Citizens Depopulation and Rates – A Practical Solution

Today, the homeowners insurance marketplace in Florida is dominated by carriers that were start-ups in the 1990s. Many of them grew by participating in takeout programs initiated to reduce the policy count acquired by the Florida Residential Property Casualty Joint Underwriting Authority, the predecessor to Citizens Property Insurance Corp. (Disclosure: Demotech reviews and rates the overwhelming majority of these carriers.)

From a non-technical perspective, a takeout occurs when a carrier has identified certain policies that it wants to write and the current carrier, Citizens, accepts the terms. If the agent and insured agree to be taken out, then the new carrier acquires additional policies and Citizens has fewer policies. In theory, a takeout permits a carrier to select the better accounts written by Citizens and offer to provide them coverage. Citizens voluntarily gives up what an independent carrier believes to be Citizens’ better accounts.

Citizens recently presented a plan for a depopulation effort. The depopulation plan involves attracting carriers by offering a direct financial benefit, surplus notes at an attractive rate, to the carrier so that it will accept policies that have been chosen by Citizens. In other words, Citizens chooses the policies that the carrier will receive. There is some agreement that Citizens’ approach to selection will be random or at least not totally biased against the carrier.

In summary, Citizens has more control over a depopulation effort than it does a takeout effort. As such, any financial incentives associated with depopulation are intended to compensate the acquiring carrier for the potential differential between the quality of the risks that Citizens may select versus the quality of the risks that the acquiring carrier might have chosen.

One of the issues of depopulation is whether the financial incentive is warranted and reasonable. This debate continues.

Based upon articles in the media, the most current depopulation proposal has supporters and detractors. However, this latest depopulation effort will not address what I believe to be a necessary, long term goal – rational, actuarially sound pricing of homeowners insurance in Florida. This would not be accomplished in the short run because a current condition for a recipient of Citizens’ funds in the form of a surplus note is that there could be no more than a 10 percent rate increase per year for three years on any policy removed from Citizens. In other words, rational, actuarially sound rates are not part of the short term equation.

Without appropriate rates focused on adequacy rather than affordability, the carrier accepting policies and surplus notes from Citizens and the rating agencies reviewing those carriers remain concerned. The typical Florida homeowners insurance carrier spends a significant amount purchasing catastrophe reinsurance, for which reinsurers justifiably charge adequate rates. Accordingly, carriers end up purchasing reinsurance at adequate rates while charging inadequate rates on the policies they issue.

We view inadequate rates as the major issue underlying the size of Citizens, as insureds typically choose lower premiums over higher premiums. To solve this issue, consideration should be given to raising rates to adequate levels statewide for all participants in the market and making adjustments for affordability a separate matter.

Assume that all rates are raised to be adequate, which would mean that the premium would be unaffordable for some Floridians. For those who cannot afford their premium, have a process to determine how much each individual Floridian can afford. Then, on a by-carrier basis, aggregate the dollar difference between the affordable premium and the actuarially sound premium and permit the carrier to assess the difference to its policyholders. Policyholders who pay their premium plus their share of the subsidy would know how much they are being assessed to assist others. They would also know that the assessment does NOT bail out carriers or pay for bonds or debt issued by Citizens to meet its obligations.

In the event that the assessment of the subsidy results in a total premium that is unaffordable, the aggrieved insured could access the same process to determine what is an affordable premium. John Rollins, a member of the board of directors of Citizens and an independent actuary, recently referred to this concept as “means-tested rates.” My suggestion takes the concept a step further by identifying the dollar difference between affordable rates and adequate rates.

Alternatively, the state of Florida could pay the subsidy. Where would this money come from? How about the extra funds held by Citizens? The reported surplus (net worth) of Citizens at June 30, 2012 was in excess of $6 billion. If reserves are adequate and its unearned premium reserve realistic, it could assist Floridians by providing more than a $6 billion down payment on the subsidy.

Call this transition means-based rates or call it an affordability subsidy, but get it in place before the wind blows so that rates are where they need to be and the cost associated with the wind is in the private sector.