As property premiums rise, should state-run Citizens be charging more?

In late August, Florida’s Office of Insurance Regulation responded to request from Citizens Property Insurance Corp. to raise its rates for property insurance an average of 13.1% by issuing an order sending the state’s insurance company of last resort back to the drawing board.

It must, OIR said in the order, not raise its rates more than 12%.

In a state where the property insurance market is unraveling in real time, with skyrocketing costs leaving property owners scrambling, bewildered and, in some cases, uninsured, the capping of how much Citizens could charge was welcome news. Finally, the thinking went, someone put their foot down.

But there is a theory, one that is bound to be controversial, that the smart fiscal move was not to cap Citizens but for the insurer to raise its rates far beyond the 13.1% it asked for. The reasoning behind this line of thinking is that the rapid growth in the number of policies Citizens has written means it has taken on a huge amount of risk that, if the worst was to happen, could leave it unable to meet the claims it is responsible for. That it, the state-run insurance company, should operate like a business lest taxpayers be left footing the bill. 

“I'll say this is, if Citizens' risk-based pricing is half, or a third, or a quarter of the private market, something's not adding up,” says Gregory Marholin, president of RescomX Insurance Solutions in St. Petersburg, adding that, “If a government entity can provide insurance cheaper than the private market, that's a major problem.”

As of June 30, Citizens has 1.3 million policies in place and its total premiums are $4.3 billion. Its exposure, though, is $561 billion.

At an OIR public rate hearing in June, Citizens said its surplus is down 33% in the past three years while its once-in-a-100-year storm probable loss is up 93% over the same period. This as its total insured value “continues to alarmingly increase,” growing 192% to $492 billion over the past three years. 

And, while all this is happening, Citizens said in the presentation if the full 13.1% rate hike had been approved “our policyholders will still be paying on average about 44% below the rest of the Florida market.”

Citizens did not respond to a request for comment.

But in June, its president, CEO and executive director, Timothy M. Cerio, said, “Citizens’ rates are artificially low, which throws off the private market and distorts competition.”

“A residual insurer should never compete with the private market. That is fundamentally unfair to policyholders in the private market.”

Market factors

Like most things doing with Florida’s property insurance marketplace, the topic is very complicated and even those in the know sometimes have a tough time grasping matters fully. That’s in large part because much of what drives the decision-making process is tied to when and if a hurricane will hit, how powerful it will be and how many will follow. 

The gist of the argument for higher rates is this: Citizens was created as a last resort for people who could not get insurance anywhere else. But with the volatility in the state’s market driving traditional insurance companies out in droves, it has far too often become the first or only choice. Which means, that as the number of its policies has grown, it has taken on greater risk and committed itself to paying out more in claims than it may be able to afford.

If it was unable to cover claims, each Citizens’ policyholder would face a surcharge of up to 45% of their premium and the state would assess other, non-Citizen insurance policies — including home, auto, specialty and surplus — 2% of the premium to cover the difference.

The only ways to even things out, the argument goes, is for Citizens to charge more or find a way to guarantee that no hurricanes, or other natural disasters, hit the state for at least a year.

Since the latter is unlikely to happen, and with warming waters the risks for historically stronger storms growing, the decisions Citizen makes should be made using basic capitalistic market principles.

Keeping up with the Joneses

Louisiana is already doing this. Its state-run insurance company, Louisiana Citizens Property Insurance Corp., is uncapped, meaning the rates are adjusted based on what’s happening in the real world.

“If the cost of reinsurance for Louisiana Citizens goes up, the trickle down effect comes into play,” says Matthew Mercier, national practice leader for the community association division of CBIZ Insurance Services in Sarasota. “They pass that down on to the consumers, whereas with our Citizens is absolutely capped on what they can do in a given year.”

The Louisiana insurer has tripled in sized to more than 100,000 policyholders in recent years as more than two dozen private insurance companies have either gone insolvent or left the state. Plus, state law requires its rates be at least 10% over the highest qualifying market rate or 10% over the actuarial rate, whichever is higher.

Given the growing number of policies and the increased cost of reinsurance, Louisiana Citizens raised its premiums 63% last year.

“There’s no sugarcoating it — this increase is extremely painful but required by law to make sure Citizens can handle a potential future disaster for its many policyholders,” Louisiana’s insurance commissioner Jim Donelon said in October after the rate increase was approved.

“My staff and I are working with the Legislature to attract more insurers to the state through the use of a program that was highly effective following hurricanes Katrina and Rita, which will give Citizens policyholders, and all Louisianans, more and cheaper insurance options in the private market.”

The incentive program provides grants to encourage insurers to write property policies in areas of the state most at risk to seeing heavy damage from hurricanes.

Legislating solutions?

And, in this sense, Florida and Louisiana are similar.

Over the past couple of years Florida’s Legislature has worked to cut down on the number of lawsuits filed by limiting what attorneys can charge. These attorney fees were largely blamed for creating an atmosphere that drove insurance companies out and costs up. While the rules are relatively new, there is anecdotal evidence that shows the market is improving, though it will take some time to fully work out.

The state, according to OIR, is also attempting to bring insurers into the state to help create more competition and, in turn, help drive costs down.

To that end, since April OIR has approved four new carriers to do business here, including three in August — Orion180 Select Insurance Co., Orion180 Insurance Co. and Mainsail Insurance Co. (A month earlier, though, Farmers Insurance announced it was cutting policies in Florida.)

In the case of the two Indiana-based Orion 180 companies, they got in by filing an extension application which is used “by companies in good standing in their state of domicile that wish to expand their business” into Florida. 

And if the state can continue attracting new companies, the argument goes, then the same market factors that led to the crisis, and the need for Citizens to raise its rates, will drive costs down and relegate Citizens to its rightful place — a last resort.

But, as with most things, that is easier said than done. While reforms will help and are helping, what will ultimately determine Citizens' role in Florida's insurance marketplace is Mother Nature.

“We went 10 years without a storm, surpluses built up and I had three straight years with my condo clients where we were giving out decreases,” Mercier says. “Citizens wasn't even an afterthought.”

As this story was being prepared for publication, the Gulf Coast and much of Florida's west coast was preparing for the arrival of Tropical Storm Idalia as it strengthened into a hurricane exactly a month shy of the one-year anniversary of Hurricane Ian making landfall near Cayo Costa.