Florida’s insurer of last resort, Citizens Property Insurance Corp., has become the insurer of first resort as thousands of new policies flood into it each week and the private homeowners insurance market continues its downward spiral.
“The reality is the marketplace in Florida is shutting down,” Citizens President and CEO Barry Gilway said at a rate hearing before the Florida Office of Insurance Regulation this week.
Gilway painted a dire picture of the Florida domestic market to state regulators at the March 15 hearing, noting that five years of sustained losses from excessive litigation, contractor schemes, major catastrophes and the increasing cost of reinsurance has led to diminished insurance capacity and higher costs for consumers. Florida carriers’ net underwriting losses for 2020 are expected to reach a combined $1.6 billion, Gilway said, with income losses totaling nearly $840 million.
“Companies that are operating in the market are not profitable, have not been profitable, and frankly some of them are having to pay high rates of return just to get the capital in order to continue writing the level of business that they are writing today,” he said.
Florida insurers are taking significant steps to reduce their exposure in areas where there is high litigation rates or high reinsurance costs, he said. The result is four companies in Florida are now closed for new business; at least 12 companies have strict underwriting restrictions such as limits on new business/renewals based on location, age of home, age of roof; required minimum Coverage A limits and policy cancellations.
In addition to coverage restrictions, carriers are offsetting their losses with rate increases. The Florida Office of Insurance Regulation has approved 105 rate changes, 90 of which were for rate increases, over the last year, with 55 of those for rate increases of more than 10%.
Ratings agency Demotech, which rates 66% of the Florida market, is also requiring the companies it rates to restrict their writings geographically and the types of homes they write in order to retain their FSR rating.
“They are doing that basically to improve the overall profitability of these companies and make sure that when the insured does get insurance there is sufficient financial wherewithal on the part of the company to support any anticipated claims volume,” he said. “There’s a lot of restrictions on the market.”
Gilway told regulators Citizens is growing by 5,000 new policies per week and is expected to reach a policy count of 700,000 by the end of the year as carriers continue to raise rates and cut back on capacity.
Citizens’ rate of growth is further exacerbated by the competitiveness of its rates, Gilway said, noting that its homeowners policies are priced lower than the average private market rate 91% of the time.
“The capacity in the marketplace has shrunk to the point where unfortunately Citizens is becoming not the market of last resort but, in many cases, the market of first resort,” he said, adding that is never the intention for a residual market mechanism.
The concern is that Citizens could return to its 2011 policy count level where there was an assessment risk of $11.6 billion to all Florida policyholders in the event of a 1-in-100 year event. Gilway said at that point, the insurer wrote 23% of the Florida market. Its top priority is protecting the company’s surplus so it can pay claims and keep all Floridians from being stuck with paying assessments.
“As we grow, then the potential for assessment grows,” Gilway said.
Citizens’ has its own share of litigation troubles as well. Gilway told regulators that 800 lawsuits were filed against the insurer in February and 78% of the claims it receives are from nonweather water losses. While assignment of benefits reforms passed two years ago have cut its AOB litigation in half, litigated claims are still a significant driver of its rate need.
The Citizens Board of Governors approved 2021 rate recommendations in January that call for a statewide average increase of 7.2% for personal lines policyholders – homeowners, condominium unit owners, mobile homeowners, dwelling, and renters. Homeowner policies would increase by an average 6.1%; condo owners would see an average 9.4% increase; and renters rates would increase 4% on average. The proposed commercial lines increase is 9.5%.
Citizens is required by law to recommend actuarially sound rates, while complying with a legislative glide path that caps individual rate increases at 10%. The insurer’s uncapped rate indication is 25.9% for homeowners and 85.6% for commercial lines.
The proposed rate recommendations came after Citizens Board deferred action on a slate of rates that called for an average 3.7% increase in personal lines coverage, including a 2.2% increase in homeowners coverage. The board directed Citizens actuarial staff to work with OIR to address the growing disparity between Citizens rates and those charged by private insurance companies in many areas of the state.
Citizens is also seeking approval by OIR to charge new policyholders actuarially sound rates instead of allowing them to join the insurer with capped premiums that existing Citizens policyholders receive, as is the case now. The exception would be in Monroe County where rates would be capped at 20% because Citizens is essentially the only insurer option. If approved by OIR, the recommendation would increase rates for new business by an average of 21%, Citizens said previously.
OIR will accept public comments on the proposed rates through March 26. If approved, the 2021 rates would go into effect for policies renewed after August 1.