Florida lawmakers’ first draft of a property reform emphasizes depopulating and diverting policies from Citizens Property Insurance Corp., the state-backed property insurer that has 1.3 million policyholders.
The proposal also seeks to reduce the financial responsibility of the state’s catastrophe reinsurance fund.
The Senate Banking and Insurance Committee unveiled the draft in preparation of offering a formal bill in two weeks. Chair David Simmons (R-Altamonte Springs) described the draft as an a la carte set of proposals that he hopes will lead to a bill that has widespread support.
“In two weeks I hope to thoroughly refine this document so we can reach a consensus of all of us on these issues,” said Sen. Simmons.
The draft includes proposals for changing how some rates are calculated, requiring Citizens to establish a clearinghouse to divert policies into the private market, placing pressure on agents to stop sending policies to Citizens, and reducing the obligations of the Florida Hurricane Catastrophe Fund.
Security First Insurance Co. President Locke Burt, a former state senator, told the committee that Florida’s domestic market is well-positioned to write Citizens policies if lawmakers created the right conditions.
“Florida domestic companies understand the Florida market,” Burt said. “We live here. We know what it means to have multiple hurricanes.”
Burt said that there are many steps lawmakers can take that would help depopulate Citizens without policyholders seeing their rates dramatically increase.
He said Citizens should start enforcing a law currently on the books that says policyholders are ineligible for Citizens coverage if they receive an offer of coverage for a private insurer whose premiums are 15 percent higher than those charged by state-backed insurer.
Companies should also be able to sell more policies on a consent-to-rate basis, he said, which gives consumers the right to approve their own rate.
“Our agents in Florida tell us people are willing to pay $200 to $300 more to be in the private sector,” said Burt.
Burt said reports that Florida domestic are thinly capitalized and would be unable to pay claims in the event of a hurricane are not true. Referring to earlier testimony by Insurance Commissioner Kevin McCarty, Burt said that 96 percent of all domestic insurers are reinsured to withstand a 1-in-80-year storm. By way of comparison, Citizens is only reinsured up to a 1-in-45-year storm.
Much of the discussion focused on how to divert policies from being insured by Citizens in the first place, a situation that some committee members said was the fault of agents who fail to properly shop the business in the private market.
One suggestion offered by lawmakers to stop that trend is to not pay agents commissions on policies placed in Citizens that could have been placed elsewhere.
“Some may say that is a draconian,” said Simmons. “But I have learned if you want to change how someone acts, take away the money.”
Florida Association of Insurance Agents President Jeff Grady said after the meeting that the agency commission proposal represented a simplistic view of the market and does not distinguish between independent agents who have multiple markets and captive agents who work for insurers that are no longer writing business in the state.
He said that Citizens pays some of the lowest commissions in the market, such as a 5.5 percent effective rate on policies placed in the personal lines account in Dade County.
“No one is getting rich sending business to Citizens from Dade County,” he said.
One idea that had seemed to have some support is that of a clearinghouse, first proposed by Citizens, so that all new and renewal policies could be shopped to the private market before being enrolled by the insurer. Under the clearinghouse concept, a policy would be put through a comparative rater that would generate quotes from multiple insurers. That list would then be provided to consumers and agents so they could review possible alternatives in the private market.
Burt said that a clearinghouse would help overcome the resistance and lack of expertise that most homeowners have when it comes to finding coverage.
“Most people don’t know how to shop for insurance and don’t know where to shop,” said Burt. “I’m suggesting that Citizens start telling them.”
Senator Jeff Clemens (D-Lake Worth) urged lawmakers to focus more on the marketing issues than on the other more complex changes in the bill.
“We just need to let people know there are options out there and we could shrink Citizens without all the language we are talking about here,” said Clemens.
The draft bill also calls for rates to go up for all new policies, policies valued at more than $300,000, and all non-homestead homes and non-residential commercial policies. For those properties, the rates would be set at the highest average among the top 20 private insurers with the greatest statewide market share.
The bill would also allow Citizens to raise rates by an additional five percent to purchase reinsurance. However, lawmakers also said Citizens should have the ability to determine if some policyholders deserved rate relief based on financial need.
While lawmakers spent the majority of their time discussing ways to reduce the number of policies in Citizens, they passed over other changes that could have an impact on the market such as the so-called “right-sizing” of the Florida Hurricane Catastrophe Fund.
Under current law, the Cat Fund is required to provide property insurers with up to $17.5 billion in coverage for a single storm season and another $11 billion for losses from a second storm.
As of now, the Cat Fund has $8.5 billion in cash and an estimated bonding capacity of $7 billion for a total of $15.5 billion. That still leaves it short by $1.5 billion to meet its first storm obligations and, potentially, on the hook for another $11 billion. Given the magnitude of those numbers, there has been a concern whether the fund could raise the money soon enough so that insurers could promptly pay claims.
In the draft bill, starting in contract year 2013-2014, the Cat Fund’s total obligation would be lowered from $17 billion to $14 billion, reducing it by $1 billion per year over a three-year period. Additionally, the fund’s maximum coverage per insurer would be lowered by five percent per year over three years taking it from 90 percent to 75 percent.
Senator Tom Lee (R-Brandon) expressed concern over increasing reinsurance costs on insurers at the same time lawmakers want them to help depopulate Citizens and make other market changes.
“I want to make sure the reinsurance costs are not prohibitive and lead to rate shock,” said Lee.
So far, the industry as a whole has been quiet about property reforms.
Property Casualty Insurers of America State Government Representative Donavan Brown said there is a general consensus that something needs to be done about Citizens. But for the moment, he said, the industry is waiting to see which proposals will emerge in the formal bill.
“We’re taking a period to reflect and digest the proposals and see what the members’ appetite is going forward,” said Brown.
The big question is to what degree the current proposals can survive some political realities. It takes 21 votes for any bill to pass the full Senate. But of the 12 members on the committee, six represent districts where Citizens represents 25 percent of the market. And out of the 40 member Senate, 21 senators similarly represent districts with the same Citizens market share.
If any of the final proposals lead to higher rates, it could be tough politically going. The same situation exists in the House of Representatives where Democrats have already indicated they will likely oppose any rate increases.
Drawing on his past experience as a state senator, Burt said that those numbers likely could stop some ideas such as raising the “glidepath” that limits Citizens annual rate increases to 10 percent.
“We support an increase in the glidepath to 20 percent,” said Burt. “What I’m not sure of is, can you get 21 votes in the Senate today?”