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Maybe someday, all homeowners will pay premiums commensurate with their exposure

(Citizens, Property Market) Permanent link

The following opinion piece was prepared by FAIA in response to "Private insurers could be in more trouble than Citizens in storm season," an article that ran in several Florida newspapers last month. 

By Jeff Grady
President, Florida Association of Insurance Agents

Zac Anderson’s June 9 article, "Private insurers could be in more trouble than Citizens in storm season," makes several incorrect assumptions about Citizens Property Insurance and gives readers a distorted view of Florida’s property insurance market. Let me set the record straight.

Mr. Anderson referenced three storm scenarios from a report by Florida’s Office of the Insurance Consumer Advocate (ICA). The report never once described private carriers as "weak," as Anderson stated. In fact, it warned upfront that there were "limitations" with the analysis and that it "...may not be applicable for other purposes." Its author, actuary Steve Alexander, even cautioned that he should be consulted for "explanations.”

In comparing Citizens to private carriers, Zac Anderson failed to emphasize that all Florida home insurers purchase substantial commercial reinsurance, which, along with the Cat Fund, often relieves them of 90 percent or more of their storm exposure. Combined with other approved methods, this enhances their claims paying capacity to levels sufficient to handle the rare 1-in-100 year storm. The article by Anderson and a subsequent editorial criticized insurers for not putting away more surplus in non-storm years when often 60 percent of a policyholder's premium goes to pay for such reinsurance.

Carriers were criticized for opposing legislation creating an insurer report card but no explanation was given for their opposition. The fact is, in addition to OIR approving every phase of their operations, insurance companies are already examined and graded by numerous rating agencies that assign both number and letter grades. For example, to obtain an "A" rating from AM Best, an insurer must be able to handle a remarkably remote 1-in-250 year storm. The OIR only requires a 1-in-100 year capability for private carriers and much less for Citizens.

According to the ICA report, the need for Citizens to levy assessments after a 1-in-50 year storm striking Miami is undeniable. But, Anderson didn't explain that private insurers minimize exposure in high-risk coastal areas like southeast Florida. Citizens must take all applicants, even poorly mitigated homes on the water's edge. In fact, while it insures a little more than 20 percent of the homeowners’ policies, Citizens carries 40 percent of the exposure—80 percent of which is in high-risk areas. No private insurer, or reinsurer for that matter, would be structured in such a way.

Citizens’ shortfalls are charged to those it doesn't even insure, including some who can't even afford a home. We're already paying assessments because Citizens’ rates were too low prior to the 2004-2005 storms. In fact, Citizens’ current $5.6 billion surplus, which Anderson (and the Herald Tribune's editorial) praised, is not just the result of luck from six storm-free seasons, it's also the result of nearly $2 billion in prior assessments and another $700 million swept from Florida's General Revenue Fund after the 04/05 shortages.

Another reason Citizens shouldn't get a "pass" (the term used in the editorial) is that its policyholders are substantially more exposed to assessments. According to Citizens, a policyholder with a $2,000 premium would pay an assessment of $1,500 while a private market policyholder would only pay $640...for the same Citizens deficit. And, those who own autos would pay more on top of that!

By contrast, when a private company fails, triggering an assessment from the state Guaranty Fund, only property policies are assessed and the annual total, for both regular and emergency assessments, would only be $80 for the first year, based on the same $2,000 premium. Unfortunately, private policyholders still have to pay the Citizens assessment of $640 on top of that to make up for Citizens' policyholders paying less than they should.

Keep in mind that, based on the recent federal census, even coastal counties including Dade, Broward, and Palm Beach, have a majority of households subsidizing beachfront homes in this fashion.

These are complicated matters, to say the least. But with the courage shown by the 25 lawmakers who signed the letter urging Citizens to operate soundly, maybe someday no one will get a so called "pass" and all homeowners, will pay premiums commensurate with their exposure.

I urge everyone to read the paper by Sen. Richter and Rep. Nelson titled "How Critical is Florida's Insurance Market."