A 45-day regulatory drama that began with Citizens Property Insurance Corp.'s triple-digit sinkhole rate increase proposal on August 3 ended with Florida Insurance Commissioner Kevin McCarty' s eleventh-hour denial on September 19.

The prequel for the face-off goes back to the 2011 legislative session.

Although a 2010 Florida law capped the state-run insurer's overall rate increases at 10 percent, the 2011 passage of SB 408 lifted the ceiling specifically on Citizens' sinkhole premium increases as part of the sweeping residential property reforms. That change allowed Citizens to vie for a significant increase in the sinkhole portion of its rate filing to compensate for the loss costs in that coverage.

The proliferation of sinkhole claims in recent years has been staggering. In 2009, Citizens collected $19 million in premium for the sinkhole activity peril and paid $84 million in losses. In 2010, Citizens received about $32 million in premiums for sinkhole coverage; ultimate losses and loss-related expenses totaled an estimated $245 million. Over the past nine years, Citizens has paid out $1 billion in sinkhole claims. It projects losses of $559 million in 2012.

This summer, amid its 13 other filings, Citizens' sinkhole rate increase requests ranged from zero to 2,688 percent, for an overall average rate increase of 447 percent.

On September 19, McCarty axed that to an average rate increase of 32.8 percent. In his Order, he made it clear that the data provided by Citizens in support of the increases was not adequate or, in his opinion, credible.

In a media statement, McCarty said, "Although the frequency and severity of sinkhole claims has increased dramatically, Citizens was not able to provide a study or credible evidence in their rate filing that supported the sinkhole rate changes. The Office found that additional data on the impact of provisions of Senate Bill 408 on sinkhole claims is necessary to evaluate prospective trends accurately for future rate filings."

McCarty also stated that the decision was reached "following a 45-day deliberative process, including a public hearing … [that] allowed Citizens to present additional information, and featured feedback from the Office of the Insurance Consumer Advocate, and from Citizens' policyholders, and the public."

Busloads of Outraged Policyholders
Those measured remarks belie the sturm und drang that accompanied the initial rate filing. Policyholder outrage was immediate, especially from those most affected in Citrus, Hillsborough, Pasco, and Hernando counties—a Central Florida region known as "Sinkhole Alley."

The chorus of complaints that the proposed increase could cause mortgage difficulties for some policyholders was not lost on Citizens' Board of Governors, whose members initially voted on July 27 to file the rates with the OIR.

At a September 12 emergency meeting held by teleconference, the board members reaffirmed the necessity of the triple-digit sinkhole rate increases but agreed to phase them in over several years. They capped the overall average statewide and territorial sinkhole premium increases at 50 percent for the first year, with new indications to be reviewed annually thereafter. Citing Section 627.0629 (5), F.S., which states that an insurer has the latitude to implement an approved rate increase over several years, the phase-in was determined to be feasible and legal.

In a foreshadowing of the denial to come (or out of an abundance of caution), the board of governors also resolved that day to review the phase-in implementation schedule if the rates ultimately approved by the OIR differed greatly from those initially filed.

The board actions were too little too late for an outraged public. Their ire stoked and led by Sen. Mike Fasano, R-New Port Richey, a persistent critic of SB 408, policyholders arrived by the busload at OIR's September 13 public hearing—booked at the Tampa Convention Center in anticipation of the crowds.

Attendees heard Citizens' Chief Financial Officer Sharon Binnun tell regulators that the hike was necessary to ensure actuarial soundness in accordance with SB 408's explicit requirement and to help achieve Citizens' goal of reducing its sinkhole claims by 60 percent. Binnun noted that the insurer's frequency of sinkhole claims has more than doubled in the past 12 months, with some 1,400 claims reported as of June 30, 2011, compared with 700 claims reported as of June 30, 2010.

No Credible Evidence
None of it was enough to sway the public or, ultimately, McCarty.

Prefacing his admonishments by explaining that the OIR's role is to "establish" Citizens' rates, as opposed to "approve or disapprove" them (as it would in the case of a private insurer), in his Order McCarty essentially described Citizens accounting of statutory changes comprised by SB 408 as inadequate. He repeatedly noted the insurer's inability to present "credible" evidence that would otherwise show the effect of the new law's specific statutory revisions intended to reduce sinkhole claim frequency and severity.

According to the Commissioner, Citizens presented no data to substantiate that its past sinkhole claims met SB 408's new definition of "structural damage," or that the legislation's requirement for policyholders to actually use claims payments to repair sinkhole damage had been monitored, or that sinkhole repairs were made in accordance with specifications of Citizens' professional engineers' reports, as also provided by the new law. The Order also cited a lack of evidence showing appropriate application of SB 408's limitation of public adjuster compensation on claims data to further illustrate McCarty's contention that Citizens' had not furnished actuarial support for the requested increases.

McCarty noted that his office compensated for limitations in Citizens' territorial data by grouping the territories in question into four regions reflective of claims and loss experience. He further noted that while the new rates " … contemplate the cost-savings of Senate Bill 408 … (they) do not fully quantify the cost-savings effects encompassed therein."

According to the 21-page Order, Citizens had wrongly assumed that its future sinkhole losses would track the frequency and severity of its other types of losses, such as fire or water. McCarty did acknowledge the likelihood that the current sinkhole claims trend would continue upward during the next two years and agreed that some prospective rate increase is "reasonable."

Independent Study Ordered
McCarty ordered Citizens to contract with an independent firm to conduct a study of sinkhole claims and estimate the impact of SB 408 on prospective sinkhole losses and the expected impact on the rate level indications. Along with studying other claims, engineering and geological perspectives relative to the 2011 legislation, Citizens must also evaluate "any other relevant provisions of Senate Bill 408 that directly or indirectly affect sinkhole losses." The resultant report must be provided to the OIR before Citizens' makes another rate filing.

"The Office's decision is intended to reflect the Legislature's intention to give Citizens actuarially supportable rates for the sinkhole portion of the premium," McCarty said. "Although more credible data and study is required, these established rates will start Citizens on the path of having a sound rate for their sinkhole risk."

Special Reports /

Insurance Commissioner Kevin McCarty Sinks Citizens’ Rate Hike Request

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