Officials of Florida’s policyholder-back insurer have decided not to pursue a plan to loan private insurers part of its surplus in exchange for removing policies citing the fact that as currently envisioned no insurers would step forward and participate in the program. The decision comes as officials urged caution that despite the large number of policies removed this year it remains to be seen how many policies will actually stay off the insurer’s policyholder rolls.
Citizens President Barry Gilway told members of the insurer’s depopulation committee that in theory the surplus note program would have a positive impact on the insurer’s exposure. However, he said, some of the program’s requirements had dampened insurers’ desire to participate in the program.
Specifically, Gilway pointed to a requirement that participating insurers must retain the policies for 10 years and for the first three years their rate increases would be capped at Citizens statutory annual cap of 10 percent.
Gilway said the 10 year take-out requirement seemed appropriate given the 20-year life of the surplus loan note. However, he said insurers were reluctant to take on the 10 year commitment while the financial consultant firm of Goldman Sachs said it could even put companies at financial risk.
As a result, he said, the program should be put on hiatus until sometime next year to give Citizens and its outside consultants more time to study the program.
“We have learned a lot,” said Gilway. “But I would not push for a resolution to move forward right now.”
Citizens officials did note that after two years during which private insurers only removed 100,000 policies, this year’s depopulation efforts has seen private insurers looking to remove over 229,000.
Citizens Chief Financial Officer Sharon Binnun said the depopulation figure greatly exceeded expectations. However, she said, it remains to be seen how many of those polices will actually be retained by takeout insurers.
“We can celebrate that the needle has moved,” Binnun said. “But we can’t declare victory until next summer and the hurricane season to see how many policies stay out.”
Binnun said a major factor in spurring the depopulation was a decision to eliminate a 16 percent ceding commission that was once retained by Citizens and is now paid to takeout companies. This year, that amount equaled some $300 million. But Binnun noted that depending on the actions of the takeout companies that is money not necessarily well spent.
“If those policies come back that is premium we just gave away,” said Binnun.
Florida Association of Insurance Agents President Jeff Grady said given the access to the ceding commission he is not surprised that private insurers are willing to step forward and remove policies.
However, he said, many policies will likely flow back into Citizens when they are renewed by the insurers at vastly higher rates or they are nonrenewed by insurers prior to hurricane season.
Grady said that process of policies flowing in and out of Citizens is leading to results that are less than optimal no matter how many policies private insurers indicate they will remove.
“This increases frictional costs to agents and Citizens, not to mention the confusion it causes for consumers,” said Grady.
Gilway agreed saying that while the insurer’s depopulation efforts have been more fruitful than in previous years in the final analysis the depopulation framework is not a successful model.
“In reality, the current depopulation effort is not working,” Gilway said. “We have depopulated 277,000 policies, but we have added 361,000 more policies this year.”
Gilway proposed creating a clearinghouse that would hopefully help divert the flow of new policies and renewal policies into Citizens.
Under the proposal, all Citizens applicants and renewal policies would be shopped with private insurers based on a set of underwriting and other requirements. If one or more private insurers are available, the system would generate the insurer’s underwriting criteria and a rate comparison with Citizens.
If the private insurers rates are less than 115 percent of Citizens rates the agent may place the business with the insurer or Citizens. However, that agent’s ability to place future policies in Citizens would be curbed. If the private insurer’s rates are greater than 115 percent of Citizens, the policyholder will have the option to go with the private carrier or Citizens.
One sticking point of the plan is how the process would affect captive agents and agents who have few private options. Some 28 percent of Citizens agents have less than three company appointments.
Gilway said in those cases Citizens would broker policies to other private insurers.
Board Chair Carlos Lacasa, however, questioned if Citizens had authority to get in the business of brokering policies. “We need to determine rapidly what statutory or regulatory requirements need to be put in place,” he said.
Gilway said that is one among many details that staff is working out and that he hopes to have the clearinghouse proposal ready for further discussion in January.