A rate hike for Florida's largest property insurance carrier is expected to take effect early next year, but there is already talk that this anticipated rate hike may be insufficient to keep Citizens Property Insurance Corp. afloat in the wake of a big storm.
Florida lawmakers this year ended a three-year freeze on rates. But in an effort to blunt the impact to customers, they agreed to put an overall 10-percent cap on any annual increases to create a "glide path" that would stretch out hikes over several years.
That statewide cap, however, has translated into widely varying rates by region, and now some legislators are worried that the bottom line increase will not do enough to bolster the finances of Citizens.
One influential state senator, Sen. Garrett Richter (R-Naples), said in October that legislators may need to spend time in the spring 2010 session deciding whether or not the glide path passed just months ago actually makes sense.
"I continue to have concerns about the length of time in years that it will take us to be actuarially sound, to have actuarially sound rates," said Richter, who is the chairman of the Senate Banking and Insurance Committee. "From all indications, we have rates out there that are still 40 to 60 percent unsound. We need to spend some time looking at the glide path and seeing whether we need to steepen that glide path.
"We need to try to get a full understanding of where this glide path is going," added Richter. "What is the forecast, and is that going to get us on solid, solid ground?"
Citizens' Officials Grilled
Richter made his comments following a contentious Senate hearing where he and other top lawmakers grilled Florida Insurance Commissioner Kevin McCarty and officials from Citizens.
Legislators remained troubled that Citizens — with more than 1 million policyholders and an estimated 22 percent share of the residential market — may have problems paying off claims in the event of a big hurricane, or a 1-in-100-year storm.
Such a storm could hit Citizens with more than $22.5 billion in claims. Current estimates show that Citizens would wind up being about $9 billion short to cover the damages, triggering assessments on insurance policies statewide to make up the difference.
Susanne Murphy, executive vice president of corporate operations for Citizens, pointed out to lawmakers during the hearing that Citizens is on better financial footing than it has been in the past. Citizens is expected to have a $3.9 billion surplus by the end of 2009 and it has another $9.4 billion worth of reinsurance it purchased from the Florida Hurricane Catastrophe Fund.
Murphy said it was "her belief" that Citizens had enough credit and liquidity "to honor all of our obligations." She said the power to impose assessments to collect money in the event of losses means that Citizens will not go insolvent in the wake of a large storm.
But some legislators remained skeptical of Citizens' overall viability. Sen. J.D. Alexander (R-Lake Wales), and the Senate budget chairman, went back and forth with Murphy at the hearing on whether or not Citizens would be able to pay off its claims in a timely fashion. Alexander said he did not disagree that eventually Citizens would get the money it needs to pay off claims. But he said the problem is that some Floridians could be waiting for months before they would be able to collect anything for their losses. Alexander said there is no guarantee that Citizens will be able to recover its full amount of reinsurance since the Cat Fund is also overextended and could have problems raising large amounts of capital.
"I don't see how you will write a check within a six-month period," Alexander told Murphy.
Part of the imbalance confronting Citizens is a function of its size and rate structure. Citizens is required by law to charge actuarially sound rates. But a public outcry over higher insurance rates prompted state legislators in 2007 to freeze rates as part of a controversial fix to the state's property insurance market at the time.
Legislators retreated from that position this past spring and gave Citizens the ability to raise rates beginning in 2010. The rate hike, which is still awaiting formal approval by the state Office of Insurance Regulation, is expected to generate $140.8 million or about a 6.7 percent increase overall.
Some legislators initially backed even higher rate hikes for Citizens, but after Gov. Charlie Crist signaled that he would be unwilling to go along, they came up with the 10-percent cap. Any push to increase rate hikes above the current cap in 2010 could wind up getting caught up in election year politics since Crist, as well as Senate President Jeff Atwater (R-North Palm Beach), will be on the statewide ballot.
Rep. Pat Patterson (R-DeLand), and chairman of the House Insurance, Business and Financial Affairs Committee, joked that Atwater was probably "clutching his chest" after hearing that some senators were in favor of boosting the hikes charged by Citizens. Patterson, who is running against Atwater in the GOP primary for Chief Financial Officer, added, however, that there has been little discussion so far in the House about revisiting the rate hikes.
Condominium Rates Increasing
One set of Citizens' rates unaffected by political considerations is going up now.
Citizens announced this fall that it is moving ahead with substantial rate hikes for commercial residential buildings that have a replacement value in excess of $10 million.
These so-called A-rated risks, which consist largely of condominiums, are not subject to traditional rate review or approval by state regulators. Citizens has decided to increase the rates by about 20 percent on average starting on Nov. 1, 2009, for new business and on Jan. 1, 2010, for renewal policies. The rate hikes apply to both commercial residential wind-only policies as well as multi-peril policies.
The rate hike came in the wake of the actuarial review that Citizens did for all of its rates and marks the first time in several years that Citizens has adjusted them.
While these policies account for just 1.7 percent of the commercial residential buildings covered by Citizens, they represent a significant amount of exposure for the carrier. An analysis prepared by Citizens shows that these 1,362 policies covering more than 1,600 buildings account for $41.1 billion of exposure. That is more than 31 percent of the exposure that Citizens has in its commercial residential coverage.
Most of that exposure — not surprisingly — is in South Florida. The analysis shows that $24.7 billion of the total amount of exposure is located in Miami-Dade, Broward, and Palm Beach counties. Citizens also has substantial exposure with condominiums in Pinellas, Sarasota, and Collier counties on the state's west coast.
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