Right-Sizing FHCF Adds Certainty But Affects Market Competitiveness
One of the most significant legislative proposals for the upcoming session in the residential property arena will be reducing the size of the FHCF. Jack Nicholson of the FHCF has said that while the FHCF currently projects that it could meet its mandatory obligations, worldwide financial conditions have reduced the margin for doing so to nerve-racking margins. He proposes that the amount of coverage provided by the FHCF should be reduced over several years while the industry co-pay is increased. He also suggests that the rapid cash buildup factor should be extended to ensure that the FHCF relies on liquid resources to the greatest degree possible.
The FHCF plays a critical role in the Florida property insurance market. Reducing the size of the FHCF, increasing its retention, or making other changes that increase the FHCF’s costs or increase the industry’s reliance on open market reinsurance will put upward pressure on rates. The FHCF proposals take this into account by making changes over a three-year period, allowing the private reinsurance market to adjust and moderating the per-year impact on insurer’s rates. On the other hand, this will likely result in annual rate adjustments in each year of the FHCF adjustments.
One underappreciated impact of the FHCF will be the disparity between private market insurance rates and those of Citizens Property Insurance Corporation if the current Citizens glide path is not adjusted. Citizens’ rate adjustments are limited to 10 percent for any policyholder. In practical effect, this means Citizens’ overall rate adjustment each year is somewhat less than 10%, and Citizens will require several years for the current glide path to bring its rates to actuarial soundness.
Some insurers have observed that even in the current market, Citizens’ rates are below their own rates making it not a residual market but a competitive market. If the FHCF shrinks, Citizens might buy more private reinsurance, or it might not. In either case, the current glide path would ensure that any increased costs remain capped. At the same time, private insurers would be required to purchase other reinsurance to replace the FHCF and would need to recover those costs. This has the potential to increase the disparity between Citizens’ rates and private market rates, further incentivizing policyholders to choose Citizens over the private market if price is a driving factor.
In sum, both policyholders and insurers benefit from ensuring that the FHCF is able to meet its promised obligations. However, if changes are made to the FHCF without considering the corresponding impact on rates in the private market and in Citizens, the changes might be detrimental to reducing the size of Citizens and restoring the private market.