Appointed and elected officials, property owners, and insurance groups in Florida continue to take sides in the ever-widening sinkhole debate. Citizens Property Insurance Corp., the state-created insurer with almost 1.4 million policyholders, has proposed rate increases for sinkhole coverage that supporters say are necessary and opponents call grossly excessive.
By law, Citizens cannot raise its rates by more than 10 percent a year. However, legislators passed SB 408 during the 2011 session, which excludes sinkhole coverage from that cap.
Sen. Mike Fasano, R-New Port Richey, was a vocal opponent of SB 408. In addition to the language concerning sinkhole rate increases, the bill specifically defines "structural damage" in an attempt to narrow the definition of a sinkhole loss. Additionally, the bill requires a policyholder to pay 50 percent of sinkhole testing costs up to $2,500 if the policyholder requests testing after an insurer denies the sinkhole claim. Further, sinkhole claims must be filed within 2 years of the covered loss. Citizens has long struggled with inadequate rates overall, and supporters claim that SB 408 provides a means for its governing board to address at least one aspect of coverage.
Fasano remains irate and unmovable, and today announced a sign-waving protest campaign in front of the Pasco County Government Center. He is urging people to join him on August 16 from 4 to 6 p.m. to protest the proposed increases. Fasano also has asked Gov. Rick Scott and CFO Jeff Awater to oppose the rate hikes and called for statewide hearings on the matter.
Why the Increase?
The proliferation of sinkhole claims in recent years has been staggering. In 2009, Citizens collected $19 million in premium for the sinkhole activity peril and paid $84 million in losses. In 2010, Citizens received about $32 million in premiums for sinkhole coverage; ultimate losses and loss-related expenses totaled an estimated $245 million. Over the past nine years, Citizens has paid out $1 billion in sinkhole claims.
In an effort to right the ship, at the July 27 board of governors' meeting, members approved a rate hike for sinkhole coverage that will culminate in a statewide average rate increase of 429 percent. Homeowners living in sinkhole-prone areas such as Sen. Fasano's district in the Tampa Bay area could see increases of up to 2,000 percent, which has drawn the senator's attention.
The new rates must be approved by the Florida Office of Insurance Regulation (OIR), and were a topic of discussion at the Aug. 2 meeting of the Florida Cabinet. Lisa Miller of Lisa Miller & Associates attended the meeting. What follows are excerpts from her account of the exchange between CFO Jeff Atwater and Insurance Commissioner Kevin McCarty:
CFO Atwater: I understand the objective of the legislature [in SB 408] and they were really going after the claims. There are honest sinkhole claims and there are manufactured sinkhole claims. Capital has left us and clearly this is devastating. There are mortgage players who want sinkhole coverage. I don't know how many were taken by surprise [by the rate request]. You haven't seen the filing? and you have probably seen the legislation. Did the legislation offer Citizens any choice and can you offer us guidance as to the process you go thru? There will be market change because the legislation went after the fraud … the rate has to go into effect and at the moment when the cap comes off immediately, none of us saw the magnitude. Is there an option or do you have an option and do you believe these are sound actuarial rate filings?
Commissioner McCarty: I appreciate your prefacing that we have not seen in the filing. Their rate filing is predicated on past experience and they do not contemplate the anticipate costs savings generated by the legislation. The legislation struck a balance about the availability of coverage and the option to buy it. The senate report and the OIR report shows Citizens only collected a small premium in relation to the losses. Part of what we take into the account is what will happen in the future. You touched on some very important points; one is the forced repair. We have evidence that says that 72 percent of the money is not going to fix the home. The fraud in the system may be reduced and the frequency of claims and those need to be taken into consideration—this is to not diminish the fact that there won't be a significant rate increase for Citizens.
Atwater: Did Citizens have a choice to base the rate on past losses or future changes? By law, could they have had the choice to factor in the change.
McCarty: I believe that that was an option they could have exercised but the board has a fiduciary responsibility to factor in an actuarial rate as well. We will carefully study the rate filing. I think there is built into the statutory rate some discretion by Citizens and insurers.
Atwater: Is it common in your role for you to apply discretion that even if the filing had not offered the law change savings as an option?
McCarty: If the rate is supported by actuarial science and law then it is my obligation to approve it. I don't have the authority to limit a rate increase if it is supported by actuarial principles. I want to give credit to the legislature that tried to address the real need. One of the things we have to ferret out in this process is we must figure out what is the credit we give based on the relief SB 408 provides.
Atwater: The legislature had to boldly act by beating back the fraud and they did. All of us looking at this now have to look at those in the geography of sinkhole alley and will they benefit from the law in this ratemaking.
McCarty: Through the process of the rate filing the office will take into consideration the effects and impacts of the law. While the past experience is informing, rates are prospective and not retrospective.
As the uproar continues, Commissioner McCarty has tried to tamp down the rhetoric by repeatedly expressing his commitment to a balanced and deliberative approach to the rate request. While warning that an increase is inevitable, McCarty says he is prepared to phase in the hikes to soften the blow to homeowners.
Florida's new Insurance Consumer Advocate Robin Westcott also is in favor of incremental increases, and sent a letter to Citizens stating that view.
A New Board?
At an earlier board meeting on July 13, Chair Jim Malone dropped another bombshell when he suggested taking at least part of Citizens private. The idea quickly drew favorable responses from Gov. Scott and State Sen. Garrett Richter, R-Naples, the major architect of SB 408.
However, Citizens will have some new board members to debate the idea. Service terms for all eight members of Citizens' board of governors expired on August 1. Board members are appointed by the governor, the CFO, the Senate President, and the House Speaker. Each person appoints two board members, (one serves a 3-year term, the other a 2-year term). Thus far, Speaker Dean Cannon, R-Winter Park, has reappointed Carlos Lacasa for a 2-year term and appointed Christopher Gardner for a 3-year term; Senate President Mike Haridopolos, R-Melbourne, has reappointed Carol Everhart for a 2-year term and Tom Lynch for a 3-year term.
Gov. Scott and CFO Atwater have not announced their appointments.
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