Trying to rescue Citizens Property
The Tampa Tribune
Published: July 15, 2009
Citizens Property Insurance Corp. governors took an initial step last week to secure the company’s financial stability – and boost Florida’s financial health – when they voted to increase most policyholders’ premiums by up to 10 percent next year.
Although theirs is only a recommendation – the Office of Insurance Regulation will decide whether the plan is financially sound – the governing board had little choice.
The state-run insurer of last resort has been woefully underfunded since lawmakers and Gov. Charlie Crist imposed a rate freeze in 2007. Fortunately, lawmakers recognized during the spring legislative session that the artificially low rates set to protect policyholders’ wallets had put the state in financial peril.
Citizens insures about 1 million properties and has some $412 billion in exposure. The company estimates it will have roughly $16 billion on hand this year to cover losses, which could reach $22 billion if a 100-year storm hits the state.
The rate increases should bring in an additional $140 million for Citizens.
At the same time the board voted to increase rates, it also decided to cut rates by as much as 10 percent for some 80,000 property owners, who had been overcharged the last few years. What’s happening with Citizens demonstrates what an enormously complex process setting rates can be. While regulators may look to the numbers, politicians look to votes. That’s how Crist has been able to exploit the process since before assuming office in 2007. During his campaign he painted private insurance carriers as price gougers making money off Floridians’ suffering.
Crist isn’t alone. Most of us consider insurance a necessary evil. None of us want to pay for it, and few of us can fathom the rate increases the companies claim are necessary to achieve financial stability and the ability to pay claims.
But the most viable companies – those with the financial wherewithal to meet their obligations – have all come begging to the insurance commissioner for rate increases.
The reasons, by now, are familiar. Since 1992, when Hurricane Andrew cost the companies billions, insurers have threatened to leave Florida. State leaders convinced the strongest insurers to remain by allowing them to form stand-alone companies. Other, sometimes undercapitalized, companies moved in. Things proceeded fairly smoothly until the wicked seasons in 2004 and 2005.
The big companies stopped writing new policies and canceled others. Some companies failed. Citizens took on policyholders who could not find private insurance. Today, State Farm says it will leave Florida in the next few years because it can’t afford to stay. On Monday, an insurance rating company downgraded the financial strength of Allstate’s Florida entity, Castle Key.
And even though new companies have moved into Florida and removed some 400,000 policies from Citizens, it’s not clear they would be capable of paying for the wind damage if a deadly hurricane strikes this year.
In short, the state is in desperate straits. We’re at the point where we must develop anew a private market or let the state take it over. But is that what we need or want? Citizens for all?
At least lawmakers are doing more than praying for good weather. If we’re lucky – and maybe the advent of El Nino, whose winds discourage hurricane formation, is a good sign – we’ll avoid hurricanes in the next few years and insurance companies can grow their reserves. In the meantime, a 10 percent annual increase in Citizens’ rates, however painful, takes an important step toward getting the company on sound financial footing.