• Florida's Citizens Property Insurance Evaluates Operations Budget as Policy Numbers Continue to Decrease; Changes Approved to Appraisal, Second Structure Policy Language
  • October 8, 2015
  • Law Firm: Colodny Fass P.A. - Sunrise Office
  • Florida's Citizens Property Insurance Corporation ("Citizens") will continue to shrink as depopulation activities proceed in the months ahead, but the State-run insurer's top executive warned its Board of Governors ("Board") that water loss claims continue to hamper efforts to reduce rates for many policyholders.

    In his overview, Citizens' President, CEO and Executive Director Barry Gilway reported that, since January 2015, 141,680 Citizens customers have found coverage in the private market, which has allowed Citizens to shrink to under 586,000 policies from a peak of nearly 1.5 million in 2012.

    Ironically, this rapid depopulation has presented a whole new set of challenges, since the resulting reduction in premium places an upward pressure on Citizens' operating margins, he explained.

    With revenue down, but claims costs still high, Citizens continues to work on further improvement to its loss costs based upon the current litigation levels, which were described as "historic." To best develop its operating path forward for the 2016-2017 fiscal year, Citizens has forecasted the impact of continued depopulation on its financial position under specific scenarios. Administrative expenses are being evaluated to help balance the decline in premium with the ability to absorb a rapid and significant increase in premium and claims levels following an event or series of events on a change in reinsurance pricing.

    To date, Citizens has completed a review projects now underway, including over 60 major initiatives on which decisions are still pending. Notably, it has performed a review of 458 contracts--all over $250,000 and representing $1.069 billion total contract value--to determine criticality, scalability and possible future savings. A forecast has also been made on the financial impact of 1-in-25 and 1-in-100 year catastrophes, second events and the impact that lower probable maximum loss would have on future reinsurance purchases, as well as renewal decisions on current reinsurance agreements--one of Citizens' most critical expense areas.

    Additionally, Citizens is providing customers with more information regarding the takeout process--including estimates on renewal rates--to help them make more informed decisions.

    Coupled with its reinsurance program, which has transferred $3.9 billion in risk from policyholders to global investors, depopulation efforts have helped Citizens eliminate the risk of assessments on Florida policyholders following a 1-in-100 year storm, while continuing to serve policyholders who cannot find coverage in the private market, Mr. Gilway said.

    Water loss remains a challenge for Citizens, especially in Miami-Dade County, where these types of claims now account for more than half of every premium dollar collected.

    If water claims in Miami-Dade mirrored trends in other parts of Florida, more than nine out of 10 Miami-Dade policyholders would have seen rate reductions for 2016, Mr. Gilway said. Instead, the Florida Office of Insurance Regulation approved rates last month that call for an average 8.1 percent increase for Miami-Dade customers.

    "With all this success, leading Citizens is almost like playing whack-a-mole," Mr. Gilway said. "When you knock down one issue, another one takes its place. In claims, the critical issue that has surfaced in the past two years is water damage."

    Citizens is ramping up efforts to educate policyholders on how to effectively identify and report legitimate water claims while bolstering efforts to ascertain fraudulent claims he described as preventing Citizens from reducing rates in South Florida.

    Among the efforts is a voluntary program to link customers with qualified remediation and repair companies to provide rapid, guaranteed repairs while reducing costs for all policyholders.

    The Board also pproved various action items today, including contracts with six vendors to provide a collective 750 commercial adjusters.

    Also approved were changes to Citizens' Personal Lines policy contract language addressing the "Appraisal" section. The intent is to improve the effectiveness of the appraisal process, align better with private industry policy language, and encourage policyholders to consider alternative dispute resolution rather than costly, time-consuming litigation.

    Among the changes are:
    • Elimination of proposed language providing a 60-day review period prior to the inception of the appraisal process
    • Deletion of the phrase "financially disinterested" as a requirement for appraisers or umpires
    • Introduction of the requirement that an appraiser be "competent," replacing the term "impartial"
    • Introduction of the requirement that the umpire be "competent and impartial," utilizing the language introduced by 2015 legislation defining "appraisal conflicts of interest for umpires" (Section 627.70151, F.S.)
    • Refinement of requirements for supporting documentation of damaged property, clarifying additional details that must be included in an appraisal award
    The Florida Office of Insurance Regulation must still approve these revisions.

    Modifications were also approved for Citizens' underwriting rules to allow separate policies for secondary habitable structures located on the same property. Citizens' current procedures do not allow for this.

    Many properties in Florida include a second habitable structure on the same property as the primary residence. The only coverage available for these structures is the 10 percent blanket coverage B extended from the primary structure. This limited coverage amount is frequently inadequate to cover the second structure. Citizens has received market feedback that its current practice leaves certain customers unable to secure sufficient coverage for these structures.

    At one time, Citizens allowed a separate policy to be written on the second structure. However, in 2012, when the option to schedule other structures under Coverage B was eliminated, Citizens also ceased writing separate policies for these secondary structures. Existing policies that were already in force with Citizens were allowed to renew. The recent plan to reinstate Coverage B limits up to an additional 50 percent of Coverage A will address some, but not all, scenarios for secondary structures. Changes in the development timeline for expanding Coverage B limits have delayed this option to provide any additional coverage.

    Market research of numerous Florida private market insurers indicates that many allow a separate policy to be written on secondary habitable structures. Others will not write a separate policy, but offer higher limits as part of Coverage B Scheduled Structures.

    While some such coverage may be available in the private market, there are still individual situations and regions where the private market will not accommodate these types of risks.

    Additional analysis has identified potential coverage redundancies when multiple polices are issued. Minor duplications in coverage can be addressed through underwriting rules, coverage exclusions or the application of the "Other Insurance" clause in the policies. These issues are minor and do not create unacceptable excess exposure for Citizens, it was explained.