Florida Citizens’ Rate Increases Way Below Actuaries’ Indications

July 28, 2010

If insurance actuaries had their way, rates for homeowners insured through Florida’s public insurer Citizens Property Insurance would be going up 55.9 percent on average. But state law caps how much Citizens can raise individual policyholders’ rates in any one year so the insurer has proposed to raise rates by only 10.2 percent on average statewide.

The average 10.2 percent increase would apply to multi-peril and wind-only home policies. Citizens is also looking to raise rates for all condominium policies an average 2.2 percent; dwellings, 9.7 percent; mobile homes, 7.4 percent; and mobile home dwelling, 5.9 percent.

The state-backed insurer’s requested increases for each line of its business are substantially below what actuaries who crunch the numbers say Citizens needs to be adequately funded. State law requires Citizens to show what actuarially-sound rates would be compared with what is allowed under the restriction that rates charged not raise costs more than 10 percent a year for any policyholder.

The actuarial indication for dwelling policies is a 54.8 percent increase, compared to the 9.7 percent being proposed. For condos, the actuarial sound increase would be 20 percent, rather than the 2.2 percent proposed. For all of its business, actuaries determined Citizens actually needs a 48 percent rate hike to be adequately funded. But under the rate capping system, Citizens is requesting only an 8.4 percent hike on average for all of its lines of business.

All of the proposed increases include a mandatory provision for payments to the Florida Hurricane Catastrophe Fund that in some cases nudges the increase above 10 percent. The actuarial indications, however, do not include this extra charge.

The increases are part of a rate package to be submitted by Citizens to state regulators, who must sign off on them before they can be put into effect. The final decision will be up to the Office of Insurance Regulation and Insurance Commissioner Kevin McCarty.

The proposed effective date for the increases is Jan. 1, 2011 for multi-peril policies and Feb. 1, 2011 for all wind-only coverages.

The 10.2 percent average homeowners increase would affect personal residential multi-peril policies that cover water, fire, sinkholes, theft, wind and other perils and many of which include liability coverage. It would also affect policies providing wind-only coverage for personal property.

The rate changes vary by territory, with some homeowners rates in Dade, Lee, Broward and other south Florida counties going up 11.2 percent and rates in other parts of the of the state actually going down.

Renters with insurance would get a break; the recommendation is for a 0.2 percent reduction on average in these rates.

Commercial Property

Wind policies for commercial residential (condo buildings, apartment buildings, and homeowner associations) and commercial nonresidential (office buildings, gas stations and other commercial properties) will also see increases if approved: 11.6 percent average for commercial residential and 10.0 percent for commercial non-residential.

Citizens is not looking to raise rates on commercial residential multi-peril policies at this time. These policies are rated using Insurance Services Office (ISO) rates, loss costs and multipliers. Citizens said it is currently using the most up-to-date ISO rates available for this line of business and no filing to amend rates is necessary at this time.

Sinkhole Claims

According to the insurer, the increases are necessary largely because of rising non-catastrophe costs including sinkhole claims.

Citizens said it has seen steadily increasing losses due to non-catastrophic events over the past five years. For instance, for homeowners coverage, the non-catastrophic loss ratio has increased from 41.7 percent in accident year 2006 to 75 percent in accident year 2009, an increase of nearly 80 percent.

Citizens has seen a dramatic increase in losses from sinkhole claims. Also, due to adverse selection, its sinkhole loss ratio continues to grow. In accident year 2009, Citizens earned $19.6 million of homeowner’s premium but incurred an estimated $97 million in ultimate sinkhole-related losses.

Citizens said that its administrative expenses, as a percent of premium, are significantly lower than those of private insurers.

Other Insurers

Citizens is not alone in seeking rate increases. A number of insurers have been receiving approval for rate increases. Allstate Insurance subsidiaries in Florida are seeking rate increases — Castle Key Insurance Co. has asked for average of 33 percent, while Castle Key Indemnity has filed for an average increase of 18 percent. The Caste Key insurers have requested the rate increases “based the continued costs of reinsurance and increasing costs associated with paying homeowners claims,” according to Amy Moore, company spokesperson. Castle Key Insurance companies currently write approximately 250,000 policies.

Joseph Petrelli, president of Demotech, an actuarial services firm that rates about 50 of the property/casualty insurers writing in Florida, believes that carriers need sizable rate hikes to cover losses and reinsurance costs and to keep investors happy.

“I think over the last several years the companies have drawn down on funds available from their holding companies, on funds available from investors. We believe we’re at a critical point here where … over the next several months, and the next year, it’s going to be critically important for companies to be able to secure an adequate rate, not just a rate increase of X percent, but it maybe a very painful rate increase of 2X percent,” Petrelli told Insurance Journal in a recent interview.

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