Your Population Program is Better Than Your Depopulation Program
As the 2013 legislative session approaches, the respective insurance committees of the Florida Senate and House of Representatives are beginning to address issues related to Citizens Property Insurance Corporation. Citizens continues to take on 8000 new policies a week, and notwithstanding substantial depopulation activity late this year its policy count will drift back up as fewer policies are assumed prior to the 2013 hurricane season. The underlying issue is fairly simple– the legislature froze Citizens’ rates several years ago and when it finally lifted the freeze it set a cap on annual rate increases that has assured Citizens’ rates lag the market. A number of insurers continue to write new business in the state, but they obviously tend to avoid risks where premiums are inadequate in relation to risks and expenses. This means that in addition to the residual market risks Citizens should be writing, Citizens also writes many risks for which the sole issue is rate adequacy.
Representative Doug Broxson summarized the issue last week about as simply and succinctly as it can be said: Citizens’ population program outweighs its depopulation program. By selling its product at a subsidized rate below the private sector costs, Citizens will continue to have plenty of new customers. Worse, it will take on these customers faster than it can send them back to the private market through depopulation initiatives. This is because the private market will take out the policies it perceives to be rate adequate, while the inadequately rated policies will stay behind.
The House insurance committee touched upon the first step toward reducing the size of Citizens– stop making it more attractive to join Citizens than the private market. The decision to moderate the rate increases of policyholders already in Citizens arguably was a reasonable public policy decision at the time. However, Citizens’ selling new policies at rates lower than the private market is fundamentally inconsistent with any notion that Citizens is a residual market. As the old saying goes, when you’re in a hole, the first thing you should do is stop digging. The first thing policymakers should do is address the reason Citizens is taking on new business so rapidly. Once that happens, figuring out how to reduce the existing policy count will make more sense.
Of course, the legislature does not agree on the approach for Citizens, and therefore its fundamental role. Several members of the House insurance committee said Citizens should immediately seek to implement actuarial sound rates for new business. This was promptly followed later in the week by a bill from Senator Flores specifying that Citizens’ subsidized rates should apply to both new and renewal business. The first step toward depopulation is to address whether Citizens truly is a residual market, or whether it is a government-mandated, taxpayer-subsidized competitor to the private market. If it is a residual market, the next step is simple– Citizens should be charging realistic rates for new business. Only then will depopulation efforts lead to a smaller Citizens in the future.