Contracting Citizens

"I think given all the obstruction there is to taking policies out of Citizens, this is remarkable," said Florida Insurance Commissioner Kevin McCarty.

The advantages of a smaller Citizens are significant. Less exposure reduces the likelihood that Citizens would need to impose assessments on insurance policies in the event a large storm wipes out its claims-paying capacity. It also reduces the need for reimbursement from the Florida Hurricane Catastrophe Fund, the main reinsurance fund utilized by Citizens.

The question is whether or not Citizens can continue to shrink in size in the months to come amid ongoing speculation over what direction the Florida Legislature will push the publicly created insurer. A state-mandated rate freeze is currently scheduled to expire in January 2010 unless lawmakers intervene once again. Citizens officials are already working on a new actuarially sound rate structure that will be submitted to the OIR by next summer.

Meanwhile, a new task force that is reviewing the mission and performance of Citizens is expected to make recommendations to lawmakers by the end of the year on what to do, while others, such as McCarty, have their own ideas on what should be done to reduce the number of policies maintained by the non-profit company.

Carrier Has Swung Up and Down

Scott Johnson, executive vice president of the Florida Association of Insurance Agents, warned the task force in November that previous incarnations of Citizens also went through "massive depopulation" of its policyholder numbers, but it was a temporary trend. Even Citizens officials concede that the company remains the primary carrier for many older homes along Florida's coast.

Johnson's organization recommended that the task force consider ideas that would once again raise Citizens' rates above those offered in the private market — the way it was before the Legislature altered Citizens in January 2007. Another idea is to turn Citizens into a backstop or a short-term measure for many homeowners.

Johnson also floated the concept that Citizens' wind policies be sold as part of a complete insurance package to homeowners and not "from a government storefront," so it was invisible to consumers.

State regulators have their own views about what additional steps should be taken in the near future. Belinda Miller, OIR deputy commissioner, said the state is concerned that some private carriers are offering discounts in one line of business, such as auto, if a customer agrees to purchase a homeowners' policy in Citizens.

In other words, the private carrier is giving a financial reward in order to steer consumers into the government-created program.

"That behavior is increasing the risk," said Miller.

McCarty also said he remains concerned that most of the remaining policies in Citizens are in the high-risk areas, leaving the carrier potentially "too overexposed" in the event of a major storm. More than 381,000 policies retained by Citizens are wind-only policies for high-risk areas such as barrier islands, homes east of Interstate 95 in South Florida, and most coastal regions.

McCarty said that the time may have come to bar companies from being allowed to write multi-peril policies for homeowners along the coast while leaving the wind-only coverage to Citizens. "They are cherry picking the risk," said McCarty.

Perception Could Fuel Consumer Choice

Some view the reduction of the number of Citizens policies as vindication for such incentives as the $250 million that Florida lawmakers set aside back in 2006 for loans to insurers. Two of the insurers approved for the latest take-out — American Integrity Insurance of Florida and Florida Peninsula Insurance Company — each received loans under the program.

But some controversy has arisen over the handful of private companies that are accepting these former Citizens policies, including whether or not they have enough capital in the event of massive claim payouts.

The OIR, however, contends that it has vetted the companies before letting them take the policies. Ed Domansky, a spokesman for OIR, said that the state reviewed the financial status of each company approved as well as the qualifications of the management team and the structure the company has put in place.

"It's a very comprehensive review that has been undertaken," said Domansky.

Domansky added that while OIR does not look at the underwriting status of each and every policy assumed, the state does study the take-out plan to make sure that the private company is not overexposed in one area.

Under current law, each Citizens consumer has the right to refuse the offer from the private company offering to take over the policy. Some have suggested that consumers may have a perception that they should stay in Citizens because ultimately the claim will be backed by the state.

Locke Burt, a former state senator and president of Royal Palm Insurance who sits on the task force, says there's a way to counter that perception. Burt said that the Legislature should repeal a law that currently prohibits agents from telling Floridians that claims up to $500,000 will be paid by the Florida Insurance Guaranty Association in case a company is declared insolvent.

"Consumers want information," Burt said. "What's wrong with telling them that if a hurricane hits, their claim will be paid? We ought to be allowed to tell folks what the law is. It's for their benefit."

New Limits Will Also Cut Policies

While thousands of policyholders have switched out of Citizens to other carriers, the insurer may remove several thousand additional policies before next hurricane season, thanks to changes in state law that take effect on January 1.

Citizens will no longer be able to issue or renew policies that cover any home that has a replacement value (not market value) of $2 million or more. The new prohibition kicks in for new policies at the start of the year, while existing policyholders will be given a notice 180 days in advance.

Those existing policyholders may be able to stay in Citizens for another three years if they provide a sworn affidavit from one or more insurance agents stating they have attempted to find a replacement carrier but were turned down by one insurance carrier and three surplus lines carriers.

Citizens has identified nearly 1,300 homes that fall under the new restriction, all of them located in the high-risk areas or coastal regions.

Another change could impact as many as 8,000 Citizens policyholders across the state: A requirement that homes valued at $750,000 or more must have storm shutters and opening protections in order to keep from having their policies dropped.

The new statutory requirement applies to any home located in the wind-borne debris region as defined by the Florida Building Code, an area that covers the entire coastline and all of Broward, Miami-Dade and Monroe counties.