Florida Turns to Surplus Lines to Help Depopulate Citizens

By | December 9, 2011

Florida lawmakers are considering allowing surplus lines carriers to participate in the depopulation programs of the state’s largest homeowner insurer in an effort to reduce its policyholder rolls.

Citizens Property Insurance Corp. currently has nearly 1.5 million policyholders, representing nearly a half a trillion dollars in exposure. With Gov. Rick Scott making it a priority to depopulate or privatize the insurer, state lawmakers are desperate for new ways to attract private capital.

The most policies taken out of Citizens by private insurers in one year was in 2008, when private companies assumed 385,000 policies. Since then, the number of assumed policies has dropped significantly from 150,000 policies in 2009 to just 59,700 policies in 2010. But just as quickly as those policies were removed, more new business came in.

Some lawmakers are now turning to the surplus lines industry to at least marginally stem the tide of growth in Citizens, which is nearing 25 percent of the state’s total homeowners´ market.

State Sen. Garrett Richter (R-Naples), along with Rep. Jim Boyd (R-Bradenton), are sponsoring bills that would allow surplus lines insurers to directly assume Citizens’ policies.

First included in a Citizens’ reform bill that lawmakers rejected in the 2011 legislative session, the issue has been uncoupled from other unpopular reforms in hopes of gaining lawmakers support when the legislature convenes next year.

At a Senate Banking and Insurance Committee meeting yesterday, Richter said bringing the surplus lines industry into the depopulation picture is another tool to help expand the private market. “If the members are serious about shrinking the size of Citizens, then they should vote for this bill,” he said.

Under the bill, surplus lines carriers would have to meet a number of conditions in order to assume Citizens’ policies.

First, an insurer must maintain a minimum surplus of $50 million as opposed to the $15 million that surplus lines carriers currently must maintain to do business in the state. Secondly, the insurer must maintain an A minus or better financial rating from A.M. Best. The insurer must also maintain enough capital reserves, surplus, and reinsurance to cover at least two projected 100-year maximum probable hurricane losses per hurricane season.

The bill also specifies that an offer of coverage from a surplus lines insurer must be similar to Citizens and that policyholders be notified of any differences between the two policies. In the event an admitted insurer and surplus lines carrier seek to assume the same policy, precedent would be given to the admitted carrier.

The bill is being backed primarily by GeoVera Specialty Insurance Co., which has operated in the state since 1994 and currently has 30,000 policyholders around the state. The Fairfield, Calif.-based company primarily offers residential homeowners polices and earthquake coverage in the southeast and Midwest.

Tim Meenan, of the Tallahassee, Fla., law firm of Blank and Meenan, which is representing the company, says the insurer is looking to remove up to 50,000 Citizens policies. Right now, most surplus lines insurers typically only write multi-million dollar homes or large condominium and commercial buildings.

Meenan, however, said that GeoVera targets the state’s older housing stock, which do not meet most private insurers´ underwriting criteria and thus end up in Citizens.

And while 30,000 or 50,000 assumed policies drawn from Citizens by one company may be only a fraction of its overall population, Meenan said the potential is there for more surplus lines companies to similarly consider removing policies.

“We do believe that the surplus lines carriers could be part of an answer to Citizens,” Meenan said.

With the exception of the provisions in the bill, along with other laws, the surplus lines industry is largely deregulated. For example, surplus lines policies get to set their own rates and their policies are not covered by the Florida Association of Guaranty Association, which pays homeowners’ claims in the event an insurer goes bankrupt.

That lack of regulation is making many lawmakers and consumer groups wary of the bill.

The bill anticipates the objection to surplus lines carriers not participating in FIGA by requiring the carriers to make a deposit equal to the unearned premiums, net of unearned commissions, on the assumed book of business with the state’s Department of Financial Services’ Bureau of Collateral Management.

But those opposed to the bill, said it is not clear how the money would be used in the event a surplus lines carrier went bankrupt. They also objected to the fact that the state would have no oversight of rates beyond an initial agreement that the Citizens’ policyholders assumed by a surplus lines carrier would initially see no rate increase.

They say that could lead unsuspecting Citizens’ policyholders facing escalating rates and insured by unregulated companies that could make policy changes at will.

“I have a grave concern that we are starting down the road to take away consumer protections,” said Sen. Mike Fasano (D-New Port Richey). “There is a movement here to force consumers out of Citizens whether they want to or not.”

Sen. Mike Bennett (R-Bradenton), however, said the law would in no way change the current rights Citizens policyholders have under current law.

Right now, Citizens’ policyholders can choose to remain in Citizens even if they receive an offer of coverage from a private insurer if it means their rates will increase by 15 percent or more. Policyholders can also remain with Citizens if their agent is not appointed by the assuming company.

“I can change companies or decide to go back to Citizens,” said Bennett. “You can’t ask for more than that.

Florida Association of Insurance Agents President Jeff Grady said the association has worked with state lawmakers and the surplus lines to address any agents’ concerns when it comes to the bill.

“It is a specialized piece of law and we don’t see a line-up of companies looking to do it,” Grady said. “How it would actually work remains to be questioned.”

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