By Kathy Danforth / Published January 2015
Created by the legislature in 2002 to provide stability in the aftermath of natural disasters and the retreat of insurers, Citizens Property Insurance Corporation was intended to be “insurer of last resort.” Hence, its growth and status as the largest insurer in the state was not the welcome news that it might be for a private, for-profit organization. Adam Marmelstein, Director of Market Services with Citizens, states, “The number of Citizens policies grew tremendously in the wake of these storms, so there is a depopulation effort underway to return Citizens to its natural state: providing coverage to those who cannot get it elsewhere. We have developed and designed programs to carry out the mandates of the legislature to reduce the number of policies, in compliance with the directives of the Florida Office of Insurance Regulation and in conjunction with mandates from the Department of Financial Services.
“There are three programs to do this,” Marmelstein explains. “The Florida Market Assistance Plan, an older program, which is not as well known, enables agents to find individual Citizens policies that they feel they have amarket for and contact that customer to remove that policy from Citizens.
“Clearinghouse, which began in January 2014, acts in two ways,” according to Marmelstein. “Anyone who wants a new policy with Citizens has to first go through Clearinghouse to see if there is an available market to take that risk. In September 2014, we also started processing existing policies through Clearinghouse before renewal in an effort to find a private market insurer before renewal. Currently this program is only aimed at individual, residential homeowners with an HO3 policy, and does not apply to condominium units, rental homes, mobile homes, or commercial residential policies held by homeowner associations or condominiums. Some of these policy types will be added to the Clearinghouse program in 2015 as required by statute.
“The policy assumption program includes commercial residential properties and affects homeowner associations and condominiums,” says Marmelstein. “The Florida Office of Insurance Regulation evaluates ‘takeout carriers’ (TOC) for financial status and stability, and if approved, these companies can select existing Citizens policies to assume. The carriers are provided a set of data from Citizens with policy information such as location, type of construction, and coverage values so the company can manage their risks. This process enables a company to acquire large quantities of policies—hundreds to thousands in one fell swoop—since trying to pursue them through an agent one policy at a time is much more labor intensive.”
When a TOC chooses a policy to assume, they will contact the policy-holder, who can choose whether to accept or reject the offer. Marmelsteinnotes, “If the association’s agent does not have a limited servicing agreement (LSA) with that carrier, the policyholder does not receive the offer.If there is not another offer from a carrier with whom the agent does have an LSA—in which case, they would receive that offer—then the policyholder will receive an “Agent Decline” letter as required by statute. Thisinforms a policyholder that an offer exists, but that it is not available forthe policyholder’s consideration. The letter suggests that the policyholder should contact their agent if they wish to learn more about the offer.”
Marty Turner, President of Turner Insurance Advisor Group, Inc., observes, “An agent may decline to participate for many reasons; it could be compensation, carrier reputation, an unfavorable contract, etc.”
Two advantages of a private policy are avoiding the possibility of a significant assessment and improved coverage. “If you are with Citizens, you are first in line to be assessed a fee if Citizens cannot pay all of its claims,” Michael Peltier, Media Relations Manager with Citizens, states. “A Citizens policyholder can have an assessment up to 45 percent of their annual premium to cover losses. With a private policy, this is limited to two percent of the premium. Citizens has the power to levy these assessments to remain solvent.”
Marmelstein adds, “Another advantage of a TOC is that they often offer better coverage. For example, for residential policies Citizens covers personal contents with a limit of 25 percent of the coverage A limit, whilemost private carriers have a limit of 50 percent of coverage A limits. Commercial residential policies, such as condominiums or HOAs, have more variability in terms, but generally have more limited coverage with Citizens.”
Turner observes differences in coverage, some of which may be significant to a community. “First, Citizens only writes Basic Form coverage, which is the least attractive form of property coverage [and excludes all perils not specifically named]. Every private market carrier that I know of writes Special Form coverage, which is the best coverage [and only excludes specified perils]. Citizens does not offer coverage enhancements like ordinance and law, equipment breakdown, and lower deductibles. The Citizens sinkhole deductible is 10 percent, but many of the private companies offer a lower amount.”
“In November 2014, the Florida Office of Insurance Regulation began requiring TOCs to disclose what their anticipated premium would be, either in their opt-out letter informing the policyholder of their option to leave Citizens or by supplying a contact phone number. Citizens also provides the Citizens renewal premium amount to the carrier to be provided in the opt-out letter so the policyholder can make an informed decision whether to participate in the takeout offer,” Marmelstein relates. “Coverage by a TOC must be at least comparable to Citizens, but ‘comparable’ is a term defined by law
in Florida Statute 627.351(6)(c)5b, and is not necessarily what a board might consider comparable. The five points which must at least equal Citizens’ coverage benefits are coverage A (coverage of the main building), hurricane deductible percent, law and ordinance coverage percent (if the Citizens policy included this coverage), wind mitigation credits available, and method of loss payment (either replacement costs or market value).”
There are other aspects of coverage or issues in changing carriers to be considered, such as sinkhole coverage, payment plans, anticipated future premiums, losing grandfathered status at Citizens, etc. Peltier notes, “For some communities, Citizens may have treated a risk for a property differently than a private carrier in terms of rating and pricing, but they are grandfathered in on a ‘glide path’ that guarantees rates cannot go up more than 10 percent each year. The agents play such a critical role in the process of helping policyholders evaluate their individual situation. We rely on them to be the experts in advising their clients how to best protect themselves.”
“If a community gets an assumption offer for a commercial residential property through the assumption process, the association can always opt out of it,” states Marmelstein. “The association can opt out from 30 days before until 30 days after the assumption date. After the opt-out period and up until the expiration date of the Citizens policy, the policyholder is eligible to return to Citizens without meeting the premium test that no private policy at less than 115 percent of the Citizens premium is available, but they will be subject to all the same underwriting re-quirements as a new policy and will also be charged rates identical to any other new business. I am not aware of any plans or proposed legislation that would interfere with this ability of an association to opt out of any assumption offer.”
If an association does accept a private TOC offer and later wishes to return to Citizens, it will be treated as new business and be subject to new underwriting guidelines and eligibilitystandards. “It is not guaranteed that Citizens will cover any property,” Marmelstein notes. “Even though it’s the insurance of last resort, it’s not the insurance of everyone regardless of their risk. If there’s existing damage, ancient roofs, or other unacceptable coverage risks, we won’t cover it.”
Marmelstein clarifies, “This process is different than when a private market offer is made at renewal that is equal or less than the premium from the Citizens renewal policy. If an association receives such an offer, they are ineligible for renewal at Citizens. It doesn’t mean that particular offer has to be accepted, but the association is no longer eligible for renewal coverage from Citizens. However, a takeout offer in the assumption program is not considered to be a binding offer that makes an association ineligible for Citizens renewal.”
“The coastal areas are not as likely to be chosen by a TOC because the gap between the Citizens premium and what a private company would have to charge is larger,” Peltier notes. “From an economic standpoint, areas where a takeout makes the most sense are where the Citizens premium is very close to what a private company would have to charge to make a profit.”
However, Marmelstein points out, “There are some areas that you wouldn’t think would have trouble getting coverage, but with the relatively wholesale removal of major carriers, policyholders ended up coming to Citizens. It isn’t necessarily the case that the places with the most hurricane exposure are the only areas covered by Citizens. So far, we are seeing that the policies involved in the takeout tend to mirror the general population.”
Since a peak in the number of Citizens policies in mid-2012, the number of policies has been reduced from approximately 1,400,000 to close to 850,000. “Not all of that is directly attributable to these programs,” Marmel-stein comments. “There are a number of factors, including the return of some stability to the Florida market.” Never-theless, the retreat of Citizens is making progress.
Turner is optimistic that the takeout process can be a step toward strengthening the insurance industry in the state and promoting the return of strong, well-respected, stable carriers. “The takeout carriers are filling an important role in providing more competition in the state, and most will also write voluntary business. More choice means more competition, and more competition means lower premiums and enhanced coverage,” remarks Turner. Citizens may be a comfortable solution, but return to a free market has rewards that make evaluating the options worthwhile.