Florida Senate Bill Would Depopulate Citizens, Raise Rates, Create Clearinghouse

Lawmakers in the Florida Senate have taken steps to return the state-backed insurer Citizens Property Insurance Corp. to its original purpose of being a market of last resort by requiring it to charge actuarially sound rates and restrict the number and type of properties that it insures.

The Florida Senate Banking and Insurance subcommittee, after weeks of deliberation, approved SB 7018 that includes provisions designed the reduce the 1.2 million policies written by Citizens and revive the state’s private market.

Senator David Simmons (R-Altamonte Springs), subcommittee chair, said the changes in the bill would reverse current market conditions that have seen Citizens come to dominate the property market and made it difficult for private insurers to compete.

“Going forward, we have to fix Citizens and what this bill does on July 1 is subject Citizens to a mission statement that has been lost over the last seven or eight years,” said Simmons.

Central to the bill is a change in Citizens rating methodology that would increase rates to actuarially sound levels. It would exempt new policies from the current glidepath that limits rate increases to 10 percent annually. Instead, the rates on new policies would be based on the highest of the top 20 private insurers writing in a given territory.

In cases where there is no private market in a given territory, regulators would have to calculate an actuarial rate.

Citizens would also be permitted to increase rates by three percent to purchase additional reinsurance and, in so doing, decrease its policyholder surcharges by one percent in the coastal, personal lines and commercial accounts.

Simmons said the new rating structure would make Citizens less attractive to homeowners and help revitalize the private market, which has been struggling to compete for business with the low-priced Citizens.

“No longer will Citizens be undercutting private insurers in the state of Florida,” said Simmons.

In addition to changing the rating methodology, lawmakers also are looking to restrict the eligibility of properties for coverage based on home values.

Under the bill, starting in January 1, 2014, homes with a replacement value of more than $1 million would no longer be eligible to be insured with Citizens. Over the course of the next five years, that threshold would be lowered by $100,000 annually until by 2019 homes with replacement value of $500,000 or more would be ineligible for Citizens policies.

Senator Gwen Margolis (D-Miami) said this “stair step” approach to reducing the coverage limits on high-value properties would give homeowners and condominium owners time to prepare for the changes. She said that is especially important because the property owners have to maintain enough coverage to satisfy mortgage lenders.

“I have talked to a lot or realtors about what problems people have to insure their mortgages,” said Margolis. “This gives people time either to find new policies or borrow money to pay down their mortgage.”

Lawmakers also took aim at non-homestead properties owned by second home owners and individuals who reside out-of-state. According to Citizens data, 167,962 policyholders have mailing addresses that are in the U.S. but not in Florida, and 24,672 policies have foreign addresses.

“Someone is going to ask why we, the citizens of Florida, are subsidizing 192,000 residents,” said Simon.

Simmons originally wanted to make all of these non-homestead properties ineligible for Citizens but he supported an amendment from Margolis that would require that all current non-homestead and non-rental properties with a replacement cost greater than $300,000 be subject to rates based on the highest of the top 20 insurers writing in the territory, or be otherwise actuarially sound.

In the case where an owner of a second home is renting over a 12-month period, those rates would remain under the glidepath limiting increases to no more than 10 percent per year.

The changes would affect an estimated 30,000 homeowners and 3.1 percent of the Citizens overall market share. But Simmons said the rate change is well worth it.

“Why make a big deal of this?” Simmons said. “Because of the liability it represents for the citizens of Florida.”

To further depopulate Citizens, the measure also calls for creation of a clearinghouse through which new and renewal policies will be marketed to private insurers before they can become eligible for Citizens.

The bill also instructs Citizens officials to devise a program where some individual homeowners could request their rates be modified based on financial need.

Senate lawmakers also included a controversial surplus note program, which would allow Citizens to loan a private insurer part of its surplus in exchange for the insurer taking policies out of Citizens. Citizens initiated the concept last year but pulled it back due to lack of insurer interest and a protest by some lawmakers that it represented corporate welfare.

While the Senate is taking an aggressive posture toward increasing rates and depopulating Citizens, so far the House of Representatives is not exactly in step. The House Insurance and Banking committee has approved two bills that are much narrower in scope.

Representative John Wood (R-Winter Haven) is sponsoring HB 835 that matches the Senate’s reduction in high-valued policy coverage. However, his bill does not make any changes to Citizens rating methodology, keeping intact the 10 percent glidepath for both new and renewal policies. The committee also approved a second bill that matches the Senate by creating a clearinghouse in Citizens.

Donovan Brown, Property Casualty Insurers Association counsel for state relations, said he expects that the House will eventually consider other provisions in the Senate bill.

“There are parts of the Senate bill that they do agree with,” said Brown. “And I think while the House has a limited scope for now, that doesn’t mean they won’t consider others.”

Other insurance representatives are taking a wait-and-see approach to the reforms pending Insurance Commissioner Kevin McCarty’s analysis of the bills’ impact on the market.

Florida Association of Insurance Agents President Jeff Grady said that the Senate legislation raises many questions, the most pressing of which is the impact on policyholder premiums.

“The legislation is well intended but there is some difficulty to see how much of this translates into rate increases,” said Grady. “But the process is a long way from here.”

He said he expects the bill will be amended as it moves forward.