Florida’s insurance commissioner has proposed a set of reforms designed to return the state-back property insurer to being a residual market, while at the same time offering the private insurance market incentives to take on more property risks.
Insurance Commissioner Kevin McCarty unveiled his proposals as lawmakers, regulators, business groups and other stakeholders begin a process that they hope will shrink the size of Citizens Property Insurance Corp. with its 1.3 million customers.
At a recent Florida Senate and Banking Insurance Committee meeting, Chair David Simmons, R-Altamonte Springs, said he believes it is time to seriously change the dynamics in the market while at the same time acknowledging that the path ahead will not be easy.
“We don’t have a silver bullet solution, but we hope to have a group of solutions to address the total picture,” said Simmons.
McCarty’s recommendations to the committee came in the form of a proposal titled, “Principle-Based Reforms for Florida’s Property Insurance Market.”
At the center of McCarty’s reforms is a call to separate the conflicting roles that Citizens fulfills in the market.
“You cannot be an alternative market offering affordable insurance and at the same time be a market of last resort,” McCarty said.
One of McCarty’s proposals calls for Citizens’ coastal account to be carved out so it can function like a Beach Plan. It would have a rating schedule, whereby its rates would have to be higher than the average of those of the top 20 private insurers. The proposal also calls for technical managers to oversee the entity and use as advisors representatives of insurers that are actively writing in the state.
Both proposals would signal a return to previous public policy. Carving out the wind portion of Citizens and changing its oversight and rate baseline could result in an entity similar to the old Florida Windstorm Underwriting Association before it came part of Citizens.
McCarty also supported in theory two proposals that Citizens managers have considered. One calls for Citizens to enter into risk-sharing arrangements with the private market, which echoes the insurer’s now discarded surplus note program.
He also supports the concept of creating a clearinghouse so that applications for Citizens coverage could be shopped to private carriers before they would be eligible for coverage through the state-back insurer. If a homeowner received an offer of coverage within 15 percent of Citizens rates, that applicant would be ineligible for coverage from Citizens.
While presenting his plan as a way to shrink Citizens, McCarty said that the domestic market does offer a safe, financially stable alternative for Florida homeowners.
He said that in 1992 domestic insurers represented of just four percent of the state’s market. In roughly two decades, he said, the domestic insurers’ market share has grown to 49 percent.
Of those insurers, he said, 96 percent of domestic insurers have surplus and reinsurance coverage that would allow them to withstand a one-in-80 year storm. Ninety-one percent have the financial resources to handle a one-in-100 year event. By way of comparison, Citizens currently has the funds to cover a one-in-45 year event.
“Some have criticized domestic carriers as thinly capitalized companies,” said McCarty. “That is simply not true.”
But McCarty pointed out that getting that message out to the public represents a challenge.
Regulators signed-off on plans by private insurers to remove 450,000 policies from Citizens. However, due to a law that allows homeowners or some agents to take a pass on the offers of coverage, only 277,000 policies were actually removed from the public insurer.
At the same time, Citizens continues to receive an average of 8,000 applications for coverage a week, which has resulted in the insurer issuing 361,000 policies in 2012.
“Just trying to handle that flow of business is a Herculean task,” said McCarty.
While McCarty was offering his set of property reforms, other state officials were urging lawmakers to tread carefully given the state’s political and economic conditions.
Chief Financial Officer Jeff Atwater said that while it is time that lawmakers, state officials, and the industry hammered out a pathway to improve the market, they must be cognizant of how changes could affect the state’s economic conditions.
“We are really dealing with something that is fragile, which is the well-being of our citizens in a very modest economic recovery,” Atwater told lawmakers.
Atwater also pointed out that the way forward will not be easy given the political climate in which some lawmakers are pushing hard for a private market solution while others are filing legislation designed to maintain Citizens in its current form.
He also urged policymakers to watch how reforms could affect the affordability of coverage, given that homeowners in some portions of the state are already paying thousands of dollars for insurance.
“The fact is in both chambers and across Florida we are holding on dearly to the pace which change can be achieved,” said Atwater.