Citizens Rates and the Silent Majority
The board of governors of Citizens Property Insurance Corporation considered a proposal Thursday that would have resulted in its charging actuarially appropriate rates for new customers while maintaining the statutorily-imposed glide path for existing customers. The board ultimately decide to give further consideration to the issue before acting.
A significant factor in the decision to defer action was the adverse feedback from lawmakers and state officials. Citizens’ implementing statute requires it to have actuarially sound rates, but also requires the corporation to cap policyholders’ rate increases at 10 percent per year. This supports the suggestion that different rate levels can, and should, apply to new business and renewal business.
“In plain language, a new policy is not subject to the cap,” according to Citizens Chairman Carlos Lacasa. General counsel Dan Sumner agreed, stating that Citizens’ artificially low rates deter competition from private carriers and preclude meaningful reductions in Citizens’ size.
Sumner said residential rates are 43 percent of what they should be, with rates on commercial insurance being about 75 percent short.
As the old saying goes, the first thing to do when you’re in a hole is stop digging. In Citizens’ case, there’s a big hole of more than a million policies written by an organization with rates that are, in the aggregate, inadequate. The first step in stemming this problem is to stop writing policies at inadequate rates. Although some policmakers and critics contend that Citizens should continue making underpriced insurance available, this reflects the vocal minority urging policy that works to the disadvantage of the silent majority. Citizens’ shortfalls will be made up through assessments on all Florida policyholders, not just those who have Citizens policies. Most policyholders in this state are not insured by Citizens. This means people who are not benefitting from Citizens’ underpriced insurance end up paying the difference.
It is clear that insurance is not readily available in some areas of the state. However, that doesn’t mandate a conclusion that the state, when making coverage available, should undercharge for it. In fact, when Citizens undercharges for its product, it has an adverse effect on the private market. Unable to compete with Citizens’ inadequate rates, the private market pulls back on its writings, making the lack of availability a self-fulfilling prophecy. If Florida is going to revitalize the private market and reduce the massize assessment potential that exists in Citizens, the first step will be to address the extent to which Citizens’ rates undercut the private market and are not reflective of its own costs.