According to Louisiana Senate Bill 19, Louisiana Citizens Property Insurance Corporation would be required to get approval from the state House and Senate committees before rate increases of more than 25% could go into effect.  The bill, sponsored by Sen. Bret Allain, was introduced in the Senate due to large rate increases many Citizens policyholders saw in certain territories last year.  The bill would allow lawmakers the opportunity to analyze and consult experts on the necessity of rate increases proposed by Citizens before any large rate increases were implemented.

Currently, Citizens is required by law to have rates that exceed by at least 10% the higher of:

• The market rate in each parish.
• The actuarially justified rate in each parish.

Citizens performs a rate study annually that analyzes the current market rates in each parish and analyzes the actuarially indicated rates in each territory.  Rate increases proposed and approved are based on either the market rate or the actuarial indicated rate.  The result in the past has left some policyholders with large rate increases that they feel they cannot handle.  If LA SB 19 is passed, lawmakers would be given the opportunity to approve any rate increases greater than 25% and possibly implement the rate increases over a period of two to five years. 

The Bill has passed in the Senate with 36 yeas and 0 nays, and has moved to the House for consideration.

What do you think the effect of this bill would be on Citizens rates?  Would it result in lower rate increases year over year and provide relief to policyholders?  Could it hurt Citizens’ goal of being the “Insurer of Last Resort” if it results in blocking rate increases that keep Citizens rates higher than the market?  Is it a good idea to put approval of large rate increases in the hands of lawmakers rather than continuing with the current laws governing Citizens’ rating?

The US Department of Health & Human Services has recently clarified the employer requirements with respect to offering group medical coverage in 2014.  While a $2,000 per employee penalty (all employees less 30) still applies for employers with at least 50 FTE’s who do not offer any type of group medical coverage, employers have some potential to avoid the full impact of this penalty as long as they offer some type of group medical coverage…even if the plan offered has an actuarial value less than 60%.

In the event an employer offers a group medical plan with an actuarial value that is less than 60%, the applicable penalty is the lesser of:

• $3,000 for every employee who receives subsidized insurance coverage at a state exchange.
• $2,000 for every employee (less 30). 

In some cases the “$3,000 per subsidized employee” will actually be the lower penalty.  This will tend to be the case for employer groups with lower earning employees who may choose to not purchase coverage in 2014.  See the helpful employer mandate chart published by CIGNA for more information.

Fortunately, there are a variety of modeling tools available to help employers assess the impact of PPACA.  Tell us about your business.  Will you offer group medical coverage?  Do you understand the impact PPACA will have on your organization?  Have you used a PPACA modeling tool?  Let us know.

The Florida House and Senate will soon consider bills to enact portions of the NAIC Model Holding Company Act: Senate Bill 836 (SB836) and House Bill 821 (HB821).  Both bills contain almost identical language and provide the Office of Insurance Regulation (OIR) with new tools in monitoring the solvency of insurers and performing financial examinations of these entities.  

One of the main tools being added is that the OIR would be able to examine any insurer and its affiliates to ascertain the financial condition of the insurer.  This authority also allows the OIR to examine the enterprise risk of a group of affiliated companies or an insurance holding company and how that risk might affect the financial condition of the insurer.

The bills also include additional calculations and tests, for both property & casualty and life & health, to determine a company action level event, as well as revisions to the provisions for companies at the mandatory control level. They also change annual statement requirements by necessitating the actuarial opinion summary (AOS) be included in the annual statement (624.424(1)(a)2, F.S.).

Some specifics relevant to the P&C industry are:

• Establishes a new additional trigger for a company action level event, as follows: (Three times the Authorized Control Level Risk-Based Capital) > (Total Adjusted Capital) >= (Company Action Level Risk-Based Capital) AND The “Trend Test” is triggered.
• After the mandatory control level is passed, the OIR now can forego taking action if the company MAY (not “will”) eliminate the control event within 90 days.
• The AOS must be completed in accordance with the NAIC P&C annual statement instructions.
• Every insurer must file an enterprise-risk report by April 1^st.  Exceptions may be granted by the OIR for domestic subsidiary insurers of compliant insurers or domestic insurers writing only in Florida with less than $300 million premium that can demonstrate that there’s no substantial regulatory or consumer benefit. Note that a waiver is valid for two years.
• Supervisory colleges may now be formed to assess a company under ss. 608.801 and 624.316.  The OIR can decide its powers and the company is billed for its expenses.

HB821 bill is set to take effect 10/1/2013 if it passes and SB836 is set to take effect on 1/15/2015.  The text of HB821 can be found here and the text of SB836 can be found here.

What effects would these law changes have on your insurance company and its interactions with the OIR?  What would be your most pressing questions for regulators if these changes are made?  What are the hurdles you might face if these changes are effective by the end of the year?  Let us know.

Compliance to regulatory bureau statistical reporting demands is often done as an afterthought or not addressed until the insurer is forced to do so in response to fines or assessments for timeliness or data quality issues from the Bureau or, worse yet, from the regulator.  There are a lot of good reasons why insurers have problems complying with stat reporting requirements in a timely or effective manner.  Here are four of them: 

• “It does nothing to drive new business.”
•  “We are saddled with a variety of legacy systems and different platforms making it difficult to capture and retain data in a format that can be reported accurately.” 
• “Our technology budgets are under pressure to keep up with changing products and maintaining ‘front end’ systems.” 
• “Statistical reporting is largely invisible and few of our personnel are aware of what it is and why it is required.” 

However, all insurers must collect data to issue policies and handle claims, as well as comply with regulatory requirements.  Insurers with the ability to quickly comply with bureau statistical reporting regulations have a competitive advantage.  These insurers tend to be compliant by design, and they proactively utilize their data to identify changing trends and business opportunities.  Careful design of front-end systems enables the efficient collection of the “right” data which reduces operational costs while enhancing the customer and agency experience.  It also builds-in the ability to quickly meet new demands created by ever changing business and regulatory environments. 

If you want to conquer the statistical reporting challenge, here are five things you should consider:

• Don’t limit your thinking to only bureau or regulatory requirements.  The same tools used to produce required statistical reporting can also produce vital strategic reports for use internally.
• Be mindful of statistical reporting requirements as existing data/claims systems are enhanced or new systems are implemented. 
• Consider all aspects of how data is to be utilized as “front end” administrative and claim systems are being developed or implemented to ensure “back end” requirements such as financial and statutory reporting requirements are addressed. 
• Develop data warehouses to consolidate experience from legacy systems regardless of their platform or formats to build a central repository for reporting needs.
• Work to ensure the data is accurately flowing through all systems and is mapped correctly to enable accurate reporting.

On March 25th, Florida State Senator Joe Negron filed SB 7132 dealing with motor vehicle registration fees and the elimination of a long-standing tax credit provided to insurance companies. The Appropriations Committee is currently scheduled to discuss the bill on March 28^th.  Under the bill, revenue lost from a reduction in vehicle registration fees would be offset by the elimination of tax credit.  Sen. Negron estimated the elimination of the tax credit could generate $220 million of additional revenue that could then be used to offset the revenue lost by reducing vehicle registration fees. 

The bill seeks lower vehicle registration fees that were just increased in 2009. Specifically, the bill looks to, among other things, lower the fee for issuance of an original licenses plate from $5 to $2.50, lower the service charge for issuance of license plate validation sticker from $3 to $1, and lower the surcharge of license tax from $4 to $2.  To give some context to the amount of savings for individuals, the estimated savings of $220 million would be spread out over the roughly 18 million registered vehicles in Florida^1, amounting to around $12 per vehicle.

On the other hand, the bill looks to remove the allowance for an insurer to take credit against their premium tax for up to 15% of the salaries of non-licensed employees located in the state of Florida. This tax credit has been in place since 1987, and it acts as an incentive for the state to attract more jobs in the insurance sector. It also provides for carriers who employ more Floridians to enjoy a cost advantage over those who employ fewer.

While lowering front end fees on all individuals who operate a licensed vehicle, the bill puts additional hindrances on the domestic insurance market. These domestic carriers have made significant financial commitments to Florida, and have dedicated management teams, operations, and facilities in the state that employ Floridians. If this tax credit is removed, these carriers will be faced with increased costs that will hamper their competitive positions against carriers who do not employee Floridians.

Any insurance carrier operating in the state who employees Floridians will be affected. The domestic carriers, who tend to have a large percentage of their employees within the state, will be most affected. These include domestic carriers who write automobile, commercial insurance, workers compensation, medical malpractice, etc.  Ultimately, these costs will be passed back down to Floridians in the form of higher insurance rates. What may not be understood by some is how many Floridians are dependent on insurance from domestic carriers. To provide some insight, around 40% of households in Florida receive property insurance from a domestic private insurance company. When all lines of business are considered, this percentage is sure to grow and the pool of people receiving benefits becomes more and more aligned with those paying the costs. Is this proposal just robbing Peter to pay Paul?

What are your thoughts on this bill? How would this proposal affect your business and tax burdens?

Credit insurance is not as well-known or well-understood as Auto or Homeowners insurance, even though the typical consumer will be bombarded with credit insurance offers every time they purchase a car, open a new credit card, purchase a home, or participate in many other financial transactions.  Unlike Auto property or Homeowners property, these coverages do not pay to repair the property.  Instead, they are related more to the amount you owe rather than the value of the property.

Guaranteed Auto/Asset Protection (GAP) Insurance — GAP insurance covers the “gap” between what your regular insurance will pay and what you actually owe on a vehicle.  As an extreme example, you go to the Ferrari dealer and finance the purchase of a brand new 458 Italia Coupe for about $240,000.  You call your insurance agent after the purchase and get a standard auto policy for this vehicle.  A month later you total the vehicle.  Because the 458 is only actually worth about $210,000 (because of depreciation) you are out $30,000.  Even though the vehicle is no longer operable, you still owe the bank the $30,000.  If you have GAP coverage on this vehicle, the GAP insurance pays the $30,000 to the bank and you are in the clear to purchase a new Ferrari!

Involuntary Unemployment Insurance (IUI) – Every time I call my credit card company, regardless of the reason, I have to hear them pitch the purchase of insurance that will pay my bills if I lose my job.  In light of the recent recession, this coverage made more sense as the national unemployment rates increased and maintained higher than normal levels.  There are a wide variety of coverages and many options available for IUI – some that provide coverage in the event of a strike or lockout, some make payments for only a couple of months and some make payments for up to a year.   Upon experiencing an involuntary unemployment event, IUI will make your minimum payments to your lender and by doing so can help protect your credit rating and alleviate some of the burden of being without a job.

Mortgage Credit Insurance (MCI) – MCI should not be confused with Mortgage Insurance (PMI), which is intended to make payments to the lender in the event of a borrower default.  Unlike GAP or IUI, MCI is considered a credit life type of insurance.  This is because the coverage is intended to provide a benefit should you experience a serious disability, injury, or death.  In the event of a triggering event, the benefit makes payments to the lender on behalf of the insured.

There are many other types of credit insurance products that provide coverage for many types of loans, life events, and collateral.  In common among the majority of credit-related insurances is that the lender (not insurer), is typically the direct marketer of the insurance product.  In addition, in most instances, the purchase of these policies cannot be a determining factor in whether or not the bank will give you a loan.  It is important that the consumer understand the coverages that they will be presented with and possibly purchase.  In some instances, such as when the consumer has an amount of savings sufficient to cover the losses that the credit coverage is intended to provide, it may not make sense to purchase the credit coverage.  In other instances, there may be insurance alternatives that make more sense to purchase.

Autonomous (driverless) cars are coming.  In the next 10-20 years, many technologists and automobile experts estimate that the quality and price of autonomous cars will allow the slow takeover of American roads.  Google has been driving driverless cars around the Bay area without causing any accidents.  More companies are applying for permits to test technologies of their own. 

This revolution holds many changes for society, nearly all of which will be positive in the long-term.  Many of these revolve around accidents.  Almost 35,000 people died on American roads during 2012.  Hundreds of thousands more were injured.  Along with the reduced death and disability — the real impact on people — these cars will also cause less stress and, potentially, lower costs on the U.S. healthcare system.  Everybody that’s wasted countless hours in traffic because of fender-benders will also appreciate autonomous cars. 

And even without considering accidents, the gains for society will be tremendous, especially when all cars are autonomous.  Autonomous cars will accelerate together, drive closer together, and communicate with traffic networks to significantly reduce commute times in metropolitan areas.  Existing road networks will either be sufficient or allow less infrastructure spending in the future.  Driving closer together raises fuel efficiency.  So would less aggressive driving and less gridlock.  People could be working while traveling to and from work, hopefully increasing either productivity or the time spent at home.  Cars could be made to simulate either home offices or home theaters.

Anytime there is a disruptive technology, there are always short-term losers.  Short-term because nobody still cries about the demise of elevator operators, even though long-term this frees up individuals to pursue other more productive occupations.  Obviously, autonomous cars will be terrible for truck drivers and taxi drivers, and there will likely be a decline in the use of hotels along interstates.  Auto repair shops won’t have as many smashed-up cars to repair.  And of course everybody will miss the Allstate Mayhem, Progressive cheerful sales rep, and the GEICO gecko commercials.

One of the losers will be the automobile insurance market.  If accident rates fall by nearly as much as proponents expect, there would appear to be little to no need for automobile liability or collision insurance for private passenger and commercial vehicles (including bodily injury, property damage, medical payments, PIP, UM, and physical damage).  While there will continue to be a market for comprehensive coverage (for hail, vandalism, theft, etc.), this alone will not support the large number of companies and individuals (including agents, claims adjusters, etc.) currently in this field. 

So what do you think?  How should automobile insurers prepare for driverless cars?  Will driverless cars kill the automobile insurance industry?  Let us know.

Commissioner McCarty’s Florida Property Insurance Proposal

The Florida Senate Banking and Insurance Committee meeting on January 16th, 2013, started off with a simple pronouncement from CFO Jeff Atwater to the members of the committee that “standing still cannot be the solution.”  To those on the outside of the Florida residential property insurance market, it would appear that lawmakers have been anything but “still” over the past few years.  Passage of Senate Bill 408 and changes to rates and coverage options at Citizens Property Insurance Corporation would leave a casual observer to think that the property market has been in flux as of late.  However, the results of these actions show that they have been simply nibbling at the edges.  Citizens continues to grow at a rate of 8,000 new policies a week and, despite recent interest in depopulation, only about 60% of the policies approved for depopulation were actually removed.  Searching for a more holistic approach to fixing the market, the Committee requested Insurance Commissioner McCarty present a principle-based reform plan for Florida’s property insurance market.

The Committee charged Commissioner McCarty with providing solutions that, among other things, returned to a free market approach, enhanced Florida’s attractiveness as a place for insurers to do business, and reduced the overall exposure of Citizens.  The Commissioner’s presentation clearly reveals, from an insurance fundamentals perspective, a market that is distressed.  Since 1992, national insurers have decreased their Homeowners insurance market share from 96% to 31%.  To fill the holes left in the market (which was growing in total throughout this time period), Citizens grew to account for 20% of the market while the Florida domestic insurance market grew to account for 49% of the market.  This domestic market has produced a net income loss from 2008 to 2011, when no major catastrophes struck the state.

Part of this loss, and resulting rate increases for the domestic market, is due to the effects of the cost of reinsurance.  The Commissioner estimated that 91% of the Florida domestic carriers were reinsured to a 1-in-100 year event.  This reinsurance protects the domestic carriers from the most severe catastrophic events, but also makes sure that liquidity can be provided at the time of an event, meaning losses can be paid on a timely basis.  As a comparison, Citizens was estimated to have to begin assessments within its Coastal account after only a 1-in-34 year event.  The nature of the Citizens entity as it currently stands foregoes providing funding for events prior to their occurrence (which is the standard to which private carriers are held) for long-term financing of these losses over time by the taxpayers.  As a result of not having to provide reinsurance or capital before a catastrophic event, Citizens has cost advantages over the private market.

When these cost advantages are coupled with the statutory capping of the Citizens rates in their move to “actuarially sound” levels, the ability to remove policies from Citizens decreases tremendously.  Please note that “actuarially sound,” as used above, is company specific.  An actuarially sound rate for Citizens would provide for all of its costs, not the reasonable costs to which a private carrier would be subject. 

For the same product, the “actuarially sound” rate for most private carriers would be higher than the “actuarially sound” rate for Citizens.  Citizens’ CEO Barry Gilway, in his own presentation to the Committee, presented the following information on the relative percentage of his Company’s policies that were currently at “actuarially sound” rate levels:

In the many years that Merlinos & Associates has been providing actuarial consulting services to already established and start-up property insurance companies in Florida, we have observed this pricing disparity addressed in several ways in the market.  After the storms of the 2004 and 2005, private carriers who agreed to accept policies from Citizens were required to charge rates equal to or below Citizens for a period of time.  This requirement allowed for effective and efficient depopulation.  However, the cost differences noted above, exacerbated by the effects of House Bill 1A in 2007, left many carriers in a financial hole and led to several large insolvencies.  As regulators have become more concerned with the adequacy of the rates for policies being taken from Citizens, the financial condition of private carriers has begun to improve at the expense of the efficiency of the depopulation process.  As the “actuarially sound” rates of the private carriers and Citizens have invariably begun to separate, private carriers have found it increasingly difficult to match the premiums that Citizens charges and prevent Citizens policyholders from opting out of the depopulation or simply returning to Citizens when it presents a cheaper option at renewal.

Recognizing the incompatibilities discussed above, the Commissioner correctly described the current role of Citizens as an alternative market, not a residual market, which is attempting to serve two masters: provide a market to those who cannot find coverage AND provide affordable rates.  A residual market entity would provide coverage to insureds who cannot find insurance at any price from the private market.  In the Citizens alternative market, the short term economic hardship of high rates is suppressed for the benefit of individuals in exchange for long-term structural deficits for all taxpayers. The main issue with this approach is that the faucet cannot be turned off.  As rates are held below truly “actuarially sound” levels (as required by the private market), Citizens continues to grow and the structural deficits become larger and larger.

The Commissioner’s presentation outlined a plan of reforms that seek to achieve four desired outcomes:

• Restructure alternative markets so they become residual markets.
• Maximize the risk-bearing capacity of the private market.
• Promote consumer choice, responsibility, and market power.
• Enhance meaningful risk mitigation programs.

The first outcome is paramount to the creation of a competitive market place, and reaching this outcome requires recognition that the Citizens mechanism is failing in its current form.  With this in focus, the Commissioner calls for the deconstruction of Citizens into component parts:

The Beach Plan

• Would consist of what is currently the Citizens’ Coastal Account.
• Would focus on providing only wind insurance, so as to maximize the ability to respond to a catastrophic even and allow technical experts to pursue cost savings advantages for this peril.

The Residual Risk Plan

• Would include the remainder of Citizens’ policies.
• Would be subject to a market-pricing rate standard.
• Would implement a policy Clearinghouse (as described by Citizens CEO Barry Gilway) to better facilitate shopping by insureds prior to their receiving coverage.

The Sinkhole Facility

• Would essentially eliminate sinkhole as a covered peril within the standard insurance market.
• Would provide a separate program to aid those whose properties have been damaged by such an event

These proposals are bold in scope and reflect a clear understanding of many of the underlying problems with the current Florida property market.  The return to rate adequacy for Citizens would allow for more effective depopulation efforts, remove pressures currently on private carriers to compete with subsidized Citizens rates, and attract new capital to the markets.  These proposals also allow for a more gradual movement towards rate adequacy for coastal exposures and areas affected by sinkhole losses by carving out those risks from the Citizens book of business.  As such, it would seem the Commissioner’s proposals are well-reasoned and meet many of the actuarial issues facing the market. However, as the Commissioner himself recognized, these principles-based solutions are not the same thing as the politically tractable solutions.

These reforms are substantial and would require several years to establish these mechanisms and transition to a post-Citizens market.  Additionally, these reforms would require some insureds to pay substantially higher premiums than they currently receive.  In the interim, as these mechanisms are established and individuals learn of their premium levels, elections will occur that could change the political landscape once again.  Is there political will to see that these long-term decisions are carried to fruition?  It would seem that these changes should be coupled with near-term corrections to the Citizens rate capping statutes to better facilitate transition of policies to a market-based rate standard.  Additionally, increasing the Citizens rate cap above the current 10% level would allow increased efficiency in the depopulation of Citizens and reduce the likelihood of assessments for the upcoming storm seasons.  Finally, allowing additional rate increases within Citizens would provide benefits to the market that could not be undone by the shifting of political winds.  In the current political climate, focus should be given to making these long-term decisions while simultaneously providing short term assistance to an ailing market.  After all, breaking up is hard to do.

Ryan Purdy, FCAS, MAAA, is a principal and consulting actuary at Merlinos & Associates.

As employers start to assess how they will be impacted in 2014 once the coverage requirements of the Patient Protection and Affordable Care Act (PPACA) take effect, many groups are looking for ways to mitigate the impact of the expanded coverage requirements that are mandated under PPACA.  For many employers, the impact can be mitigated through the use of a different employee contribution strategy.  By adjusting the employer subsidy levels of the employees enrolled in non-single coverage, the employer can reduce plan enrollment and the associated plan costs.

The employer community recognizes that the general coverage rules of PPACA require that employers with more than 50 full time equivalent employees (FTE’s) must provide qualifying group medical insurance to all employees who work at least 30 hours per week.  In December 2012, the Department of the Treasury and the Internal Revenue Service (IRS) clarified the employer requirements with respect to the level that the employer must subsidize its group health plan.  The substance of the IRS regulations is that:

• Employers must provide a minimum level of subsidy for “employee only” coverage, but employers do not need to provide subsidies for the dependents of employees. 
• The employee contribution for “employee only” coverage should not exceed 9.5% of the employee’s W-2 wages in order for the plan to be deemed affordable under IRS safe harbor rules and avoid a potential $3,000 per employee penalty if the employee purchases subsidized coverage on a state exchange. 
• There are no limits on the level of employee contributions for the dependents of the employee. 

Large employers that have a significant number of spouses and children covered under their group health plan can “encourage” them to leave the plan and purchase coverage on a state exchange.  If the applicable employee has a household income that is less than 400% of the federal poverty level (FPL), the spouse and children could purchase subsidized coverage on a state exchange.  Depending on the plan design and level of employee contributions on the employer’s plan, it’s possible that the dependents of the employee could purchase a more generous plan of insurance at a lower cost on the state exchange.

The point is that the dependents of the employees would not necessarily be hurt financially by migrating from the employer plan to an insurance policy purchased at a state exchange.  This strategy assumes that the employer would have an employee contribution for the “single tier” that passes the affordability safe harbor test; this would prevent the employees themselves from qualifying for subsidized coverage on the state exchange.  Thus the employer that utilizes such a strategy would see employees drop from non-single coverage to single coverage.  The cost savings can be significant.

At its December 14th, 2012, Board Meeting, Citizens Property Insurance Corporation (Citizens) made two strategic decisions on its approach to depopulation.  First, they decided to delay the publicly scrutinized plan to provide Surplus Note loans to several companies willing to take policies out of Citizens.  Citing the need for additional studies of the plan, they have moved this plan to the backburner for the time being.  While it is unclear if it or a similar program will be brought forth for consideration in the future, Citizens did acknowledge that the high level of depopulation activity achieved in the later part of 2012 was in part due to a similar decision last year to eliminate the ceding commission from the assumption process.

It is this recent success in depopulating Citizens that may ultimately doom the Surplus Note program in its proposed format.  It would be reasonable to conclude, based on these results, that the removal of the ceding commission sufficiently increased the demand for depopulation in a much simpler and less politically volatile manner.  Step back from the details of each plan, and it’s easy to see that the removal of the ceding commission and the Surplus Note program achieved the same result: Citizens cutting a check to private companies to take on underpriced risks.  The reduced ceding commission recognized that demand for Citizens policies was low because rates for these risks, as viewed by the market, were inadequate.  By effectively raising the rates for those policies assumed, Citizens was able to change the demand for its policies in the private market.  One limitation of relying only on reducing the ceding commission is that its affects only last until renewal.  The Surplus Notes program properly recognized that longer term compensation for rate inadequacy may be needed to keep those depopulated risks out of Citizens.  Currently, Citizens is awaiting the results of a policy retention study in early 2013 that may provide insight into if this additional compensation is needed.

The second decision was to recognize and attempt to actively work to limit the inflow of policies into Citizens.  There have always been some carriers who were willing to depopulate Citizens at the prevailing rates.  However, these carriers have been smaller and able to accept only a limited number of risks.  Many of the larger entities in the market have been unwilling to accept risks at this rate.  As a result, the inflow of policies into Citizens has continued at an alarming pace, outstripping any outflow from the depopulation activities.  Citizens is essentially a boat that is taking on water quicker than it can be bailed out.  Discussion of Citizens being in the best financial shape it has ever been in (recall that it ran out of money in 2004) are missing the mark, as an insurer’s strength is best measured by its funds held relative to its obligations.  Citizens’ obligations continue to grow with each new policy it writes.  Or, to put it another way, the boat continues to fill.

To plug the holes, Citizens’ CEO Barry Gilway presented the board with an idea to create a clearinghouse for Citizens policies.  This idea recognizes the limitations of captive agents or agents with limited markets in shopping business before it being placed within Citizens.  Gilway estimated that more than 50% of the policies are not effectively shopped in the private markets before coming to Citizens.  Under the clearinghouse plan, each policy applying for coverage with Citizens, both new and renewal, would be placed in a clearinghouse system which would check the risk against a set of underwriting and exposure criteria provided by participating private carriers.  The system would then produce premium comparisons between each private carrier and Citizens.  Should there be private market capacity available for less than 115% of the Citizens premium, the agent could place the risk with the private carrier.  If no such offer existed, the policy would be allowed coverage from Citizens.  

With the clearinghouse plan, Citizens hopes to expand the information used by the insured in their buying decisions and bridge the gap between those carriers who are willing to write at prevailing rates and those who are not.  The intended result is to slow or stop the continued growth of Citizens until sufficient capital can be brought to market so that the traditional depopulation activities can actually reduce policy counts within the Company.  

What are your thoughts on the benefits that this program can provide?  What are the unintended consequences of implementation of the clearinghouse mechanism?  What are the greatest challenges in implementing such a plan?  Let us know.

Ryan Purdy, FCAS, MAAA, is a consulting actuary specializing in coastal property insurance.