A letter arrives to say that a private company has taken over your homeowners policy from Citizens Property Insurance Corp. There isn’t much explanation, but the first-year rate quote isn’t awful. The next year, though, the policy goes up 40 percent. That summer, a storm does serious damage to your house. The company that said it would cover you goes under, and there’s no money to pay your claim.

Such a scenario is possible if the Florida Senate goes along with the House in letting “surplus lines” companies assume policies from Citizens, the state-run insurer. Unlike “admitted” companies, surplus lines companies’ rates are not regulated in Florida. Companies can charge whatever they want without approval from the Office of Insurance Regulation. They are not part of the Florida Insurance Guaranty Association, the fund to pay claims from bankrupt companies.

Admittedly, there’s a problem when the state-run insurer of last resort has more policies (1.4 million) than any other company. In its push to shrink Citizens at any cost, however, the House set up hundreds of thousands of consumers for sticker shock and worse.

Traditionally, surplus lines companies have covered high-end, highest-risk properties for whose owners money is no object. Indeed, the Insurance Information Institute’s 2012 handbook says, “The surplus lines market exists to assume risks that licensed companies decline to insure or will only insure at a very high price, with many exclusions or with a very high deductible.” This market is for the oceanfront mansion owner, not the inland three-bedroom two-bath owner. Citizens itself just correctly reduced to $1 million from $2 million the maximum replacement value that can be included in a hurricane policy.

Under HB 245, Citizens policyholders who received offers from surplus lines companies would have to take action to stay with Citizens. Instead, they should have to take action to switch companies, which would more likely prompt a call to their agent with questions. This legislation would enable companies to trick policyholders into thinking that they have no other option. Homeowners now can choose Citizens if the cheapest private policy costs 15 percent more.

During his November meeting with The Palm Beach Post Editorial Board and regularly thereafter, Gov. Scott has spoken of the need to reduce the cost of living in Florida. If the Legislature allows surplus lines insurers to start picking up Citizens policies, it surely will raise the cost of living – dramatically, in some cases – and hurt the recovery of the real estate market. And as former state insurance consumer advocate Sean Shaw points out, what happens with Citizens tends to happen with private carriers. If legislators believe that unregulated property insurance rates will help Florida, they’re dreaming.

- Randy Schultz,

for The Palm Beach Post Editorial Board

By Zac Anderson Saturday, February 11, 2012

TALLAHASSEE

It’s almost heresy in the Capitol, but one conclusion leaps out in the debate surrounding Citizens Property Insurance Corp. in certain committee rooms this year: Florida’s much maligned state-run insurer is in solid financial shape.

The idea runs counter to everything lawmakers and insurance lobbyists have been saying in recent years as they seek to dismantle the government insurance giant. It is being repeated in subtle, sometimes grudging, but unmistakable ways as lawmakers consider ditching one of the assessments Citizens can levy on private insurance policies after a major hurricane.

Insurance companies badly want the assessment gone, so lobbyists who normally denounce Citizens as financially unsound are highlighting the company’s $6 billion reserve, sterling credit rating and enviable borrowing ability to argue that the post-disaster income stream is no longer needed.

Florida’s largest insurer — with 1.5 million policies — is so healthy, they note, it could easily pay the $7.3 billion in claims from a repeat of the record-setting 2004-05 hurricane seasons. Citizens could even survive another Hurricane Andrew — the monster storm that hit South Florida in 1992 and sent the state’s insurance market into a 20-year tailspin — with relative ease, according to fliers being passed out by one insurance company executive at committee hearings.

The optimistic reviews of Citizens’ finances by some lawmakers and insurance lobbyists contrasts sharply with dire warnings they and Gov. Rick Scott have repeatedly issued in recent months.

Indeed, the idea that Citizens is a grave financial risk is being used to justify controversial efforts to push policies out of the state-run company and into the private market. One of those measures is included in a bill that has already passed the House. It would dump thousands of Citizens policyholders into unregulated “surplus” insurance lines, with companies that can raise rates without state interference.

Scott has made reducing the number of policies held by Citizens a priority. Over the last few months, the insurer has eliminated coverage on structures such as screened porches, pool cages and carports. Company officials also have moved to cap coverage on expensive homes and condos near the coast.

Read more on Florida’s property insurance industry

Lawmakers have justified those moves by saying the company has too much liability and could levy assessments on every insurance policy in Florida to help cover claims if a major disaster strikes.

“The very real possibility that Citizens could face billions of dollars in losses and does not have the money to pay for its claims, in my opinion, is the greatest financial threat facing our state’s economy and already overburdened taxpayers,” Sen. J.D. Alexander, R-Lake Wales, wrote in a newspaper opinion column last year.

But the change in tone on the Citizens assessment bill is so pronounced that some longtime Citizens defenders point to it as proof that breathless warnings about the company’s finances have long been exaggerated.

“The bottom line is the scare tactics that some of my colleagues use, that the governor uses and his administration, their scare tactics are not needed,” said Sen. Mike Fasano, R-New Port Richey.

February 12, 2012

Private companies offer coverage, but state-run insurer’s rates tough to beat

Florida’s largest insurer faces a big risk from hurricane damage and is trying to reduce it by shifting customers to other carriers. But policyholders must do some homework before accepting a transfer, consumer advocates say.

If they decide in favor, they will help shrink state-sponsored Citizens, which has 1.5 million policies and more than $500 billion. The transfers are part of a program approved by the Legislature to reduce the need for post-storm charges if Citizens runs out of money.

Everyone in the state may be charged up to 6 percent of his annual premium if Citizens lacks money to pay claims after a storm. But Citizens policyholders would pay first and could pay the most — up to 45 percent of their premiums.

A few thousand offers are sent to Citizens customers by private insurers every other month. Homeowners who accept the offer sometimes pay higher rates. But if they stay with Citizens, they face the possibility of a steep assessment.

That’s ultimately what persuaded Ray Oneidas, 85, of Tamarac, to leave Citizens recently. Oneidas, who owns a two-bedroom house, said his Citizens premium is $1,800 and he’ll have to pay only $100 more a year for the same coverage with Florida Peninsula Insurance Co. of Boca Raton.

“I decided to get away from Citizens,” he said. “I don’t want to be liable for any deficits.”

In general, a private insurer provides “more robust coverage” with a lower risk of assessments from Citizens, said Roger Desjadon, president of Florida Peninsula.

Sean Shaw, founder of Policyholders of Florida, which calls itself a pro-consumer group, agrees that it’s best to have coverage from a private insurer because Citizens needs to be smaller. In the past, though, he said homeowners who switched complained about rate increases after the first year, when their policies were renewed.

Citizens has 212,621 policies in Broward County and 145,291 in Palm Beach County.

Rick Bogani, head of Connect-Bogani Insurance in Royal Palm Beach, said most homeowners go years without thinking about property insurance because their payments are made from escrow accounts. Homeowners who receive offers should shop for coverage — and not necessarily accept a policy from the company that sent the letter.

The state’s free referral service, the Florida Market Assistance Program, matches customers who can’t find property insurance with licensed agents and insurers selling new policies. Register for the program at fmap.org or call 800-524-9023 for help.

In addition to closely checking rates, homeowners should make sure they aren’t switched to a private company automatically. A letter sent to Citizens policyholders by Florida Peninsula says they must specifically reject the offers or their policies will be switched automatically.

The state allows for that wording because it’s trying to encourage customers to leave Citizens, said Jack McDermott, spokesman for the Florida Office of Insurance Regulation.

Shaw said customers who do nothing shouldn’t face losing their Citizens coverage. “You don’t want people to get [moved] into another insurance company just because they didn’t respond,” he said.

Catastrophe losses in 2011 led to the U.S. property and casualty industry’s largest underwriting loss since 2002, and while 2012 should see a “modest improvement” in pricing, a true hard market is likely “at least a year or two away,” according to A.M. Best.

In a special report on theU.S.property and casualty industry’s 2011 results, Best says $44.1 billion in catastrophe losses for the year helped drive net income down 49.2 percent to $21.9 billion. In 2010, industry net income was $43.1 billion and catastrophe losses totaled $19.6 billion.

Underwriting losses are expected to total approximately $33.9 billion for 2011, the second consecutive year of underwriting losses and the third-larges annual underwriting loss ever behind 2001 ($56.4 billion) and 2002 ($34.3 billion).

The industry’s combined ratio climbed 6.5 points to 107.5 for 2011. Catastrophe-related losses accounted for 10.1 points, compared to 4.6 points in 2010. Reserve releases shaved 2.7 points off of the 2011 combined ratio, down from three points from reserve releases in 2010.

Best says it expects the impact of reserve releases to decline going forward. “While there are select lines where reserving strength remains, A.M. Best continues to believe the overall industry’s previous reserve cushion is largely exhausted because of sizable reserve releases over the past six calendar years.”

The ratings agency adds, “With overall industry reserve redundancies expected to continue through 2012, albeit to a lesser extent, the overall reserve deficiency will continue to increase, and core, undiscounted reserves will remain inadequate.”

Despite the challenges in 2011, the industry’s policyholders’ surplus declined only 1.4 percent to $562.7 billion, Best says. In 2010, policyholders’ surplus stood at a record $570.4 billion.

Additionally, the industry saw net premiums written increase 3.5 percent to $442 billion.

Best says, “While the overall U.S. P&C industry demonstrated its resiliency yet again in 2011 and remains well capitalized, the year’s results—and expectations for 2012—will vary by segment.”

Best says pricing continues to improve in personal lines and in catastrophe-exposed property accounts, but some commercial lines are still “fundamentally underpriced, and the segment continues to be negatively impacted by weak macroeconomic conditions and decreasing reserve adequacy levels.”

The outlook for commercial lines remains negative as a result, Best says, while personal lines andU.S.reinsurance are stable.

Looking ahead to 2012, Best says it believes a traditional hard market is still a year or two away, although, industry operating performance is expected to improve in 2012. Best says insurers “still face a challenging environment, with relatively weak underwriting results and lackluster investment returns expected to influence operating results over the next year.”

Supporters of the bill say it will make the Florida property insurance market more attractive to out-of-state capital and reduce the short-term exposure of the private market. But another bill, HB 833– designed to reduce back-door assessments on policyholders by reducing the amount of reinsurance backed by the state, is drawing complaints from Citizens and private insurers.

They contend that because the bill shrinks the size of the Florida Hurricane Catastrophe Fund, or Cat Fund, and increases the amount of co-pays for private insurers, it will force them to raise their premiums. That means Citizens, whose rate increases are capped at 10 percent annually, would be more attractive to consumers, the exact opposite of the intent of Gov. Rick Scott and other elected officials seeking to bring more private insurance capital to Florida.

Both HB 1127 and HB 833 were discussed in a workshop meeting of the House Insurance and Banking Subcommittee last week. Whereas HB 1127 passed through the committee Tuesday with two negative votes, HB 833 did not come up for a vote.

Rep. Bill Hager, R-Boca Raton, who is sponsoring the bill, said he doesn’t agree with the contention of some private insurance companies that say Citizens must be reformed along with the Cat Fund, but is willing to make changes to the legislation. Regardless of any potential amendments, Hager said, the bill should move forward because the Cat Fund faces a potential $3.2 billion shortfall if a catastrophic storm hit the state.

“The Cat Fund bill can, in fact, move forward with or without changes to Citizens,” Hager said. “I think I’ll come forward with modifications of the bill. I may have something that deals with a piece of Citizens, but I think it’s wrong for us to wait, particularly with the start of hurricane season five months away.”

Citizens itself is also critical of HB 833. In a narrow vote last month, its Board of Governors voted to draft a letter noting its concern.

“We have concerns about enacting into law reductions to the size of the FHCF and the potential impact it could have on Citizens’ policy count as the result of reduced depopulation activity,” the letter reads in part.

Although there has been comparatively little talk in the Senate about the potential Cat Fund shortfall, Sen. JD Alexander, R-Lake Wales, sponsor of the companion SB 1372, said he won’t wait for other reforms to Citizens before moving forward.

“We’ve been talking about some possible changes to it to accommodate some of those concerns. My ultimate goal is to reduce the risk. Quite frankly, when you’re going in the wrong direction, any step in the right direction is helpful,” Alexander said.

Gray Rohrer, 01/24/2012 – 05:45 PM

January 5, 2012

Florida Citizens Property Insurance Corp. is considering the use of private reinsurance, and its risk-transfer plan this year could also include the issuance of its first catastrophe bond.

Spokeswoman Christine Ashburn says the board of the state-backed insurer—which has grown to become Florida’s largest insurer of property—has “supported a long-term buying approach—becoming a regular buyer” of private reinsurance, instead of relying solely on the Florida Hurricane Catastrophe Fund, which is in the midst of shrinking.

“Our strategy now includes becoming a consistent buyer,” Ashburn adds.

Additionally, those counted on to make financial decisions at Citizens are “assessing the opportunity to become involved” in issuing a catastrophe bond.

“From what I understand, for whatever reason, the numbers seem to be in a good place for this year,” Ashburn says.

Citizens hopes to move forward with a recommendation for its risk-transfer plan sometime in March or April, she adds.

Meant to be the state’s insurer-of-last-resort, Citizens has been, and will again find itself, in the spotlight asFlorida’s Legislative Session begins Jan. 10. The insurer has grown too large, and has maintained that status despite legislative efforts to reduce Citizens’ exposure to loss. The insurance industry and some lawmakers are again looking to find ways to shrink Citizens this year.

Prior legislation has given the go-ahead to gradually begin increasing rates after years of frozen rates, and steps were taken to make it more difficult for homeowners to get into, and stay in, Citizens.

Ashburn says Citizens has requested, and has been approved by state regulators, to take additional steps to reduce its size and exposure.

For instance, Citizens will begin to send nonrenewal notices on wind policies for homes valued more than $1 million. The home-value threshold was already lowered to the same level for personal property policies. In addition, the insurer will no longer writer builders-risk policies and made some changes to the deductibles associated with sinkhole endorsements on policies.

Ashburn says its leadership has recreated a depopulation committee, charged with finding ways to get primary insurers interested in taking policies from Citizens. Dozens of domestic insurers had formed to take policies several years ago but the pace has slowed.

“We are definitely taking a look at everything in order to try to make headway in reducing our size and [probable maximum loss],” Ashburn says.

Even what Citizens pays for legal costs has come under scrutiny. OneFloridalawmaker has suggested Citizens find ways to lower the more than $2.4 billion it spent the last five years in litigation before legislators look to allow Citizens to reduce coverage options and raise rates.

Litigation rates related to sinkhole claims are much higher than for other claims, Ashburn says. Because Citizens is a government entity with the ability to assess mostFloridapolicyholders, the insurer has the responsibility “to assure that the claim is resolved for the proper amount based on the coverage provided under the insurance policy,” Ashburn says.

“All but a small percentage of Citizens’ claims are paid without the need for litigation,” she adds. “For claims where disputes do arise, they are based on the specific facts of the individual case.”

Florida’s Citizens Pulls Back on Condominium Rate Hikes for Now

Florida condominium buildings that rent out 25 percent of their units will see no rate increase for now despite playing a key role in the state’s largest property insurer’s plan to reduce its policy count.

Since last month, Gov. Rick Scott, along with other state officials, has pressed the board of Citizens Property Insurance Corp. to find ways to shed its current 1.5 million policyholders. One proposal called for capping the available coverage for condominium buildings that rent 25 percent of their units through timesharing agreements or other arrangements at $1 million.

Citizens’ staff said the cap could have a significant impact on the insurer’s bottom line, which currently has more than $500 trillion in exposure.

Currently, the insurer writes 26,000 wind-only policies on condominium buildings, most of which are located along the state’s coast line. Those policies represent $100 billion in exposure, of which only 20 percent is covered because rates are inadequate. About $55 billion of the coverage is for building complexes worth more than $1million.

Citizens’ officials, however, warn that implementing such a cap could spell trouble down the road.

“I sense this is one of those kinds of issues where we could confront a backlash at all levels and we really have to thoroughly look at it,” said Citizens Board Chair Carlos Lacasa.

Citizens board member Carol Everhart, vice president of the Tampa, Fla-based BB&T bank, which insures condominium units, recused herself from the vote. She warned, however, that if the proposal was implemented, it would have serious consequences.

The premiums would rise for those owners by upward of 45 percent, said Everheart.

The condominium issue demonstrates the dilemma faced by policymakers trying to trim Citizens. The state needs the lower rental rates for apartments and condominiums along the state coastline to help prop-up a sagging economy that has been hardest hit by the construction and tourist industries.

On the other hand, if the state should suffer a major hurricane, it could wipe out the balance sheets of many insurers and leave Citizens as the one major player left in the market. This is why Scott and others are pressing now for changes to be made.

Citizens’ board member John Rollins said he understands the position of condominium owners, many of whom have lived in the state for years. Still, he said, something must be done and the 25 percent rule is the best offer currently on the table.

“Condominium complexes should not enjoy a major subsidy in rate level by sitting on the beach in the most risky areas of Florida and sitting in the assessment account, ultimately, of every Floridian,” said Rollins.

The board voted to table the issue until February 4 to gather more data. However, given that the legislature is half-way through its session, it will be a tough sell to lawmakers and consumers alike.

A.M. Best Company, Inc.

Citizens Property Insurance Corp. got one step closer to shrinking its size and cutting $1.5 billion from its exposure when its board of governors ordered its staff to implement reform initiatives on Dec. 14.

The board also signed off on a proposed legislative package that will help make it more financially stable.

Citizens is working to reduce its number of policies from 1.5 million to 800,000 and to once again becomeFlorida’s “insurer of last resort,” said Sam Miller, of the Florida Insurance Council.

The policy count of 800,000 was an estimate based on how many policies the private property insurance market might be willing to write and if Citizens were to become a true residual market, Sharon Binnun, chief financial officer of Citizens, told Best’s News Service in an email.

Reports have said the company plans to lower its risk by about 7%, but Binnun said there’s no specific percent reduction goal. “Instead, the goal is to move back to being a true residual market and only writing business that the private market will not write,” she said.

As a result, Citizens’ catastrophe risk would be lowered. The company currently has a total exposure of more than $500 billion, which represents total insured value. Its probable maximum loss, which projects losses under different hurricane scenarios for specific insurers, is an estimated $23 billion for one in 100, Binnun said.

Citizens had claims-paying resources of more than $16 billion for the 2011 hurricane season when combining surplus, risk transfer and pre-event liquidity, she said. If the company experienced a bigger loss than that, assessments would be needed to cure the deficit.

Citizens’ plan also includes five suggestions for legislative change, according to Binnun, which include:

– Increasing the current 10% rate glide path.

– Requiring Citizens’ rates to be noncompetitive.

– Allowing Citizens to pass through to policyholder rates the entire cost of risk transfer.

– Revising existing statutory eligibility requirements.

– Removing statutory barriers to depopulation.

In November, Gov. Rick Scott ordered Citizens’ board of governors to develop a plan no later than Dec. 6 to shrink its size and exposure. “We know we have a serious problem if a major storm hits our state,” he said at the time (Best’s News Service, Nov. 14, 2011).

Citizens was formed in 2002 by combining two residual-market associations and was supposed to be the insurer of last resort. However, in 2007 it was allowed — and encouraged — to compete in the private market, Miller said.

Today Citizens has grown to become the largest property writer in Florida and the 14th-largest homeowners multiperil writer in the United States (Best’s News Service, Nov. 14, 2011).

According to BestLink, Citizens had a total of $2.6 billion in direct premiums written in 2010, with $1.16 billion in direct premiums written for its homeowners line.

The goal is to dramatically lower Citizens’ policy count and exposure by June 2012 when hurricane season begins, Miller said. By that time, the hope is that the company will be on the road to becoming Florida’s insurer of last resort again.

The top five writers of homeowners multiperil in Florida in 2010, according to BestLink, were Citizens Property Insurance Corp., with 15.3% market share; State Farm Group, with 12.97%; Universal Insurance Holdings Group, with 7.98%; Tower Hill Group, with 4.74%, and USAA Group, with 4.64%.

(By Marie Suszynski )

A market turn may be in the offing as property/casualty insurers continue to deal with extensive catastrophe losses and disappointing investment returns, market observers say.

While reserve releases continue, they’re occurring at a slower pace. In addition, rising demand for commercial insurance is reflected in increased premium volume.

However, any turn is likely to be gradual and perhaps be more of stabilization than a true hard market, analysts say.

A survey of large commercial U.S. property/casualty insurers amply demonstrates the continued impact of catastrophe losses and poor investment returns during the first nine months of the year. Although net written premiums among the 10 largest U.S.-based or U.S.-listed commercial property/casualty insurers that report quarterly results were up 8.3% compared with the same period last year, the group’s collective net income fell by nearly half and its combined ratio deteriorated nearly seven percentage points to 102.6%.

“It’s been a difficult year,” said James Auden, an analyst with Fitch Ratings in Chicago. Few large insurers have an underwriting profit, and while specialty companies show an underwriting profit, they tend not to have significant property exposures, he said.

Catastrophe losses are “up considerably from last year,” with Hurricane Irene adding to third-quarter losses, he said. In addition, “pricing is inadequate broadly across commercial lines.”

“When we look at bottom-line performance, it’s very rare for a company to produce a double-digit (return on equity) this year,” Mr. Auden said. “The industry is not generating an adequate return on capital.”

“The first issue is the extent of catastrophic losses in a relatively mild hurricane quarter and less consistency. We’re seeing reserve releases dwindle as an earnings source,” said Meyer Shields, a director at Stifel Nicolaus & Co. in Baltimore.

“I do think we’ll see results continue to worsen, and some of it is from the ongoing deterioration we’re seeing in reserve releases. I think that will drive rates up, but I don’t think we’re at such a horrific state that we’ll see the kind of increases we saw after 9/11,” Mr. Shields said, referring to the market tightening after the 2001 terrorist attacks on New York’s World Trade Center and elsewhere.

A second issue that points to improvement in rates is a much worse outlook on investment income, Mr. Shields said. “Investment returns will remain low, which only leaves underwriting profit as a source of adequate return.”

Worldwide catastrophe losses— which Swiss Reinsurance Co. said amounted to $70 billion for the first half alone—and investment returns were big issues for the industry, said Mark Dwelle, an insurance analyst with RBC Capital Markets L.L.C., a unit of RBC Dominion Securities Inc. in Richmond, Va. Despite those factors, “results were generally pretty good in the context—we knew there were going to be catastrophe losses and they were generally well-telegraphed,” he said. “The optimism about the pricing environment had certainly increased, although there was only modest evidence of that in the actual results.”

“The question that most investors are asking at this stage is at what point rate increases will be sufficiently larger than loss-cost trends to produce improved margins,” said Mr. Dwelle.

Signs of stabilization

There are some signs “with regard to overall pricing that it might be stabilizing,” said Rich Attanasio, a vp with A.M. Best Co. Inc. in Oldwick, N.J. Like other analysts, he pointed out that weather in the United States has had a “pretty significant impact” on insurers. In fact, weather events are a major issue for insurers, given the number of significant events in the past couple of years, he said.

“The question is: Is this the new normal?” said Mr. Attanasio.

He noted that price increases have not occurred equally across the board. While prices hikes have tended to fall hardest on homeowners and small commercial accounts, larger commercial property accounts are “probably stabilizing,” said Mr. Attanasio.

Fitch’s Mr. Auden said that “one encouraging sign is, we continue to see premium growth in the sector and that’s a sign of better economy,” thus creating more demand for coverage.

With greater revenue growth and despite weaker results, companies were making more positive statements about insurance pricing, said Mr. Auden. “But we don’t know if that’s an enduring trend. And given where accident-year results are, you need more pricing increases. We see it being more price stability rather than a hard market.”

“We got a more positive read on what is happening with rates, which should not be confused with rate adequacy, and it should not even be confused with rate increases keeping up with loss-cost inflation,” said Stifel Nicolaus’ Mr. Shields.

“There doesn’t seem to any kind of a hard market in the historical sense—it’s more of a gradual process,” said Alan Murray, vp and senior credit officer at Moody’s Investors Service in New York. He called the situation a sort of “good news/bad news dynamic.”

Mr. Murray said the bad news is the stabilization has come after many years of pricing weakening on commercial lines. But “the flip side is that companies remain quite well-capitalized.” He said one of the classic drivers of a hard market is weak earnings, significant loses and weakened balance sheets.

“We have not seen that combination of pressures materialize for the industry,” said Mr. Murray, who added, though, that Moody’s moved the outlook for commercial insurers to stable from negative during the third quarter.

Mark Hoffman

Business Insurance News

November 20, 2011 – 6:00am