The Law Behind the Citizens Rate Debate
The rate levels of Citizens Property Insurance Corporation have received considerable attention in recent weeks. Citizens committees have considered the possibility that under current law it should be charging actuarially sound rates for new customers and its capped rates should apply only to existing customers. Although the statutory basis for this approach has been part of the discussion, this proposal has drawn opposition from several sources, including CFO Jeff Atwater.
To fully understand the issue, it is helpful to review the relevant portion of the Citizens statute, with emphasis on particular phrases:
(n)1. Rates for coverage provided by the corporation must be actuarially sound and subject to s. 627.062, except as otherwise provided in this paragraph. The corporation shall file its recommended rates with the office at least annually. The corporation shall provide any additional information regarding the rates which the office requires. The office shall consider the recommendations of the board and issue a final order establishing the rates for the corporation within 45 days after the recommended rates are filed. The corporation may not pursue an administrative challenge or judicial review of the final order of the office.
2. In addition to the rates otherwise determined pursuant to this paragraph, the corporation shall impose and collect an amount equal to the premium tax provided in s. 624.509 to augment the financial resources of the corporation.
3. After the public hurricane loss-projection model under s. 627.06281 has been found to be accurate and reliable by the Florida Commission on Hurricane Loss Projection Methodology, the model shall serve as the minimum benchmark for determining the windstorm portion of the corporation’s rates. This subparagraph does not require or allow the corporation to adopt rates lower than the rates otherwise required or allowed by this paragraph.
4. The rate filings for the corporation which were approved by the office and took effect January 1, 2007, are rescinded, except for those rates that were lowered. As soon as possible, the corporation shall begin using the lower rates that were in effect on December 31, 2006, and provide refunds to policyholders who paid higher rates as a result of that rate filing. The rates in effect on December 31, 2006, remain in effect for the 2007 and 2008 calendar years except for any rate change that results in a lower rate. The next rate change that may increase rates shall take effect pursuant to a new rate filing recommended by the corporation and established by the office, subject to this paragraph.
5. Beginning on July 15, 2009, and annually thereafter, the corporation must make a recommended actuarially sound rate filing for each personal and commercial line of business it writes, to be effective no earlier than January 1, 2010.
6. Beginning on or after January 1, 2010, and notwithstanding the board’s recommended rates and the office’s final order regarding the corporation’s filed rates under subparagraph 1., the corporation shall annually implement a rate increase which, except for sinkhole coverage, does not exceed 10 percent for any single policy issued by the corporation, excluding coverage changes and surcharges.
7. The corporation may also implement an increase to reflect the effect on the corporation of the cash buildup factor pursuant to s. 215.555(5)(b).
8. The corporation’s implementation of rates as prescribed in subparagraph 6. shall cease for any line of business written by the corporation upon the corporation’s implementation of actuarially sound rates. Thereafter, the corporation shall annually make a recommended actuarially sound rate filing for each commercial and personal line of business the corporation writes.
The above statute indicates that Citizens should file recommended rates on an actuarially sound basis. However, notwithstanding this filing, Citizens cannot increase the rates for any individual policyholder by more than 10%. It is clear, therefore, that existing policyholders will see the effects of Citizens’ rate changes phased in over time according to the 10% glide path established by the legislature. Open to debate, however, is whether the imposition of the glide path on existing policies means that Citizens can, and in fact should, implement actuarially sound rates for new business. On a related note, Florida’s rating law allows insurers to phase in proposed rate increases, creating the possibility that Citizens could implement actuarially sound rates without abrupt swings but at a faster rate than under the glide path. Also, some observers might inquire whether Citizens’ rate structure would be unfairly discriminatory if it were charging actuarially sound rates for new business but capped rates for existing business. However, the specific rating provisions of Citizens’ statute seemingly would take precedence over the more general provision of the rating law.
As with many issues relating to Citizens, rating considerations require careful study and a delicate balance. Supporters of continuing the glide path cap on rates for new business must recognize this runs counter to decreasing the size of Citizens and ultimately increases the potential assessment burden on all Floridians, including the majority of Floridians who do not hold a Citizens policy. At the same time, there are areas of the state where consumers have little or no choice other than Citizens, and some policymakers point out that abrupt changes in Citizens’ rates might have an adverse effect on the real estate market and other aspects of the economic recovery. Given the importance of these issues, the Citizens board and policymakers can be expected to continue their careful study of these issues.