Citizens Property Insurance Corporation’s Clearinghouse Proposal

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.