Florida Citizens Proceeds with Bid for 400% Sinkhole Rate Hike

By | July 28, 2011

Florida residents who purchase sinkhole insurance through the state-back Citizens Property Insurance Corp. could be looking at increases of more than 400 percent for the optional coverage next year.

By a 4-0 vote, the Citizens’ board took full advantage of a law passed this year allowing it to charge actuarial rates to meet its sinkhole losses. The insurer, which covers 1.4 million policyholders, last year paid out more than $245 million in sinkhole loss while only taking in $32 million in sinkhole attributed premiums. Based on those figures, the insurer projects that it needs need a 428.6 percent increase for its sinkhole coverage.

“We recognized that our rate needed for sinkhole coverage is enormous,” said Sharon Binnum, chief financial officer for Citizens. “This fact and its impact on policyholders is not lost on us, but these rates are based on Citizens’ actual sinkhole loss experience.”

Politicians immediately called on Insurance Commissioner Kevin McCarty to hold public hearings on the rate request.

“In light of these almost incomprehensible rate increases I respectfully expect that all Floridians be given the chance to have their voices heard,” state Senator Mike Fasano (R) wrote to McCarty. “Hearings held throughout the state, especially in those areas which will receive the highest rate increases, must be held before the filing is given consideration.”

Before any rate increase of more than 15 percent can take effect, it must be approved by the Office of Insurance Regulation. OIR officials said they have yet to receive the filing and it is premature to say how the office will proceed.

Most of the sinkhole losses have been centered in three Florida counties, Pasco, Hernando, and Hillsborough. An estimated 90,000 policyholders now carry the sinkhole coverage, which is currently inexpensive, costing less than $20 in most areas.

But some are now predicting that if the increase is approved, many of those policyholders will drop the coverage.

There is some concern that mortgage lenders may require the sinkhole coverage. However, the majority of lenders have been satisfied by another clause in the law. Several years ago, lawmakers enacted a provision whereby policyholders are covered for catastrophic ground collapse, which is separate from sinkhole coverage. The ground collapse definition is much stricter including that the home be condemned, but many lenders accept it since it covers a total loss.

In addition to the sinkhole rate increase, Citizens is looking to raise its rates a statewide average 9.4 percent increase for all other perils. This proposed increase reflects the so-called “glidepath” in state law that restricts Citizens’ rate increases to 10 percent annually.

Actuaries have indicated that the insurer’s results would actually justify a rate hike on the order of 40 to 50 percent.

“Something had to be done about the sinkhole rates because that is draining the surplus,” said Kyle Ulrich, senior vice president for the Florida Association of Insurance Agents. “But you can’t ignore the wind risk they have housed over there.”

Lawmakers declined during the last session to increase the glidepath to 20 percent.

Fred Karlinsky, of the law firm Colodny, Fass, Talenfeld, Karlinsky and Abate, said the impact of Citizens’ regular rates is readily seen in the market. “There have been no start-up companies in the last 18 months,” he said. “If the legislature looks at Citizens, it is unworkable. Somehow, they have to figure out how to move the ball forward.”

Karlinsky thinks the legislature needs to act sooner rather than later. “I’d like to see the legislature call a special session on Citizens because it warrants its own discussion,” he said. “Clearly, it is becoming an unsustainable liability.”

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