the price through assessments on their policies. The Florida Insurance Guarantee Association just last month tacked on an additional two percent assessment on premiums that will take effect in 2008. It is the third such assessment made by FIGA to retire Poe's outstanding liabilities.

Bob Milligan, Florida's insurance consumer advocate, said homeowners must consider the financial health of the take-out companies. He pointed to Poe as an example of what can go wrong, although he said he's confident in the state Office of Insurance Regulation's analysis of the take-out carrier's finances. “The OIR looked very carefully at how well-funded these organizations are,” he said. “While I would refer to them as thinly capitalized, they appear to have adequate capital. There's a little bit of risk.”

Another factor in consumer's decision making is likely to be the cost of the policies. Under a former state law, Citizens was required to have the highest rates in any one area of the state. This year, lawmakers struck that requirement, instituted a rate rollback, and effectively made the state-sponsored insurer a competitive market. As a result, it likely will be a slow process when it comes to new companies offering coverage to Citizens' policyholders.

Danny Perez, marketing manager for Argus Fire & Casualty, said the company knows some Citizens policyholders will be leery to make the switch. He expects it will take months to absorb the 18,000 policies it has agreed to take. Just because there hasn't been a hurricane in two years, doesn't mean consumers will find drastically lower prices. Don't expect to save big money, said Lincoln Mitchell, product and underwriting director at American Integrity. “Generally speaking, we have the same rates as Citizens,” he said. “It's not going to be a very big savings.”

While agents may be leery of advising their clients to switch to the take-out companies, it may not be due to commission rates. So far, it looks as if the new companies will be paying commissions at about eight percent, or slightly higher than that of Citizens. Grady notes that commissions rise with the number of companies selling policies. He said some policyholders may opt to pay more with Citizens because they will be more comfortable with a company that is capitalized by the state of Florida.

“Consumers face a choice here and they won't be forced out like they once were,” Grady said. They should be in no hurry to sign on the dotted line in 10 days.”

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