Even though the chairman of Citizens Property Insurance Corp. called it "fiscally irresponsible," the state's largest property insurer is moving ahead with a controversial new rate structure for 2010.
Citizens' Board of Governors in July approved new premiums that will require a 10 percent hike in rates for many of the more than one million policyholders covered by Citizens. But it will also call for rate decreases of up to 10 percent for thousands of customers who live in areas where the carrier does not have as much risk.
The new rate structure, which must be officially approved by the Office of Insurance Regulation (OIR), is expected to generate about $140.8 million. Because it includes both increases and decreases, the actual overall increase will be 6.7 percent.
James Malone, the Naples businessman who heads Citizens' board, said that the state-created insurer had little choice but to offer decreases to some of its customers. That is because state regulators contended that Citizens must cut rates if computer hurricane models showed a decrease was justified. And unlike private carriers, Citizens is not allowed to legally challenge final decisions made by state regulators. "The OIR's view of this is fiscally irresponsible," said Malone. "It may be politically convenient or politically expedient…it's not the right thing for Citizens."
Citizens' rates have been frozen for three years. State lawmakers finally agreed to end the freeze after warnings from an advisory group and Citizens' officials that potential losses from a major storm could trigger a financial catastrophe for the state. By law, Citizens can recover losses by placing an assessment on most insurance policies in the state.
Last year, Citizens collected an estimated $2.1 billion in premiums and Chief Finance Officer Sharon Binnun said the company is in the "best shape ever" because of an overall $3.5 billion surplus.
Still, the company is not collecting anywhere close to actuarially sound rates. That would take an overall statewide rate increase of 47 percent. But the new law regarding Citizens capped any year-to-year rate increases at 10 percent for individual policyholders until the rates reach actuarial soundness. This was called a "glide path," which would allow the carrier to gradually raise its rates over the next several years.
Regulators and Citizens Disagree
But when Citizens ran computer models for the new rates, those models showed that some customers may already be paying too much. While virtually all customers in South Florida are in line for rate hikes, that was not the case for those living in places such as Sarasota, Duval and Escambia counties.
Citizens own staff recommended that the carrier lower rates for eligible customers up to 10 percent, but that was initially opposed by several members of the Citizens' board. They said it was wrong to lower rates at a time that Citizens' overall financial health remained in question.
"Our goal should be financial responsibility," said Tom Lynch, a member of the Citizens' board. "The Legislature wants us to achieve actuarial soundness, but not too drastic an impact. It didn't tell us to set up a downward glide path."
But state regulators offered a different analysis. While asserting that OIR was not "prejudging" the rate filing, a top lawyer for the office told Citizens' officials that any rates charged in excess of what computer models showed could be considered discriminatory and unfair. "Our legal opinion is that there is not a legal basis to not pass along decreases," said Steve Parton, general counsel for OIR.
Citizens' board members questioned this logic. Malone pointed out that if Citizens were confronted with a major storm it would have no alternative but to impose assessments on Citizens customers and potentially most other insurance customers in the state. "Any kind of significant storm would and could wipe out the reserves we have," said Malone. "….If we are so unfortunate to have a Cat 4 [hurricane] hit Southeast Florida, everybody in the world is going to be wondering why we didn't have the resources."
Not every Citizens' board member shared Malone's fears. Carlos Lacasa, a former Miami legislator who now sits on Citizens' board, said that Citizens may never get on firm financial footing and that it was reasonable to permit some customers to receive a decrease. He noted that allowing a 10 percent decrease would cost Citizens $29 million in premium. "It's not just a question of fairness. It's a question of community reasonableness and maintaining good will," said Lacasa.
But Barney Bishop, president and CEO of Associated Industries of Florida, said he was outraged by the new rates and that his group plans to ask OIR to reject the decreases. Bishop said even $29 million is money that Citizens could have had in the bank. "If there hadn't been artificial manipulation of the rates to begin with, we wouldn't have been in the situation we are in."
State Farm Impact
While Citizens moves ahead with its new rates, top officials with the carrier said they still do not have a clear idea of what impact the pullout of State Farm Florida will have on their operations. State Farm is the state's largest privately run property insurance company and second in size to Citizens.
State Farm had hinted it might change its January decision to leave the Florida market if Gov. Charlie Crist had signed into a law a bill that deregulated large well-capitalized carriers. But Crist, asserting the measure would lead to cherry-picking of customers, vetoed the measure. While there are rumblings that lawmakers could revisit the issue later this year, State Farm has stated publicly that it is moving ahead with plans to leave.
Florida Deputy Insurance Commissioner Belinda Miller said that the state continues to insist that Stte Farm cannot transfer its customers — especially its wind-only customers –into Citizens as part of an exit plan.
Citizens' CFO Binnun said one piece of good news is that State Farm currently only writes about 9,400 wind-only policies in the high risk areas covered by Citizens. Binnun said the risk "is not zero" but it is not "significant" given the overall size of the carrier.
However, one bit of fallout associated with State Farm's potential departure is that domestic carriers have stopped accepting policies from Citizens. Scott Wallace, president and CEO of Citizens, said domestic carriers may be "hoarding their capacity" in anticipation of taking over policies now held by State Farm.
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