Florida’s fluctuating and volatile private market may be instigating long-term policy growth for Citizens Property Insurance Corp. and creating serious obstacles to its position as the state’s residual insurer, according to a new study.
The 236-page “Exposure Reduction and Depopulation Opportunities Analysis,” report from a team at Florida State University’s Dr. William T. Hold/The National Alliance for Risk Management & Insurance looked at how Citizens’ exposure can be reduced and the participation of private market insurers increased so it could continue to fulfill its mission as a residual market insurer. In doing so, the report examined prior depopulation efforts of Citizens and the residual market insurers of other states to determine “what could be learned from past endeavors.”
The study also looked at how mounting losses in the state’s domestic insurance market may continue to impact Citizens’ policy count, which has been steadily growing since last year.
Citizens commissioned the report from FSU earlier this year at a cost of $265,266. The report was presented to the Citizens Board of Governors at its Dec.16 meeting.
“Effectively reducing Citizens exposure in the long-term can be accomplished by expanding the availability of coverage by private market insurers,” the study notes. “However, several actions must first be taken to improve the attractiveness of the Florida market.”
The FSU study says Citizens has seen an “observable growth” in its policy count this year from 443,228 policies in January to 511,005 by September – an increase of $111.7 billion in exposure to $133.5 billion. Citizens continues to grow by about 3,000 policies per week, the insurer said at its December meeting, with its total policy count now at about 537,000 as private insurers respond to market challenges by restricting capacity and raising rates.
Citizens doesn’t expect to see a turnaround any time soon after Florida carriers experienced a total of $1.2 billion in operating losses through the third quarter of 2020.
The insurer, formed in 2002 by the Florida Legislature, has had a history of policy count growth and reduction throughout its tenure. It reached a high of 1.4 million policies that accounted for 23% of the state’s insurance market in 2011 before depopulation efforts, a steady private market and an 11-year hurricane drought brought the insurer to its lowest point of 440,000 policies in 2015. At its peak in 2011, Floridians were on the hook for $11.6 billion in assessments, a charge every Florida residential policyholder paid to ensure Citizens could cover losses in the event of a 1-in-100-year storm.
In 2015, Citizens was able to eliminate assessments for Florida consumers, thanks to depopulation efforts, the reinsurance market and catastrophe bonds.
But in recent years, the state’s private insurance market has grappled with unprecedented losses from litigation and catastrophic events that has led to rising rates and a pullback in capacity for the property insurance market. Because Citizens’ rates are capped on a statutorily required glide path of 10% per year, meaning the company cannot raise them more than that, the residual insurer is becoming a competitive alternative to the current private market.
“Over the past 18 months, Citizens has become the insurer of first resort,” said Chairman Carlos Beruff at the December board meeting. “This is not its statutory mission and we must take steps immediately to reverse this trend and protect Floridians who are ultimately on the hook if Citizens is unable to pay claims.”
Market Hindrances to Health of Citizens
FSU’s report identified seven market hindrances that must be addressed for Florida’s insurer of last resort to further reduce its exposures, respond to market constraints and protect its customers.
Those hindrances include:
- Florida’s catastrophic risk exposure
- Levels of uncertainty in predicting future catastrophic losses
- High levels of catastrophic risk that lead to inadequate investment returns for investors and other factors that raise the cost of capital
- Volatility in legislative/regulatory/administrative actions that add to market uncertainty
- Third party involvement/litigation/fraud that is contributing to losses and expenses of insurers operating in Florida
- Inaccurate rates (glide path) that can lead to market distortions and competitions between Citizens and private market insurers
- The issue of affordability in the ratemaking process that can lead to misunderstanding and market distortions.
FSU said several notable events have “heightened concerns regarding market disruptions which could result in a large increase in Citizens’ exposure,” including:
- Catastrophes between 2016 to 2018 that resulted in a total of $19.84 billion in insured residential property losses and led to a hardening reinsurance market
- Adverse loss development or “loss creep” that was not initially anticipated
- Social inflation/third party involvement in claims in the form of assignment of benefits (AOB) lawsuits
- Potential for insurer ratings downgrades from financial analysis firm Demotech
- Recent insurer rate filings, starting in 2019, of greater than 15% and indications of a trend towards more double-digit rate increases
- The COVID-19 pandemic that has raised concerns for insurance and reinsurance industries, caused uncertainty in the markets
- Developments during the 2020 hurricane season, including the tightening of the reinsurance market; pricing concerns with the Florida Hurricane Catastrophe Fund (FHCF); action against attorney Scot Strems; and the most active hurricane season on record
Historical Shifts in Florida Market
The report notes that the number of insurers operating in Florida has declined from 290 in 1995 to 165 in 2019. During that time, the state’s market share has fluctuated and shifted from being made up of predominantly national carriers to mainly Florida domestic companies that formed after the 2004, 2005 hurricane season. In 2004, Citizens wrote 15% of policyholders in the state while Florida-based domestic companies wrote 22%, and national writers, as well as their affiliates, wrote 63%. In 2019, Citizens wrote 4% of the policyholders while Florida-based domestics write 72% and national writers plus their affiliates wrote 24%, “indicating that Florida has seen a dramatic shift in market structure over the last 15 years,” the report says.
“The Florida property insurance market has evolved from being a market dominated by large, diverse national insurers with significant surplus to a market dominated by smaller, geographically focused insurers. This has resulted in an increasing reliance on the global risk transfer markets and the FHCF [Florida Hurricane Catastrophe Fund] for diversification and risk capital,” the study says.
As such, market capacity and costs are highly influenced by events that take place in the Florida market, and negative events will ultimately increase Citizens’ exposure and threaten its surplus.
The study says that by the end of 2019, Citizens had a combined surplus of over $6.3 billion, supporting approximately $102 billion in total insured value, while the entire surplus of the Florida-based domestics was approximately $4.25 billion, supporting just under $1.67 trillion in total insured value.
“The overall reduction in exposure for Citizens, combined with the lack of landfalling hurricanes for a decade, has greatly eased the financial burden on the residual market and the likelihood of assessments from Citizens,” the report states. “However, the continuing shift in policies to the Florida-based domestic insurers with weaker policyholder surplus (PHS) positions has increased market reliance on the FHCF and may have shifted the ultimate risk from an extreme hurricane event to the Florida Insurance Guaranty Association (FIGA).”
Citizens Past Policy Count Reduction Efforts
Much effort was made in reducing Citizens’ policy count starting in 2010 as the insurer approached its peak policy count. FSU noted several of these efforts in the report – the addition of a 30-day timeline on opting out of a takeout offer in 2010; eliminating the withholding of ceding commissions in 2011; enhancing data used by takeout companies to assess policies in 2012; the creating of the Clearinghouse in 2013; and the revision of the Depopulation Committee in 2014.
The FSU study said the insurer has had success with various exposure reduction programs like its takeout initiatives. The ongoing depopulation program “resulted in millions of policies being taken out of Citizens over time.”
Some policies that were taken out by private market insurers ended up returning to Citizens, with most of the returning policies coming from companies that later became insolvent, the report says. Mostly smaller Florida domestics participated in the early years of the takeout program and in the later years it was larger companies as they sought to build their books of business. After 2009, Citizens takeout program became more of a “supplemental source of policies for the companies participating,” the study said.
In recent years fewer policies became available in Citizens for takeout, which limited the option of it being a “significant growth opportunity for insurers.”
Gilway noted at Citizens’ December Board of Governors meeting “depopulation today, given the lack of capacity in the marketplace, has really come to a screeching halt.”
The FSU report’s examination and detailed analysis of the Florida market sought to develop approaches that would “shift the focus to optimal transfer of risk from Citizens to the private market.”
FSU identified three opportunities to accomplish these goals:
- Tail Minimization: Emphasizing reductions of Citizens’ tail loss potential not considering any other constraints such as post-depopulation impacts to the Florida private residential property insurance market.
- Mutual Diversification: Ranking private market participants by their ability to assume policies that are driving Citizens’ tail risk, relying on diversification and establishing a system that results in mutual benefits to both Citizens and the companies identified with high mutual diversification.
- Resilient Depopulation Package: Creating portfolios of Citizens’ policies based on specific optimization criteria that would be attractive to any private insurer and/or capital markets.
FSU also identified approaches that could be taken to reduce Citizens’ actual exposure (not just policy count) such as promoting the private market’s retention of risk depopulated by Citizens and protecting the favorable status of Citizens’ outstanding bonds, among others.
FSU’s overall approach recommended the hosting of workshops that involve a variety of stakeholders to gain a better understanding of their perception of the Florida market “and provide them with the information about the Florida market that would be valuable to potential investors and private market insurers.”
Its 18 other recommendations were organized into the following categories:
- Approach 1: Attracting investors to the Florida market – encourage new entrants to develop business models specifically for the Florida market.
- Approach 2: Increasing the use of loss control by homeowners, i.e., requiring Citizens’ policyholders to engage in loss prevention and loss reduction efforts.
- Approach 3: Reducing system inefficiencies – expand, widely promote managed repair programs; look at different claims settlement processes.
- Approach 4: Increasing the availability of quality data to stakeholders via a statewide database of loss control mitigation features, etc.
- Approach 5: Maintaining the solvency of insurers operating in the Florida market by altering the approach to Citizens’ takeout program; deploy new/emerging methodologies to better evaluate risk; regularly conduct stress testing, etc.
- Approach 6: Improving rating methodologies – make changes to Citizens’ glide path for rate increases; limit Citizens’ policyholder eligibility; update or eliminate mandatory mitigation credits for insurers or encourage private market insurers to establish “proper” discounts; create marketing campaign to educate homeowners.
- Approach 7: Miscellaneous – establish stronger requirements that policies taken out of Citizens be held for 3 years; work to help establish a centralized insurance fraud database; create state-level program to address residential property insurance affordability.
“All 18 of these ideas need to work together,” FSU’s Dr. Charles Nyce, member of the team who worked on the study, said at the Dec. 16 Citizens Board of Governors meeting. “Picking and choosing one approach here and one approach there probably doesn’t get it done. It’s going to take a concise, coordinated effort among all the stakeholders with all of these different approaches coming into play.”
Ultimately, the volatility of Florida’s insurance environment is the biggest hindrance to Citizens, and it is going to take time to enact strategies and see enough of a shift to make a difference to its exposure, the study noted.
“The FSU study has provided welcomed input in efforts to better focus Citizens on its role as the state’s insurer of last resort. The study will no doubt be referenced often as we and other stakeholders deal with the critical issues facing the Florida property insurance market,” a Citizens spokesperson told Insurance Journal.
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