Florida Approves 10.8% Rate Hike for Citizens; Also 21.4% for Sinkholes

Florida regulators have approved a 10.8 percent statewide average homeowners insurance rate increase and a 21.4 percent increase in sinkhole rates for the state-backed property insurer.

Insurance Commissioner Kevin McCarty announced the new Citizens Property Insurance Corp. rates that hue closely to the so-called glide path that restricts the insurer’s annual rate increase to 10 percent, plus any surcharges.

The new rates will to all new and renewal policies as of Jan. 1, 2013 and to the new and renewal wind-only policies as of Feb. 1, 2013.

Initially, Citizens had requested a statewide average 11.2 percent increase in its homeowner rates.

McCarty said the new rates will take Citizens one step closer to rates charged by the private market while ensuring that no policyholders will face inordinate increases in their premiums.

“Our primary goal is to ensure Citizens policyholders are treated fairly and retain an opportunity to return back to a robust private insurance market as the Florida Legislature intended,” said McCarty in statement.

Citizens’ officials, who continue to focus on cutting the number of policies in the state residual market, said they welcome the rate increases. Five private insurers have stepped forward with plans to remove up to 210,000 policies as of November. Citizens officials are also considering giving loans to a handful of other companies to remove perhaps double that figure.

“We are committed to working further with Commissioner Kevin McCarty as we move toward actuarially sound rates and seek to identify additional opportunities for our customers to find quality coverage in the private insurance market,” said Citizens in a statement.

At a recent public hearing, Citizens President Barry Gilway said the insurer needed the increase. He said that while premiums have remained stagnant since 2009 when the glide path was implemented, the insurer’s homeowners’ exposure has increased from $112 billion to $240 billion.

And even with the depopulation efforts, noted Gilway, the 1.46 million policyholder roll is expected to grow in at least the short term by 8,000 policies a day.

Without rate increases, he said, the disparity between what Citizens charges and the private market charges will continue to frustrate depopulation efforts.

“Overall, the rates are falling behind private carriers and the gap is widening,” he said.

Regulators largely agreed with Citizens. However, they took exception to Citizens choice of computer model to estimate its potential catastrophic windstorm losses.

When developing the windstorm portion of its homeowners’ rates, Florida requires insurers to consider the results of a public model created by the Florida Commission on Hurricane Loss Projection Methodology. The public model sets the benchmark for the lowest loss estimates that can be used when developing rates in any of the state’s 150 rating territories.

In addition to the public model, insurers are also allowed to utilize the AIR Worldwide model or RMS model. Citizens opted to use the AIR model, which yielded higher loss estimates than the public model or RMS model.

At the public hearing, Citizens Chief Financial Officer Sharon Binnun said the insurer had consistently used the AIR model to ensure that year-to-year loss estimates are based on the same methodology. She also said the higher loss estimates mitigated the rate difference between Citizens and private insurers who typically use the highest modeling results available.

McCarty, however, rejected that explanation saying it is not actuarially justified. Instead, regulators chose to use the RMS model, which in most cases yields loss results in the range above the public model and lower than the AIR model.

While regulators decided to reject Citizens’ use of computer model, they did agree to apply a higher risk load factor to reflect the additional cost of capital needed to insure against hurricane losses.

Previously, regulators had approved a 3.6 percent risk load factor that is available to all property insurers when calculating the profit and contingency part of their rates. That number has since been increased to 4.1 percent on homeowners’ policies and 3.6 percent for dwelling and fire policies.

When it comes to sinkhole rates, regulators found themselves confronting some evidence that the statutory reforms enacted by lawmakers in 2011 are having an impact while finding it impossible to determine exactly how much.

Among the reforms enacted in SB 408 (Florida Statute 2011), the definition of a sinkhole is narrowed, engineer inspections are required in sinkhole claims, and a mandatory 10 sinkhole deduction was put into place. Insurance Services Office estimated that those changes could result in a savings on sinkhole claims of 54 percent.

At the public hearing, however, Citizens officials noted that in 2011 the insurer collected only $51 million in sinkhole premiums to cover $445 million in claims for a loss ratio of 877 percent. And while the number of new claims filed in 2012 is only 280, there has been an influx of claims from people seeking to have their claims considered before the new law takes effect.

For those reasons, Citizens said it needed a sinkhole rate hike of 263 percent, although it filed for a 29.6 percent increase.

Given the conflicting information, regulators approved an average 21.4 percent increase that does reflect ISO’s 54 percent savings. However, regulators could find no other reasons to reduce the sinkhole rates further.

“Due to the ambiguity caused by the filed claims data, the (regulators) are unable to quantify how much SB 408 will reduce the frequency and severity of sinkhole claims,” regulators stated in their final rate order.

Florida Insurance Consumer Advocate Robin Westcott, who had argued for further reductions in sinkhole premiums, said she wished that regulators had gone further.

“I believe even further reductions are justified and I am confident that the sinkhole legislation enacted in 2011 will reduce sinkhole losses even greater than anticipated in OIR’s rate order,” Westcott said.

In setting the sinkhole rates, regulators did seek to place caps on increases in the southwest portion of the state that represents the greatest concentration of sinkhole claims. In Pasco and Hernando counties the sinkhole rate increases are capped at 25 percent and in Hillsborough County at 50 percent. In its initial filing, a rate cap of 50 percent would have applied to all three counties.

There are still several Citizens rate requests that have yet to be determined.

Regulators indicated they will have a decision on Citizens mobile homeowners rates on Oct. 8 and its commercial lines as of Oct. 19.