A 45-day regulatory drama that began with Citizens Property InsuranceCorp.'s triple-digit sinkhole rate increase proposal on August3 ended with Florida InsuranceCommissioner Kevin McCarty' s eleventh-hour denial on September19.

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

Although a 2010 Florida law capped the state-run insurer'soverall rate increases at 10 percent, the 2011 passage of SB 408 liftedthe ceiling specifically on Citizens' sinkhole premium increases aspart of the sweeping residential property reforms. That changeallowed Citizens to vie for a significant increase in the sinkholeportion of its rate filing to compensate for the loss costs in thatcoverage.

The proliferation of sinkhole claims in recent years has beenstaggering. In 2009, Citizens collected $19 million in premium forthe sinkhole activity peril and paid $84 million in losses. In2010, Citizens received about $32 million in premiums for sinkholecoverage; ultimate losses and loss-related expenses totaled anestimated $245 million. Over the past nine years, Citizens has paidout $1 billion in sinkhole claims. It projectslosses of $559 million in 2012.

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

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

In a media statement, McCarty said, "Although the frequency andseverity of sinkhole claims has increased dramatically, Citizenswas not able to provide a study or credible evidence in their ratefiling that supported the sinkhole rate changes. The Office foundthat additional data on the impact of provisions of Senate Bill 408on sinkhole claims is necessary to evaluate prospective trendsaccurately for future rate filings."

McCarty also stated that the decision was reached "following a45-day deliberative process, including a public hearing … [that]allowed Citizens to present additional information, and featuredfeedback from the Office of the Insurance Consumer Advocate, andfrom Citizens' policyholders, and the public."

Busloads of OutragedPolicyholders
Those measured remarks belie the sturm und drang thataccompanied the initial rate filing. Policyholder outrage wasimmediate, especially from those most affected in Citrus,Hillsborough, Pasco, and Hernando counties—a Central Florida regionknown as "Sinkhole Alley."

The chorus of complaints that the proposed increase could causemortgage difficulties for some policyholders was not lost onCitizens' Board of Governors, whose members initially voted on July27 to file the rates with the OIR.   

At a September 12 emergency meeting held by teleconference, theboard members reaffirmed the necessity of the triple-digit sinkholerate increases but agreed to phase them in over several years. Theycapped the overall average statewide and territorial sinkholepremium increases at 50 percent for the first year, with newindications to be reviewed annually thereafter. CitingSection 627.0629 (5), F.S., which states that an insurer has thelatitude 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 abundanceof caution), the board of governors also resolved that day toreview the phase-in implementation schedule if the rates ultimatelyapproved by the OIR differed greatly from those initiallyfiled.

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

Attendees heard Citizens' Chief Financial Officer Sharon Binnuntell regulators that the hike was necessary to ensure actuarialsoundness in accordance with SB 408's explicit requirement and tohelp achieve Citizens' goal of reducing its sinkhole claims by 60percent. Binnun noted that the insurer's frequency ofsinkhole claims has more than doubled in the past 12 months, withsome 1,400 claims reported as of June 30, 2011, compared with 700claims 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 isto "establish" Citizens' rates, as opposed to "approve ordisapprove" them (as it would in the case of a private insurer), inhis Order McCarty essentially described Citizens accounting ofstatutory changes comprised by SB 408 as inadequate. He repeatedlynoted the insurer's inability to present "credible" evidence thatwould otherwise show the effect of the new law's specific statutoryrevisions intended to reduce sinkhole claim frequency andseverity.

According to the Commissioner, Citizens presented no data tosubstantiate that its past sinkhole claims met SB 408's newdefinition of "structural damage," or that the legislation'srequirement for policyholders to actually use claims payments torepair sinkhole damage had been monitored, or that sinkhole repairswere made in accordance with specifications of Citizens'professional engineers' reports, as also provided by the newlaw. The Order also cited a lack of evidence showingappropriate application of SB 408's limitation of public adjustercompensation on claims data to further illustrate McCarty'scontention that Citizens' had not furnished actuarial support forthe requested increases.

McCarty noted that his office compensated for limitations inCitizens' territorial data by grouping the territories in questioninto four regions reflective of claims and lossexperience. He further noted that while the new rates " …contemplate the cost-savings of Senate Bill 408 … (they) do notfully quantify the cost-savings effects encompassed therein."

According to the 21-page Order, Citizens had wrongly assumedthat its future sinkhole losses would track the frequency andseverity of its other types of losses, such as fire orwater. McCarty did acknowledge the likelihood that thecurrent sinkhole claims trend would continue upward during the nexttwo years and agreed that some prospective rate increase is"reasonable."

Independent Study Ordered
McCarty ordered Citizens to contract with an independent firm toconduct a study of sinkhole claims and estimate the impact of SB408 on prospective sinkhole losses and the expected impact on therate level indications. Along with studying other claims,engineering and geological perspectives relative to the 2011legislation, Citizens must also evaluate "any other relevantprovisions of Senate Bill 408 that directly or indirectly affectsinkhole losses." The resultant report must be provided tothe OIR before Citizens' makes another rate filing.

"The Office's decision is intended to reflect the Legislature'sintention to give Citizens actuarially supportable rates for thesinkhole portion of the premium," McCarty said. "Although morecredible data and study is required, these established rates willstart Citizens on the path of having a sound rate for theirsinkhole risk."