In Citizens’ 2016 rate proposal, approved last month by the Citizens Board of Directors and awaiting approval by the Florida Office of Insurance Regulation, the insurer of last resort did not recommend any sinkhole rate increases for 2016 for most of the state, including in the sinkhole prone areas known as “Sinkhole Alley.”
In its 2016 Rate Kit, Citizens credited legislation passed in 2011, which it said has helped to rein in sinkhole losses and resulted in a significant decrease in sinkhole-related claims, as the reason for the sinkhole rate stability.
“Although some aspects of the reforms are being challenged in court, Citizens believes the prudent course is to hold off on additional sinkhole rate increases in most areas until the full effect of these changes is better known,” the company said.
In 2011, major sinkhole claims reform legislation – Senate Bill 408 – clarified the definition of sinkhole damage and required that repairs be completed if a sinkhole claim is paid. When it was passed, an actuarial analysis of SB 408 indicated that these changes could reduce sinkhole claims by approximately 54 percent. Citizens’ claims experience since the bill went into effect in 2012 seems to bear this out, the company stated, with the number of reported sinkhole claims to Citizens steadily declining since the end of 2011. In fact, the company reported claims falling by more than 60 percent since that time.
In 2011, over 4,500 claims were reported. In 2012, that number decreased to around 3,100, and in 2013 the number was further reduced to around 1,200. This declining trend has continued into 2014 and 2015.
The company stated that in 2014, Citizens recommended “actuarially sound” sinkhole rates for all counties outside “Sinkhole Alley,” which includes Hernando, Hillsborough and Pasco counties. In those areas rate increases were phased in to cushion their impact on affected policyholders, per the recommendation of Citizens’ Board of Governors.
In addition, between 2011 and 2014, Citizens increased sinkhole rates by close to +90 percent in the most sinkhole-prone areas of the state (Hernando, Pasco, and Hillsborough counties). These combined factors have led to a statewide indicated rate change for sinkholes of +57.2 percent, an all-time low since sinkhole rate indications were separated from all other perils in 2011, Citizens said. The sinkhole indications for Hernando, Hillsborough, and Pasco are +214 percent, +24.2 percent, and +23.9 percent respectively.
However, as was the case last year, there is a high level of uncertainty in these indications.
Some aspects of SB 408 are pending court challenges. Citizens reported that more than 2,000 sinkhole claims currently remain in litigation, the outcome of which may affect sinkhole rates going forward. Because of geotechnical testing and legal matters related to sinkhole claims, it generally takes five to six years for a sinkhole accident year to fully mature and thus to know the true costs, Citizens said.
For now, given the continued downward trend in reported sinkhole claims, the unknown resolution of court challenges to the law, and the high level of uncertainty in the ultimate outcome, Citizens recommends that overall sinkhole rates remain unchanged. As the ultimate effect of recent law changes emerges in the claims experience, however, there is no guarantee that future sinkhole rate increases will not be necessary, the company said.
“Although it will take several years to definitively determine whether the trend of falling sinkhole-claims costs will continue, Citizens’ actuaries believe the most prudent course is to hold off on sinkhole rate increases until the level of uncertainty in rate indications is more acceptable,” said Citizens.
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