Citizens Survey Reflects Market Concerns
Citizens Property Insurance Corporation recently sent a survey to companies authorized to write property insurance in Florida seeking their input regarding impediments to depopulation. Citizens’ policy count has increased dramatically in recent months, and interest in so-called take-out has been limited. The reconstituted depopulation committee of Citizens met last week to consider the results. The committee initially seemed disappointed in what seemed to be a low number of carriers responding to the survey. However, after some discussion, the committee saw that while a minority of the companies authorized to write the lines responded, the number of companies responding likely does reflect a substantial portion of the market actually writing today. In any event, the survey does show some concerns that are keeping insurers from taking policies out of Citizens.
Before looking into the meaning of the results, a few of the responses relating to the personal residential (homeowners) market are worth noting:
- 42 companies answered the question of whether last year’s SB 408 has influenced the number of policies they intend to write in 2012. Over 70% said no, with less than 30% saying yes.
- When asked whether SB 408 changes specific to Citizens affected their projections, 90% of the companies said no and 10% said yes.
Together, these items suggest that last year’s (1) last year’s law changes did not send a signal to the market that conditions in Florida will improve and the market is likely to show favorable prospects going forward (i.e., the law did not “fix” perceived problems in Florida), and (2) the problem is not necessarily what the law is, but rather how Florida implements the laws that do exist (i.e., if insurers do not perceive that rate adequacy exists at the individual risk level, they will limit their writings).
Further survey responses provide additional insight. Citizens asked insurers to rank various factors influencing their decisions to whether to remove policies from Citizens. Although a decision not to take policies from Citizens likely arises from a combination of factors, several results stand out:
- The largest factor ranked as “very important” was the ability of the insurer to charge adequate rates during the remainder of the takeout period. More than 70% of the respondents cited this issue. Another 14% described this as “important.”
- Other factors highly ranked as “very important” or “important” were the loss ratio on the policies to be assumed and the average annual loss-to-premium ratio on the policies.
- Availability and cost of reinsurance scored high, as did the quality and availability of Citizens data.
- Among the categories least often scored as very important were the willingness of agents to accept appointments, the payment of a ceding commisison, and the availability (or lack) of a take-out bonus.
So what’s going on here? The most significant barriers to depopulation aren’t inherent in Citizens’ process. Again, the real issue comes down to rate adequacy. The issues identified in the first two bullets above are really driving at the same thing— are the premiums going to be sufficient to cover the costs? If the answer is no, all of the effort in the world to improve the mechanical process of assuming policies won’t do anything. Simply put, Citizens has a large number of risks that are priced at levels that are not sufficient for insurers to pay for reinsurance costs, catastrophe retentions, non-cat losses and operating expenses, much less reach reasonable margins. This really isn’t a surprise; it is the intended consequence of a policy decision to suppress Citizens’ rate levels through statutory caps. Nonetheless, the difference between having a residual market with a few hundred thousand policies and one with over a million policies comes down to rate adequacy.
Citizens does a good job assisting companies that want to assume policies. Improving data quality will help insurers analyze potential portfolios, and perhaps adjusting the opt-out process to create better predictability for assumption portfolios will be a benefit. There is capital in the worldwide market that is interested in Florida. However, this capital will not pursue an opportunity to write policies at rates it perceives to be inadequate, particularly in a state like Florida that has showed wide swings in public policy relating to its residual market and the property insurance market as a whole. This leads us to the only real depopulation plan that will work in the long run– a residual market that approaches rate adequacy, prompting private capital to find an increasing number of risks that meet its profile, hopefully while maintaining a consistent public policy approach over a period of years.