Florida’s Citizens Puts Brakes on Surplus Note Program

Florida’s state-backed property insurer has opted to put the brakes on its plan to loan private insurers up to $350 million in surplus in order to address a growing wave of criticism from lawmakers, elected officials, and consumer groups.

Citizens Property Insurance Corp. had initially hoped to have its full board approve the plan and consider proposals from private insurers later this month in preparation for the insurers removing as many as 300,000 policies in December.

But faced with a rising number of objections, and at the suggestion of Citizens Chair Carlos Lacasa, the insurer has decided to bring in an outside financial consulting firm, such as Goldman Sachs, with experience in evaluating surplus note programs.

Citizens Depopulation Committee Chair Chris Gardner said the delay is needed so the program can be thoroughly scrutinized and gain the support of officials.

“I want to express my desire to make sure elected officials’ concerns are addressed,” said Gardner. “And simultaneously fulfill our mission to depopulate and maintain the confidence of the public and officials.”

Among those voicing concerns about the program have been Chief Financial Officer Jeff Atwater, incoming House Speaker Will Weatherford, (R-Tampa), Senator Mike Fasano, (D-New Port Richey), and Rep. Frank Artiles, (R-Miami).

Gardner warned, however, that the additional review should not be used to “run out the clock.” The “realistic time period for a company to move policies” is the few months after the hurricane season and that window is closing in a few months at the latest, he said.

Despite the blowback from elected officials and others, Citizens President Barry Gilway defended the program, saying the benefits to policyholders in better coverage and the reduced threat of assessments justify moving the program forward.

Citizens officials estimate the surplus note program could transfer $2 billion in risk back to the private market and potentially decrease the assessment load faced by policyholders by $1.7 billion. And since insurers would be required to maintain any policy they remove for 10 years, it could represent a $5.5 billion reduction in the insurer’s overall exposure.

Citizens officials estimate that if all the policies are removed it could decrease its share of the southeast market from 34 percent to 27 percent and its total market share from 19 percent to 15 percent. It would also lower Citizens’ Florida Hurricane Catastrophe Fund payment by $55 million annually and save $2.4 million in reinsurance costs.

Given that Citizens is growing at a rate of 8,000 policies a week and 30,000 policies a month, Gilway argued that the depopulation program is imperative given the assessments policyholders could face in the event of a major hurricane.

“Doing nothing is not an option,” said Gilway.

The surplus note program is complex.

The notes would be for 20 years and for the first three years the insurer would only have to pay interest on the note based on the 10-year U.S. Treasury Bond rate, which is roughly 1.8 percent. The surplus note insurers must offer policyholders an offer of renewal for 10 years and for the first three years they must use Citizens policy forms with no more than a 10 percent increase in rates. After that the surplus note insurers would be free to use their own policy forms and rates.

Committee member Jeff Grady, president of Florida Association of Insurance Agents, questioned if that would not inevitably lead to “churning,” whereby policyholders would eventually make their way back into Citizens in search of lower rates.

Citizens CFO Sharron Binnun said that hopefully during that three-year period policyholders would come to understand the assessment burden they face as a Citizens policyholder, which could be as high as 45 percent.

But Grady said that when consumers walk into an agent’s office, the assessments are the least of their concerns. “On the ground, at the point of sale, when the difference is a couple of hundred bucks. They are not thinking that way,” he said. “That’s tomorrow’s problem, not today’s.”

Citizens was asked if a private insurer loses a policy under the surplus note program due to changes in the insurer’s underwriting criteria or for other reasons, what guarantee is there that the insurer will use the proceeds from the surplus note to replace it with another Citizens’ policy.

Citizens is proposing that the insurer must first search for a home in the same zip code, with the same construction characteristics and Florida Hurricane Catastrophe Fund premium. If no home is available under those terms, the insurer must look in the same zip code with the same Cat Fund premium. Otherwise, the insurer is required to look for a home in Citizens rating territory and, finally, one with the same Cat Fund premium. Only when those options are exhausted can an insurer choose to write another policy in the private market.

Lacasa questioned how Citizens could make sure that a private insurer is following the spirit of the process.

“How do we ensure that an insurance company is making a good faith effort and is not just drilling down to the private market,” said Lacasa, who suggested that Citizens should work alongside a private insurer when examining potential policies for removal.

Gilway said that would in essence involve Citizens participating in a private insurer’s underwriting process, which might make some insurers rethink participating in the program.

“As an executive of a private company, I’m not going to participate in a program where I have to give up the strategic direction of my company,” said Gilway.

Grady, however, noted that requiring surplus note companies to follow the steps outlined could serve as a keep-out program. Now, he said, if a private insurer decided to non-renew policies in an area where Citizens is the only remaining option, they have the potential of turning to another private insurer.

“If a policy is non-renewed and policy ABC is heading to Citizens, now it can go to a surplus note insurer if they need it,” said Grady.