Recently, the Weiss Ratings for Florida Property Insurance Companies were reported. After a review of the results, the first question that comes to mind is, “Who uses these ratings?” But a further review of the ratings paints an interesting picture for the Florida Marketplace, and begs two more important questions: “Where are we now? Where are we going?”
Weiss Ratings is an independent rating organization for the financial sector that covers banks and insurance companies. These ratings are a summary of Weiss’ judgment of a company’s ability to stay out of regulatory control, pay all the obligations from their insurance contracts, and maintain operations long term. Weiss maintains its independence by not taking compensation for their ratings. Additionally, they reach their conclusions and publish results without a preview or influences from the company. On their Web site they display their track record by showing failed insurance companies over the last four years with the Weiss carried rating at time of failure and one year prior. They appear to do a solid job in reviewing the financial sector including insurance companies.
For the Florida property market overall, the recent results were scathing. Below is a table with the Top 25 carriers in terms of policies in force at 6/30/2011 based on QUASAR reports:
|A+||1||Citizens Property Insurance Corporation|
|E+||2||Universal Property & Casualty Insurance Company|
|D||3||State Farm Florida Insurance Company|
|D||4||St. Johns Insurance Company, Inc.|
|A+||5||United Services Automobile Association|
|B-||6||Castle Key Insurance Company|
|B-||7||Castle Key Indemnity Company|
|C||8||Security First Insurance Company|
|C+||9||ASI Assurance Corp.|
|D||10||American Integrity Insurance Company Of Florida|
|D-||11||Tower Hill Prime Insurance Company|
|D||12||Florida Peninsula Insurance Company|
|B-||13||American Bankers Insurance Company Of Florida|
|E+||14||Tower Hill Signature Insurance Company|
|C-||15||United Property & Casualty Insurance Company, Inc.|
|C||16||Florida Family Insurance Company|
|C||17||Universal Insurance Company Of North America|
|D||18||Homewise Insurance Company|
|B+||19||American Strategic Insurance Corp.|
|C||20||Southern Fidelity Insurance Company|
|U||21||ASI Preferred Insurance Corp.|
|B-||22||Liberty Mutual Fire Insurance Company|
|D||23||Olympus Insurance Company|
|A+||24||USAA Casualty Insurance Company|
|D||25||Tower Hill Preferred Insurance Company|
These grades should raise alarms that the overall marketplace is in trouble. But, it really all starts at the top. The largest carrier in the state is Citizens and, according to Weiss, they are the strongest insurance company in the state. So let’s examine Citizens for a moment.
Citizens Property Insurance Corporation is a state-run insurance company that is subject to statutory guidelines. According to their Web site, Citizens is a “not-for-profit, tax-exempt government corporation whose public purpose is to provide insurance protection to Florida property owners throughout the state. Citizens operates according to statutory requirements created by the Florida Legislature and a Plan of Operation approved by the Florida Financial Services Commission. The corporation is governed by a Board of Governors that administers its Plan of Operation. Florida’s Governor, President of the Florida Senate, Speaker of the Florida House and the state’s Chief Financial Officer each appoint two members to the Board.”
While I am sure that Citizens insures many properties that might not be able to find coverage, there are now tens of thousands of risks in Citizens solely because Citizens provides the lowest cost of insurance; Citizens is a real market competitor. But, back to the financial ratings: How is Citizens considered the most financially sound insurance company in the state?
The key component of the Weiss ratings is financial stability to maintain operations. How does Citizens score so well with these criteria? Citizens operates under the statutory authority with the backing of assessment capability against most insurance contracts in Florida. The entity is backed by insurance contracts from all carriers for most lines of insurance. Under Citizens’ original structure, the rates were tied to be in excess of the 20 largest carriers. When this provision was removed and annual caps were placed on rates, it created this monster corporation in the marketplace.
Now Citizens operates virtually as a full competitor in the market but continues with all the financial guarantees through assessment authority. The potential assessments Citizens would need in the event of a major catastrophe run into the billions of dollars (Example: $10.2B for a 1 in 100 event at $23.2B). The Citizens deficit created by a 1 in 100 event would be funded by 15% policy surcharges to Citizens policyholders and assessments up to 10% for Citizens and 16% for all other policy holders in Florida. About 80% of Citizens deficits for a 1 in 100 event would be funded by assessments coming from non-Citizens policyholders
This all assumes the current marketplace survives a 1 in 100 event. Going back to the Weiss rankings, you have to question what the market will look like if a 1 in 100 event hits Florida. There is no doubt that the biggest risk (among many) in Florida is still hurricanes, and a 1 in 100 hurricane is going to impact many to all carriers at once. How many carriers will not be able to survive a 1 in 100 event? According to these Weiss ratings it could be a material issue. Citizens is designed to survive through assessments to policyholder for all companies.
Should Citizens continue to be able to operate in this capacity? The simplest solution to correct Citizens issues is to raise rates and return the entity to the market of last resort. Of course this would require rate increases for Citizens in excess of 50% for some policyholders. The 2011 legislative session started out with hope that Citizens would begin this transformation. In the end there was little change from the Florida legislature to Citizens’ market position, and the largest carrier in the state continues to grow and the potential deficit grows.
Insurance rates still remain as a big political issue in Florida. While the public is mostly blind to the deficits that will result with a major catastrophe, everyone is sensitive to price increases. Therefore, it is time to start the search for alternative solutions. Trying to make Citizens the market of last resort is doomed by the political process. Therefore, it is time to correct the biggest mistake made from when Citizens was first formed under the Florida Residential Property and Casualty Joint Underwriting Association. It is time to make Citizens the product of last resort.
There is old adage, “You get what you pay for.” If Citizens policyholders want to continue to pay low prices through legislative restrictions to rate increase, it is time to adjust the product to match the program. There are many coverage options within the Citizens policies that are not necessary. It is time to examine all the coverage options in Citizens and make the product cover what is necessary only for the real estate transaction.
Allow the market to decide if they want that product or want to purchase alternatives in the private market. This will allow the market to compete again based on coverage, service and price versus the current market of an underpriced insurance product from Citizens. Maybe that will help improve the Weiss ratings for all the carries and put them in a better financial condition to fund potential deficits from Citizens.
Peter Scourtis, FCAS, MAAA, is a principal and consulting actuary at Merlinos & Associates.