Citizens Property Insurance board could vote this week to reject rate cuts
BY PAUL FLEMMING • FLORIDA CAPITAL BUREAU • July 5, 2009
The Citizens Property Insurance board will decide Wednesday how to move toward greater financial soundness, including a proposal to reject rate cuts for policyholders to get there faster and cost some ratepayers thousands in cheaper premiums.
Its choice won’t be final. State regulators make that call for rates that go into effect in January.
The state-run Citizens’ Board of Governors faces competing interests: Increased financial soundness against individual rates.
For three years the Legislature has frozen rates for the state’s largest property insurer. Without action, rates for Citizens policyholders would have jumped up, in some cases as much as 400 percent, in January. But lawmakers passed a bill to cap annual increases at 10 percent and set out a “glide path” to rates that accurately reflect what computer models indicate is appropriate for the $415 billion risk covered by Citizens.
But lawmakers barely considered that actuarially-sound rates could mean reductions in some parts of the state. Now regulators and a committee of the board differ on how to put the new law into practice.
The law is clear about increases: No more than 10 percent for any single policyholder. But how rates are implemented can mean as much as a $140 million swing in what Citizens takes in — and in how much 80,000 policyholders could otherwise be saving.
“It’s a sticky wicket because as an organization we need to make economic progress in terms of having the rates more appropriately reflect what the true market is,” said James Malone, a Naples investment banker and chairman of the Citizens board.
Malone pushed for the legislation to allow higher increases for the vast majority of policyholders that are below modeled rates. But he said it was clear that wasn’t going to happen.
“I believe we all felt the 10 percent was a long way from where we needed to be,” Malone said. “Given our ability to move it forward that way over multiple years — that solution, though not what I would have liked, is the art of the possible.”
About 80,000 of the state-run insurers policies — out of 1 million — would see rate cuts if the computer model used to set rates were followed. But that would also reduce Citizens’ move toward financial soundness after three years of frozen rates and contradict one purpose of legislation passed this spring.
“It’s kind of pay me now or pay me later,” said Rep. Bryan Nelson, an Apopka Republican, insurance agent and sponsor of the Citizens bill.
A buildup of reserves through increased premiums reduces the likelihood Citizens won’t have enough on hand to cover losses from a big hurricane. If Citizens runs a deficit, it makes up the money by charging policyholders — first its own customers up to a maximum 45 percent on top of premiums, then private insurance customers up to a maximum 18 percent — assessments.
The Big Bend has some of the highest indicated rate cuts in homeowners coverage. If the recommendation before the board is approved, that would mean a rate freeze for those policyholders instead.
Citizens has 2,558 property policies in Leon County covering homes, businesses, condos and mobile homes for all perils and just wind damage, with rate cuts as high as 59 percent indicated by computer models.
There are 970 policies in Gadsden County, with rate changes that vary from 55-percent cuts to 17-percent increases.
The 1,439 policies in Wakulla County have rates with indicated changes between 63-percent cuts and 8-percent increases.
There are 2,239 Citizens policies in Franklin County. Some of those have indicated cuts up to 32 percent, others with modeled increases up to 13 percent.
Under the recommendation before the Citizens board, those customers with a rate cut coming would continue to pay current rates. Regulators say those rate cuts should be implemented.
The new law caps all annual increases at a maximum 10 percent.
But whatever the Citizens board decides, state regulators set the final rates. Lawyers with the Office of Insurance Regulation have said they think the new law calls for rate reductions to be applied. Officially, OIR says it can’t say what will happen until the Citizens board submits its recommendation by July 15.
A board committee has recommended rates with increases capped at 10 percent and frozen in areas where a decrease is indicated. The general counsel for the Office of Insurance Regulation disagrees and, in an internal memo says the indicated rate cuts should be followed.
“Citizens can implement rate increases up to 10% per year and rate decreases where applicable, and still move toward the intent of HB 1495 of achieving actuarial soundness of Citizens’ overall rates, according to the analysis prepared by Office of Insurance Regulation General Counsel Steve Parton.
A 10-percent cap on increases and granting full rate cuts would bring Citizens an additional $20 million in the first year. With maximum 10-percent hikes and no decreases, Citizens’ surplus would grow by $160 million, according to a state Senate analysis.
Whatever the board decides, regulators are the final arbiter.
“The OIR first must receive and review the Citizens’ rate filing to assess the support the company has for any rate needs,” said Ed Domansky, director of communications for OIR. “Upon review of the Citizens’ rate filing, the OIR might not even agree that there is sufficient support for the indications (up or down) in some territories.”
Different from private insurers, Citizens has no option to appeal.
In June, a committee of the Citizens board considered many options, including raising all Citizens rates 10 percent no matter what rate computer models indicated.
Citizens board Chairman Malone wants to get the company in better financial shape quickly.
“Fiscally, what I’d like to do is get us as much regain from a premium base for Citizens as possible,” Malone said. “But I’d fall back on the art of the possible, doing both what’s legal and what’s fair. I think we’re going to have to figure it out. I don’t have a brilliant answer.”