FAIA Overview of Citizens, Assessments, and Consumers

Recently, the Florida Association of Insurance Agents released a white paper to inform consumers of the risk of assessments they face as a result of legislative changes to Citizens Property Insurance Corporation. The paper is not designed to address a Citizens' deficit that may or may not occur; rather, it emphasizes how such deficits could affect consumers and the private market.

Citizens has been given a high profile of late and is now an option to the standard market, but there are differences in coverage and a potential for policyholder assessments, which needs to be taken seriously by all consumers. While other government entities, such as the Florida Hurricane Catastrophe Fund and the Florida Insurance Guaranty Association, are also subsidized with consumer assessments, Citizens' assessments are given more emphasis because recent legislative and regulatory changes make potential policyholder assessments more likely and more substantial. Conversely, these same changes that impact Citizens' policyholders negatively reduce both the likelihood and amount of any assessment for consumers who purchase their insurance in the standard market. The purpose of this paper is to bring that difference to light so that consumers can make a fully informed choice before purchasing a policy from Citizens.

Citizens' Background

Many states have established residual markets, which are government or quasi-governmental insurance facilities that provide coverage to individuals and businesses that cannot find it in the private market. These facilities can be for any type of risk or exposure. However, they are most commonly established to address needs in the automobile or high-risk property markets. Medical malpractice, flood, workers' compensation, and earthquakes are examples of the type of residual market coverage provided in Florida and other states. Residual markets can be referred to as FAIR plans, windstorm pools, joint underwriting associations, or even have names styled after private carriers, such as Citizens.

Florida established the Florida Windstorm Underwriting Association in 1970 to cover the wind-only risks in Monroe County and the Florida Keys. Over time, the FWUA was expanded to include all or parts of 29 of Florida's 35 coastal counties. The tri-county area was expanded to cover Dade, Broward, and Palm Beach counties in the wake of Hurricane Andrew in 1992.

Like many residual markets, whenever losses exceed funds creating a deficit, the FWUA would assess insurance companies, who in turn recouped the assessments from their policyholders. As a result, many policyholders paying for wind pool deficits were not insured by the FWUA.

After Hurricane Andrew, there was a need to create another residual market for coastal wind exposures that would provide an all-perils policy. The Florida Residential Property Casualty Joint Underwriting Association was created in 1992 and was structured similarly to the FWUA. Deficits were paid off by levying assessments on insurance companies, who again pass them on to their policyholders. In 1995, the association absorbed another property residual market that insured commercial residential, condominiums, and apartment buildings.

In August 2002, the Florida legislature merged the FWUA with the FRPCJUA to create Citizens. Under the law, Citizens retained the right to levy regular assessments on insurers based on deficits in any one of its three accounts. It also maintained the existing authority so that the residual market could levy emergency assessments if the regular assessments failed to retire the deficit. Emergency assessments are used as a surcharge on policyholders and are used as collateral for loans in the form of bonds and other financing instruments to pay down the deficits. At the time, Citizens had to calculate each deficit separately and the assessments were levied per account. Those accounts are as follows:

High-Risk Account. It provides wind-only policies in limited coastal areas of the state formerly covered by the FWUA.

Personal Lines Account. It provides multi-peril policies throughout the state incorporating the policies formerly covered by the FRPCJUA.

Commercial Lines Account. This account includes commercial residential policies throughout the state including condominium and apartment building coverage.

Before looking at the 2004 and 2005 hurricane seasons, it helps to review the factors that caused or resulted in no assessments being levied by the FWUA and FRPCUA.

The FWUA did not provide coverage in Dade, Broward, and Palm Beach counties when Hurricane Andrews hit the state in 1992. Therefore, the association didn't incur a deficit that would have triggered an assessment. Afterwards, the association was expanded to include Dade and Broward counties east of I-95, and parts of Palm Beach, Pasco, and Hernando counties. Those areas make up Citizens' high-risk account.

The last FWUA assessment was for $100 million in 1998, due to losses sustained by a hurricane making landfall outside the tri-county area in southeast Florida.

There were no assessments needed by the FWUA, FRPCJUA after 1998, and until 2004, Citizens didn't incur a deficit.

Legislature and Assessment Changes

In 2004, four major hurricanes made landfall in Florida, resulting in more than 1.7 million claims spread out over the state's 67 counties. Citizens incurred a $516 million deficit, which meant, on average, that every non-Citizens' policyholder was levied a 6.8 percent assessment. The exact amount varied by company, and a few decided not to immediately assess their policyholders in the hopes that they could cover the assessment in future rate increases.

But in 2005, the attention turned to Hurricane Katrina and the damage it brought to New Orleans and neighboring Gulf Coast states. At the same time, however, another four hurricanes made landfall in Florida that year including Hurricane Wilma, which produced the third-highest losses in history. More importantly, Wilma hit southeast Florida where Citizens had significant exposure, causing deficits in all three accounts (including a $1.7 billion deficit in the high-risk account). At the end of the 16-month period, which included the parts of two hurricane seasons, Florida averaged one hurricane every 60 days. The legislature later appropriated $715 million to help pay down the deficits in Citizens' personal lines and commercial lines accounts, with the remaining monies being used to help lower the deficit in the high-risk account. The high-risk deficit resulted in Citizens levying a regular assessment of more than two percent and an emergency assessment of 1.4 percent that will be spread out over 10 years.

In 2006, the legislature made significant changes to the structure of Citizens' assessments. In particular, instead of only assessing those in the standard marketplace, then having to surcharge Citizens' rates to keep it non-competitive, lawmakers brought Citizens' policyholders into the overall assessment formula, which were divided into a homestead and non-homestead category. The former are those with a homestead exemption as defined for purposes of Citizens' assessments, and the latter included everybody else such as non-homestead residential policyholders and commercial policyholders.

Lawmakers established an assessment payment priority, with some groups of Citizens' policies having to pay assessments before others. For example, subject to a maximum of 10 percent of premiums, Citizens non-homestead policyholders are first in line to pay deficits in any of the insurer's three accounts. Then, every else in Citizens is required to help fund the deficits. Finally, if there is still a deficit in any account, a regular assessment is levied on all assessable policyholders, including those in the voluntary market and those Citizens policyholders in both the homestead and non-homestead categories.

In 2007, the legislature continued this assessment formula, clarifying that it applied to all deficits occurring in 2008. Lawmakers also sought to reduce the assessment that might ultimately accrue in the voluntary market by expanding the assessment base to include auto and other lines, with the exception of medical malpractice and workers' compensation policyholders.

Other Possible Assessments

The Cat Fund is a form of state-sponsored reinsurance in which all property insurers providing homeowners' coverage must participate. The Cat Fund's rates are substantially lower than the global reinsurance market. As a result, if the fund has a deficit, it has the authority to levy assessments that are passed onto policyholders, including those in Citizens. As a result of previous hurricanes, the Cat Fund is currently levying an emergency one percent assessment that started as of Jan. 1, 2007, which is being spread out over several years. The Cat Fund could also levy another emergency assessment if there are any major losses from hurricanes this year. The Cat Fund is permitted to levy emergency assessments up to six percent annually, but is subject to a 10-percent cap. In the event of a major storm, Citizens and policyholders in the private market would likely be assessed by the Cat Fund as well, putting an extra burden on Citizens.

The Florida Insurance Guaranty Association (FIGA) handles the claims of insolvent property and casualty insurance companies. While insurer insolvencies are not certain to occur in the event of a major hurricane, some companies could be at risk. In June 2006, FIGA certified that losses from the liquidation of the Poe Group of companies would exceed FIGA's balance by more than $200 million, making it the largest insolvency in Florida's history. FIGA requested a two-percent assessment to be levied on insurers, which is being passed on to all policyholders. After Vanguard Ins. Co., and Florida Select Ins. Co., went under, FIGA levied a special assessment to cover those losses. Policyholders are now paying four percent in FIGA assessments.

It must be stressed that this paper does not address the likelihood of deficits that may or may not occur. Nor does it attempt to predict the size of such a deficit. It only describes the results of a loss scenario that could generate assessments in all three of Citizens' accounts that would be substantial enough to penetrate through to the voluntary market. Some of the 2007 legislative changes could reduce or increase the amount or likelihood of a deficit in any of Citizens' three accounts. This is especially true given lawmakers' decision to reduce Citizens' rates and implement a rate freeze. As a result, all Citizens' policyholders must be aware of two points.

First, if there is a deficit in any of Citizens' accounts, the company's policyholders will pay substantially more in assessments that those insured in the voluntary market. Second, since the assessment base was expanded to include other lines of insurance, including auto and excess surplus lines, any potential assessments would pale compared to those levied against a Citizens' policyholder.