Citizens Property Insurance Corporation has been an unwieldy organization ever since lawmakers created the residual market in 2002. (See related story in Capitol Line.) At the time, the industry opposed the creation of Citizens, as did many lawmakers, and it appeared all but dead in the legislature until an Internal Revenue Service ruling granted it tax-exempt status. Ever since then, Citizens has been an albatross that has required repeated regulatory and legislative action.
Although it was granted tax-exempt status and did lead to a reorganization of management, the residual market remains largely a bifurcated entity. On one hand is the personal lines account, which issues all-perils policies. Then there is the high-risk account that only covers wind risk in certain areas of the state. Each account is supported by a separate funding structure and serves different roles in the market. However, since Citizens is a single quasi-governmental entity, when it comes to making many regulatory and legislative decisions, they must apply across the board. As the legislative process has shown, this creates a difficult challenge when issues arise that need a solution.
The one constant about Citizens, which is consistent with the two former residual markets, is that it relies heavily on policyholder assessments. Coming at a time when the state saw few hurricanes, this funding mechanism was seen by lawmakers as an immense advantage. Unlike cash, lines of credit and bonds, assessments are virtual money whose inclusion in the law was painless. As long as the state did not suffer any major hurricane losses, Citizens' assessment authority laid dormant, which arguably allowed the insurer to operate with less than actuarially sound rates.
From any perspective, the assessment mechanism was a gamble. On paper, it made Citizens appear ready for any contingency while not inflicting any up-front costs on state policyholders. In the wake of the 2004-2005 hurricane seasons, however, Citizens and the legislature lost that gamble. After seeing state policyholders having to absorb $1.6 billion in assessments due to Citizens' deficits, it appears many lawmakers and industry trade groups are ready to cut their losses and change the game. Now, instead of relying on assessments, they want to tap into excess sales tax, which they argue is generated from individuals purchasing items to prepare for hurricanes and the cost of repairing their homes.
Lawmakers have traditionally stopped listening when it comes to supporting any aspect of the insurance industry by using general revenue dollars. There are several reasons for this. Number one, the government largely ascribes to the theory that the industry is a private market, which, by definition, is based on the collective sharing of risk by consumers. Secondly, by what formula does the state measure the amount of sales tax dollars attributed to hurricane-related purchases? And lastly, to what degree is the legislature willing to cap assessments before the state steps in with tax dollars? These are the propositions that will be ground zero in the debate over Citizens and the use of sales tax dollars. How they are resolved will affect all of us.
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