The depopulation committee of Florida’s Citizens Property Insurance Corp. unveiled a plan yesterday designed to transfer about a third of the state-run insurer’s 1.4 million policies to private insurance companies over two years. The move comes a day after a report from Florida’s auditor general was released confirming that Citizens’ rates are too low to allow private insurers to compete.
The plan unveiled yesterday would allow a private insurer meeting certain qualifications to borrow up to $50 million out of Citizens’ surplus in exchange for assuming a certain amount of policies for at least 10 years. Citizens would cap the total amount it lends out under this program to $300 million. The loans would serve as an incentive for private companies to take on the additional risk and would be repaid to Citizens over 20 years. Because the policies to be taken out of Citizens would continue to be subject to the 10% cap on rate increases, the loans would also serve to protect the private insurers covering the underpriced policies in case of a bad hurricane season.
The loan amounts depend on the number of policies taken out and the amount of risk being assumed by the private insurance companies. If successful, it is forecast to reduce potential assessments charged to policyholders by $1.2 billion after a major, one-in-100-year storm.
Some lawmakers have already expressed opposition to the plan, mainly because it takes money out of Citizens’ surplus and transfers it to private insurers.
However, of all the depopulation proposals to date, this is arguably one that deserves serious consideration. Unlike previous plans, this one has strict eligibility requirements and other safeguards in place that appear to significantly reduce the likelihood that private insurance carriers participating in the program will go insolvent and place all those policies right back into Citizens, as was the case with Poe Financial Group a few years ago.
Still, neither this nor any other proposed depopulation plan addresses the root cause of the problem—the issue of rate inadequacy. As long as Citizens charges rates far below those of the private market, it will always have an unfair competitive advantage that consumers will be attracted to.
Can the current proposal successfully depopulate a significant portion of Citizens? Quite possibly. But those policies will still be subject to the rate caps that created this whole mess, and once Citizens reaches its $300 million loan limit, there will be no more money to entice private insurers to take on any more capped rate policies. So even if this plan is a success and Citizens sheds a third of its policies, it will still remain the cheapest insurer in town, and new policies will continue flocking to it.
That is why this plan must be viewed as a first step. Ultimately, the only way to effectively and permanently depopulate Citizens is organically through market-based rate competition and stronger eligibility requirements so that it is no longer a de facto price control mechanism on the state’s property insurance market.