Back from the BRINK

Citizens: Searching for a Balance

As is generally the case with every major insurance bill, in the end the issue comes down to money. In the attempt to strike a balance, lawmakers faced a hard choice over how much relief to grant consumers today, while keeping enough in reserve for this year and beyond. Experts have warned for years that Florida faced a decision over whether to achieve real rate adequacy and build up a financial structure that would withstand multiple hurricanes or face paying the bill later in the form of assessments. And although it may be unfair to weigh that argument against the last two hurricane seasons, it seems clear that it is time to start answering that question.

By the time lawmakers left Tallahassee in May, they enacted a bill that granted consumers at least some financial relief while adopting other provisions that lawmakers hoped would be the core of a new stabilized market with lower rates. And though it remained largely unsaid, most all lawmakers realized that what happens between June and November will be a greater barometer of the legislation's success than anything lawmakers did. Nowhere is this more highlighted than in lawmakers' approach to Citizens Property Insurance Corporation.

Going into the 2006 legislative session, much was made of the fact that Citizens was facing a substantial deficit, which could cost policyholders statewide hundreds of dollars. Based on losses from the 2004 and 2005 hurricane season, Citizens estimated it would have a $1.73 billion deficit. Under current law, when there is an assessment in the residual market, the residual market must levy a regular assessment against each insurer, which equals 10 percent of the insurer's net written premium. Although the law states the money must be paid within 30 days of being notified by regulators, the insurer technically is not permitted to recoup the assessment until its subsequent rate filing. If the regular assessment is insufficient to cover Citizens' deficit, the residential market can levy an additional 10 percent emergency assessment.

Faced with a homeowners' market that has left consumers staggering under the weight of destroyed homes, rate increases, and in some cases cancellations by companies, lawmakers entered the session knowing full well that Citizens was growing by 40,000 policies monthly. And that was before regulators moved to liquidate Poe Financial Companies, which insured 280,000 policyholders in south Florida. Still fresh with memory of the many "blue-tarp" voters, lawmakers quickly understood that mitigating Citizens' assessments was the only lever they could pull that would have an immediate positive impact on consumers. Taking the position that one positive fiscal byproduct of the hurricanes was an increase in sales tax as consumers had to buy plywood and other supplies, lawmakers decided to take general revenue dollars to help offset Citizens' assessment.

With Citizens' deficit at $1.73 billion, lawmakers approved a provision to take $715 million in sales tax monies and apply it toward Citizens' regular assessment. In effect, this will reduce an estimated $920 million deficit to around $205 million, which will lower a policyholder's assessment from around 11 percent to 2.5 percent. Even with the sales tax monies and the regular assessment, Citizens would still need an eight percent assessment to pay off the remaining $800 million, which by law must be paid off in one year. But to reduce the financial impact (and political upheaval) associated with that assessment, lawmakers decided to change the law whereby the emergency assessment could be spread over eight years.

Even as lawmakers pushed forward with a plan to relieve some of the financial burden of Citizens now, they also instituted a number of longer-term changes that they hope will increase the residual market's premiums going forward. Some of the changes approved by lawmakers are as follows:

As of July 1, 2008, Citizens will no longer insure a personal lines residential structure that has a dwelling replacement cost of $1 million or more or a single condominium unit that has a combined dwelling and contents replacement cost of $1 million or more.

As of March 1, 2007, Citizens will no longer cover a non-homestead property unless property owners produce a sworn affidavit from one or more agents that they have sought coverage in the private market and have been rejected by at least one private admitted carrier and three surplus lines insurers.

On policies in the high-risk account (wind-only in coastal areas), issued or renewed on or after March 1, 2007, a rate is deemed inadequate if the rate, including investment income, is not sufficient to purchase Florida Hurricane Catastrophe Fund and private reinsurance to pay all claims in a one-in-70 year storm. That level increases to a one-in-80 year storm in 2008 and a one-in-1 million-year storm in 2009.

After the Florida Commission on Hurricane Loss Projection Methodology develops a public model, it will serve as the minimum benchmark for determining windstorm rates for Citizens.

The new law provides an exception to current law so that Citizens' rates are not deemed competitive based on the premiums charged by the top 20 carriers in an area if regulators determine that no private carrier is providing coverage in the territory.

Into the Financial Breach

Even as lawmakers focused on propping up Citizens for the coming hurricane seasons, the real pursuit was finding a way to pour more capital into the market. Unfortunately, what has long been Florida's bulkhead against hurricane losses is no longer the seemingly unbreachable wall it once was. That is not to say the Florida Hurricane Catastrophe Fund is a flawed institution. Without it there likely wouldn't be a private market in Florida, and certainly the outlook for the future would be much dimmer than it is. But that doesn't escape the fact that after years of collecting premiums and building up bonding capacity, the Cat Fund is also limping badly after the 2004 and 2005 hurricane seasons.

Cat Fund Senior Officer Jack Nicholson recently reported that the fund's total loss from the 2005 hurricane season is nearing an estimated $4.5 billion. Of that amount, the fund has paid out $2.5 billion and has another $545 million in cash to handle claims that are still being submitted by carriers. Afterward, the fund will have a deficit of $1.425 billion, leaving it with no option but to issue revenue bonds. The revenue bonds are calculated based on all property and casualty premiums paid by policyholders with the exception of workers' compensation and medical malpractice. As of the end of 2005, the Cat Fund's premium assessment base was $31 billion. The potential assessment is capped at six percent per any one-hurricane season and 10 percent to raise monies for losses over multiple years.

In passing the 2006 reforms, lawmakers did institute a program whereby the Cat Fund could raise more funds. Under the law, the fund could increase its assessment by a factor of 25 percent, which would raise about $200 million. The question remains, however, whether the money should be used to reduce the assessment for prior years or be held back to pay off possible losses from the 2006 hurricane season. And that is not to mention just exactly how many claims $200 million will pay given a Category 3 or 4 storm.

Despite the financial troubles surrounding the Cat Fund, lawmakers decided they had no choice but to use the fund to solve a reinsurance crisis that potentially could affect 30 percent of the state's market. At issue was a gap in available reinsurance needed by limited apportionment companies, which by definition have less than $25 million in premiums. By law, insurers must retain losses from a hurricane equaling 30 percent of their surplus before they can access their Cat Fund coverage. Most companies purchase private reinsurance to cover the amount above the company's retention level and the point at which they can access the Cat Fund.

Currently, however, there are some 46 limited apportionment companies with $25 million or less in coverage that cannot find reinsurance because of a reduction in capacity due to the 2004 and 2005 storm seasons. Lawmakers decided to address that shortage by allowing the limited apportionment companies to purchase additional Cat Fund coverage. The one-year program will allow the companies to purchase $10 million in coverage to pay losses between the carrier's retention and the point they recover monies from the fund. The coverage can be reinstated one time and companies must pay a rate of 50 percent on line, whereas $5 million for $10 million in coverage. If all the limited apportionment companies participated in the program, the Cat Fund would expand by $460 million.

In a move designed to help other private companies, lawmakers approved a new Insurance Capital Build-Up Incentive Program. Under the program, lawmakers apportioned $250 million in general revenue tax dollars to the State Board of Administration. Insurance companies can then petition for up to a $25 million surplus note, which then can be repaid over 20 years based on the 10-year treasury bond. To qualify for the note, a company must contribute new capital to its surplus that is at least equal to half of the surplus note. All told, the company must have total capitalization of $50 million based on the combination of surplus, new capital, and surplus note.