The Actuarial and Underwriting Committee of Florida’s Citizens Property Insurance Corp. is planning a July 16 “workshop” to discuss a plan to begin assessing full, actuarially indicated rates for new customers, before deciding whether to recommend the plan to Citizens’ full Board of Directors at its July 27 meeting.
That decision was made at the committee’s May 17 meeting, much of which was devoted to responding to recent hyperventilating rhetoric from certain Florida lawmakers and media outlets regarding the impact of the plan.
Citizens’ problems date back at least to 2007, when the Legislature forced the former “insurer of last resort” to roll back and freeze its rates across the board. As the state-run insurer’s rolls swelled to unsustainable numbers (at 1.4 million policies, it is now Florida’s largest property insurer), the Legislature in 2010 finally decided to undo some of the damage it had caused, allowing Citizens to pursue a “glide path” toward shedding policies by permitting it to increase rates by up to 10% annually.
But that change hasn’t quite had the desired impact, and Citizens continues to see its policy count rise today. Moreover, as reported by Citizens board member John Wortman at the full board’s last meeting, Citizens’ personal lines and commercial residential rates are currently 42.3% short of the levels actuaries would consider adequate, while commercial nonresidential rates are 75% below the actuarially indicated levels.
Thus, the board has been exploring an area where the 2010 legislation has always been somewhat murky. While the law certainly does bar Citizens from raising rates by more than 10% for any given policy, it’s never been clear whether (and how) that restriction could be applied to new policies. After all, a new policyholder, by definition, can’t experience a rate “increase.” When he or she applies for a Citizens policy, they are assigned an entirely new rate altogether.
This is not just a matter of semantic trickery. Citizens is bound by law, not to mention by sound insurance practices, to charge rates that are actuarially sufficient. To do otherwise is to risk insolvency. Obviously, Citizens can’t charge actuarially indicated rates if it is explicitly barred by law or regulation from doing so. But if it is not, then not only CAN it do so – it must.
Of course, there already has been the inevitable blowback to the rate hike plan, led by state Sen. Mike Fasano, R-New Port Richey, and to a lesser extent, even Chief Financial Officer Jeff Atwater. Most recently, state House Majority Leader Carlos Lopez-Cantera, R-Miami, wrote to Citizens President Tom Grady that the plan “would be a blatant circumvention of state law and not in the best interest of the state of Florida and its residents.”
But leaving aside the obvious point that it is not in anyone’s interest, least of all Citizens policyholders and Florida taxpayers, for the state’s largest property insurer to be charging unsustainably low rates that could drive it to insolvency, what actually would be the impact of the committee’s plan?
Based on estimates that use last year’s actuarial assessments (the figures for 2012 will not be complete until early July) as a gauge for the plan, current overall rates for new policies are roughly 30% below actuarially indicated levels. In coastal regions, where Citizens currently has $822 million of premium in-force, the difference between the capped and actuarially indicated rates is about 54.5%. In non-coastal regions, where the company has $939.5 million of premium in-force, the difference is 18.9%.
All told, should Citizens continue to attract the same number of new policies, the higher rates would mean a revenue increase of about $32.2 million on coastal policies and $66.9 million on non-coastal policies, or about $100 million combined in new annual premium revenues.
Except, of course, that the insurer would NOT continue to attract the same number of new policies. If new policyholders had to pay the full actuarial cost of the risks they are transferring to Citizens, many of them would instead opt for private coverage, either from an admitted homeowners insurer or from a surplus lines carrier. Indeed, that’s precisely the point. As currently structured, Citizens is, in effect, engaged in predatory pricing, charging rates so perilously low that if they were charged by a private insurer, one without the power to lay taxes on the rest of the market, they could not possibly hope to cover their obligations.
Existing Citizens’ policyholders have come to rely on those suppressed rates, and thus, it is understandable to want to ease their transition to the higher rates that, nonetheless, it is imperative they eventually be made to pay. But there is no possible justification for extending that treatment to NEW policies, as well.
Over the next couple months, expect to hear a lot of debate about “legislative intent” by lawmakers who take credit for crafting the 2010 glide path bill. Though it has punted on its responsibilities on numerous occasions, the Legislature has been quite clear that it would like to see the number of Citizens policies shrink. And that goal is just simply not attainable so long as the company continues to provide incentives for policyholders to choose the state-run insurer over private alternatives.