Florida's 2013 Regular Legislative Session convened on March 5, 2013, and is scheduled to adjourn on May 3, 2013. Although reform of Florida's property insurance market has not been politically popular in recent years, changes in the leadership of the state have made changes to Florida's Citizens Property Insurance Corporation ("Citizens") a possibility this year.
Just a few short years ago, Florida was under the leadership of Governor Charlie Crist, who presided over significant populist reforms of the property insurance market, including a freeze on the rates used by Florida's state-run insurer, from 2007-2009. The rate freeze made Citizens an attractive option for many Florida homeowners seeking rate relief. Some of these reforms, while popular with voters at the time, are now viewed as unsustainable over the long term.1 In contrast, Governor Rick Scott, who is a proponent of free markets and sensible regulation, has been publically critical of Citizens, most recently appointing an Inspector General to investigate allegations of wasteful spending by Citizens, and declaring his outrage at recent pay raises for Citizens executives.2
What has yet to be accomplished is finding a way to return Citizens to the role originally intended for it: to be the insurer of last resort for Florida homeowners. When Insurance Commissioner McCarty presented his proposals for reforms to Florida's property insurance market to the Senate Banking and Insurance Committee (the "Senate Committee") on January 16, 2013, in response to a Committee request for advice on how to return to a free market approach and reduce the overall exposure of Citizens, he stated (among other observations) that Citizens is too large and that its rates are lower than many private carriers, reducing competition among private carriers.3
This article discusses the different proposals under consideration by the Florida Legislature for reducing the size of Citizens.
II. Ways to Reduce Citizens' Size
As of January 31, 2013, Citizens had approximately 1.3 million policies in force, and $418,777,838,024.00 in total exposure.4 According to quarterly data released by the Florida Office of Insurance Regulation ("OIR"), Citizens was the largest writer of residential property insurance in the state as of September 30, 2012, with a market share of 23.7%.5 (The #2 writer in the state, Universal Property & Casualty Insurance Company, had a significantly lower market share of 9.1%.)6 In his January 16, 2013, remarks Commissioner McCarty indicated that Citizens writes 8,000 new policies each week.7 In view of these astonishing figures, it is little wonder that lawmakers are looking for ways to shrink Citizens. Most of the proposals under review with the Legislature concern either depopulation or rate reform. Each of these issues is discussed in turn below.
Commissioner McCarty has indicated that there has been an increase in interest in depopulating Citizens, due to new capital entering the marketplace and private carriers being able to get the rates they need to make depopulation feasible.8 He has also indicated that despite increasing interest in depopulating Citizens, and one of the largest depopulation years on record in 2012, only about 60% of the policies that were approved for removal were actually removed.9 The OIR approved the removal of up to 451,643 policies from Citizens in 2012, yet only 277,000 policies were actually removed.10 Accordingly, the question remains as to how to effectively implement a depopulation plan.
Last year, Citizens' new President, Barry Gilway, proposed a $350 million loan program to provide long-term, low-interest loans to insurers in the private market willing to take some of the riskier policies off of Citizens' books and keep them for at least 10 years.11 This proposal came under fire by various constituencies and was put on hold at the end of 2012.12 But, a draft bill that was reviewed by the Senate Committee on February 21, 2013, would allow Citizens to consider any prudent and non-discriminatory approaches to reducing policies including a surplus note program that would include participation by mutual companies.13
Another depopulation option proposed by Mr. Gilway is a "clearinghouse" to help ensure that property insurance policyholders have access to information about all the insurers for which they are eligible. Currently, with insurance agents usually appointed only by a handful of carriers, many Florida homeowners are choosing coverage from Citizens simply because they are unaware of other options. Mr. Gilway has indicated that the technology now exists to make this type of clearinghouse a viable solution for depopulating Citizens. He contemplates a brokerage mechanism that would allow for broader access to private insurers willing to quote coverage. The idea of a private market clearinghouse was met with approval by the Senate Committee on February 21, 2013.14 Some of the concepts reviewed by the Senate Committee in the draft Citizens bill were:
- A redefinition of Citizens' mission by statute to include the use of a clearinghouse, to ensure that Citizens coverage is only available to eligible participants.
- An enhanced application for coverage.
- Insurance agents submitting applications would retain control of the expirations.
- Clarification that a private company's offer of coverage within 15% of Citizens' rate would make both new and renewal policies ineligible for Citizens.15
B. Rate Reform
In addition to depopulation, the other main component of Citizens reform could be changes to its rates. There appears to be more tolerance for Citizens rate increases now than in past years. For example, some of the Citizens rate reform proposals that are currently under review by the Senate Committee include the following:
- Citizens' rates must be actuarially sound for new policies, and non-competitive with the private market. A non-competitive rate is defined as the highest rate among the top 20 writers.
- All new policies, and certain other policies, must be placed at the top 20 rate.
- The current "glide path" to actuarially-sound rates will apply by territory, not by individual policy.
- Permit Citizens to buy 3% private market reinsurance and reduce its assessments by 3% (1% per account).
- Rate relief for Citizens policyholders who can demonstrate financial need.16
C. Miscellaneous Citizens Reform Measures
The Senate Committee has also reviewed other, miscellaneous measures designed to reduce the exposure of Citizens.17 These ideas include:
- A reduction of Citizens' maximum policy limits, from $2 million to $600,000.
- A prohibition on new coastal policies unless the property is built to Monroe County building codes.
- Allowing Citizens to enter into risk-sharing agreements with private insurers, which would allow it to obtain reinsurance in the private market.18
- A prohibition on agent commissions for ineligible policies placed in Citizens after January 1, 2014.
- Disclosure of potential surcharges and assessments with each renewal notice that is sent by Citizens to its policyholders.
- A prohibition on Citizens issuing wind-only policies. This provision was voted to be taken out of the draft Citizens bill that was reviewed by the Senate Committee on February 21, 2013. According to a recent QUASR Report issued by the OIR, Citizens' market share of wind-only policies is 94% of all personal and commercial residential policies issued in Florida (as of June 30, 2012). We expect further review and discussion of this idea.
III. Open Issues for 2013
While reform of Citizens appears to be the top property insurance- related priority for the Florida Legislature for 2013, there are a few other areas that may be ripe for legislative reform as well. For example, a reduction of the exposure to Florida's state-run reinsurer, the Florida Hurricane Catastrophe Fund ("FHCF"), was a concept explored by the Senate Committee on February 21, 2013 but ultimately removed from the draft bill.19 The FHCF's current projected borrowing capacity is $7 Billion and its current estimated claims-paying capacity is $15.5 Billion.20 There has been significant discussion by the Senate Committee of reducing the top layer of the FHCF by $1 billion per year for three years and reducing the maximum percentage payout by 5% per year for three years.21 There has also been another proposal for creating a new facility within the State Board of Administration to help insurers identify global capital available for additional coverage options other than the FHCF.22 It remains to be seen whether these types of proposals will garner much support from legislators.
Additionally, there have been several proposals made for rate reform measures that would benefit Florida's private market carriers.23 It may be difficult for Florida's elected officials to reach a consensus on all of the proposed rate reform measures, but one thing appears certain: the rates charged by private market carriers are still very much tied to the rates charged by Citizens since insureds will have the Citizens option in many instances, at least for the immediate future.
Looming over all of the insurance reform proposals for 2013 is the question of whether Charlie Crist will return for another gubernatorial bid. Crist, who switched party affiliations from Republican to Democrat in 2012, has indicated that he may be a candidate for the position. This could make the subject of insurance reform a hot button political issue, as many elected officials may not want to implement any reforms that could be fodder for political campaigns in 2014.
Although the 2013 Florida Regular Legislative Session has begun, it is not scheduled to conclude until May 3, 2013. While there are several proposals regarding Citizens that are currently under review, the Legislature may pass Citizens legislation this year, or may defer Citizens reform for a later date.
1. For example, Citizens' rates are no longer frozen and are now on a "glide path" to actuarial soundness.
2. See, e.g., http://www.miamiherald.com/2013/02/16/3239074/amid-higher-premiums-citizens.html (Feb. 17, 2013) (last accessed Feb. 26, 2013) and http://www.sunshinestatenews.com/story/don-gaetz-calls-confirmation-hearing-citizens-property-president (Feb. 22, 2103) (last accessed Feb. 26, 2013). The pay raises were between 12-14% for Citizens' Chief Financial Officer,its Chief Insurance Officer, and its General Counsel, bringing their salaries to a range of $215,000-$255,000 per year. The press on Citizens has been so negative that its new President, Barry Gilway, has been called before the Florida Senate's Banking and Insurance Committee for a confirmation hearing. See id.
3. See http://www.floir.com/siteDocuments/KMSBIPres_1-2013.pdf (last accessed Feb. 26, 2013).
4. See https://www.citizensfla.com/about/corpfinancials.cfm (last accessed Feb. 26, 2013)
5. See http://www.floir.com/siteDocuments/QUASRngQuarterlyRpts/3Q2012/PIF.pdf (last accessed Feb. 27, 2013).
6. See id.
7. See supra note 2.
8. See id.
11. See, e.g.,http://www.insurancejournal.com/news/southeast/2012/10/12/266472.htm (Oct.12, 2012) (last accessed Feb. 26, 2013).
13. See Senate Committee materials published at http://www.flsenate.gov/PublishedContent/Committees/2012-2014/BI/MeetingRecords/MeetingPacket_2048.pdf (Feb. 21, 2103) (last accessed Feb. 26, 2103).
18. This provision is also in Senate Bill 724 filed by Senator Jeff Brandes on February 8, 2013. See http://www.saintpetersblog.com/brandes-files-bold-bill-to-reduce-exposure-of-citizens-insurance (last accessed Feb. 26, 2013).
19. See supra note 12.
20. See the Florida State Board of Administration's October 9, 2012 Claims-Paying Capacity Estimate Report, available at http://www.sbafla.com/fhcf/LinkClick.aspx?fileticket=R1r4R25KObg%3d&tabid=31 6&mid=998 (last accessed Feb. 26, 2013).
21. See supra note 12.
22. See id.