The Composition of Citizens and Its Effect on Depopulation
Policymakers, industry representatives and other interested parties continue to discuss the role of Citizens Property Insurance Corporation in the Florida market and opportunities that might exist to reduce its size. Various parties have proposed ideas for encouraging the admitted market to write more business or to take policies out of Citizens. Citizens officials recently convened a “depopulation summit” to allow anyone interested in the topic to share his or her ideas. Ultimately, however, the state’s ability to reduce the size of Citizens requires an understanding of the types of business that are in Citizens. Bob Ritchie took the opportunity to categorize the types of business in Citizens in his remarks to the depopulation summit. Although there might be other ways of categorizing or subdividing the Citizens business, Mr. Ritchie’s description warrants further consideration. Below I’ve set forth the broad categories he mentioned, coupled with my own thoughts or observations.
Residual Market– Mr. Ritchie first pointed out that as one would expect for a residual market, Citizens has a core group of policies that will not be able to find coverage in the admitted market due to risk quality. These policies might have poor loss ratios, construction types that are not consistent with the admitted market’s current desires or guidelines, or other characteristics that make them unlikely to find coverage with a private insurer. Realistically, we have to expect these policies to remain in Citizens. Perhaps the most significant question for these type of policies is whether some of them meet even the most basic of underwriting criteria. Recall that one characterization of Citizens’ role is to provide coverage to persons who are “in good faith entitled” to it but are unable to find it. Assuming these policies indeed meet the minimum standards of underwriting for a residual market, then we can expect these policies to remain in Citizens for the foreseeable future.
Coastal– The vast number of coastal properties in Florida presents a challenge in securing adequate capacity for insuring them. Admitted market insurers seek to mitigate their exposure to catastrophic losses by diversifying their portfolios geographically. This presents is challenging in a peninsular state like Florida where the population centers are concentrated in southeast Florida and in central Florida. Increasing private market capacity will help reduce Citizens’ coastal exposures because any private insurer’s portfolio inevitably will include some of these southeastern and central Florida risks. A key public policy question for this state is the degree to which its residents should be asked to subsidize the insurance rates paid on non-homestead properties.
Tri-County Non-Coastal– Some areas of the state– South Florida in particular, have become increasingly affected by high loss ratios on the non-catastrophe aspects of the business. The combination of fraudulent or inflated claims, the prevalence of public adjusters, and high severity of losses is causing the private market to reduce capacity in some of these areas even aside from the threat of hurricanes. In this case, perception becomes reality, and if insurers perceive that certain areas of the state or types of coverages present adverse business opportunities, insurers will shift capacity away from those areas. The downside, of course, is that Citizens is unable to do this, and it is left to write business in these areas ultimately causing these increased costs to be borne not only by its own policyholders but also by Floridians at large.
Manufactured Housing– Citizens has a significant number of manufactured housing risks (not to mention that many homeowners in this segment choose to go uninsured). Manufactured housing capacity in the admitted market is a small subset of the overall personal residential insurance capacity. We therefore can expect a significant number of manufactured housing risks to remain in Citizens for the foreseeable future.
Sinkhole– Two legislative sessions ago there was some discussion about whether Florida should have a sinkhole facility. Unfortunately, Citizens is serving in this role. Citizens writes a disproportionate share of the policies in areas that have histories of sinkhole exposures. Given the catastrophic nature of this risk and uncertainties regarding some of the sinkhole laws, the admitted market will remain reluctant to write sinkhole coverage in areas that have been most effect. It is unrealistic to think Citizens’ exposures will be reduced in these areas anytime soon.
The admitted market will write additional policies, and even take current policies from Citizens, if it perceives the rate levels to be adequate. At the same time, Florida law and public policy will need to respond to some of the specific concerns– sinkhole exposure, high non-catastrophe loss ratios, etc., to make even more meaningful reductions in Citizens’ exposures.