Fla. Chief Financial Officer Slams Changes Leaving Residual Market 'Unsound'

Florida's legislative changes to Citizens Property Insurance Corp.–its homeowners market of last resort–has left the residual carrier writing “actuarially unsound” policies, the state's chief financial officer told industry officials here.

Florida CFO Adelaide “Alex” Sink, while speaking at the annual conference of the National Council on Compensation Insurance, also voiced criticism of the industry for what she said was a failure to express sympathy for the plight of homeowners faced with steep rate increases.

The additional changes approved by lawmakers earlier this month to Citizens include freezing rates for two years, while expanding coverage by lowering the rate threshold the company charges from 25 percent to 15 percent above what private carriers levy.

The Florida Hurricane Catastrophe Fund was also beefed up from $23 billion to $39 billion to provide cheap reinsurance in another move to lower rates.

Ms. Sink said she opposed saddling Citizens with additional risk. “I know we are gambling a hurricane will not hit our state,” she said.

If Citizens and the catastrophe fund run a deficit after incurring excessive losses, all of Florida will be subject to assessments to cover the cost of bond issues to replace cash reserves, she observed. In addition, unrelated lines such as medical malpractice and auto insurance will also see increases.

The CFO, a Democrat elected last year, did not single out any government official, although many of the changes to Citizens have been spearheaded by the Republican Gov. Charlie Crist.

Ms. Sink said it was unfortunate that “insurers were made out to be the bad guys,” but she added that the industry is partly to blame. “We have not had enough good messaging,” she added.

Carrier messages were all about shareholder losses, while the state rarely heard about sympathy for policyholders from insurers, she observed.

Although some state insurers are starting to take on new property risk, it is difficult to attract outside carriers to Florida “when Citizens is writing actuarially unsound policies,” she said.

Ms. Sink made no mention of the new law championed by Gov. Crist that prohibits national carriers from establishing state-only subsidiaries–a move said by the industry to inhibit such companies from writing in the state.

An audience member drew applause when he told Ms. Sink that capital would come to Florida “if the state was not busy suppressing rates.”

Ms. Sink said she hoped that if the state escapes hurricanes this year, then changes could be made to attract insurers.

She said the state had put good building codes in place after Hurricane Andrew in 1992, but noted that Florida is doing nothing in the area of zoning codes to discourage building in coastal areas.

Ms. Sink said there has been positive news about the state's workers' compensation insurance market since reforms were introduced three years ago. Rates have been reduced and competition has increased, she said.

Meanwhile, an insurer-commissioned report released last week said Florida's legislative reforms have provided the greatest benefit to coastal high-risk areas, but could potentially raise premiums in less-risky areas.

The report, prepared by the Seattle-based actuarial consulting firm Milliman Inc., was commissioned by the Property Casualty Insurers Association of America.

The report found that the new laws provide immediate savings for homeowners by shifting potential payments for hurricane losses from the homeowners receiving the current policy benefits to future policyholders, motorists and business owners, all of whom would be assessed.

“While the Milliman report finds that the new law should lower insurance prices for some consumers, all Floridians need to understand that this is accomplished by transferring much of the cost of paying for future hurricane losses to individuals and businesses in lower-risk areas across the state,” said William Stander, PCI's assistant vice president and regional manager.

“The new law may drive away some private insurance companies that would otherwise want to conduct business in Florida,” added Nancy Watkins, principal and consulting actuary for Milliman and the report's co-author.