On August 16th, Citizens Property Insurance Corporation made filings with the Florida Office of Insurance Regulation proposing a rate change of 10.5% for Homeowners HO3 rates effective February 1, 2013, for both new and renewal policies.  The filings are a product of the July 16th Board of Governors Workshop on proposed rate changes and the final voting on the direction of the proposed changes at the July 27th Board of Governors Meeting.  The proposed changes were aimed at moving Citizens away from being a competitive insurer and returning it to its stated purpose of being an insurer of last resort in the State of Florida.  The decision-making process made headlines over the past two months due to two controversial proposals. 

The first was aimed at speeding up the glide path to actuarially sound rates for all Citizens policyholders.  It proposed interpreting F.S. 627.351(6)(n)6  as applying the 10% cap on rates only to renewal policies.  This interpretation would allow Citizens to increase rates for new policies to actuarially sound levels that were, on average, 28% to 37% higher than the current, inadequate rates.  The proposed interpretation drew criticism from the high risk areas of the state that would be most impacted by the rate change while garnering support in low risk areas tired of their tax money subsidizing the others’ losses.  State senators and municipal leaders were split on the fairness of such a move, but the Florida CFO and Office of the Insurance Consumer Advocate expressed severe doubts to the Board of Governors about the legality of skirting the 10% cap.  The proposal was voted down at the July 27th Meeting.

The second major rate-making proposal was the inclusion of a risk load, a traditional insurance provision designed to cover the risk of random deviations from the policy’s expected costs.  Because of Citizens’ directive in F.S. 627.351(6)(n)1 to make actuarially sound rates in the same manner as a private insurer, Citizens’ lack of a risk load contributes to its competitiveness in the private market and calls into question its status as an insurer of last resort.  “An Analysis of Citizens’ Risk Loads 2011” by Dr. Charles Nyce, which recommends incorporating a risk load, was considered at the July 27th Board of Governors meeting.  The Board decided to propose rates with a risk load to the OIR, but include two sets of indications in the filing: one with and one without the risk load.

Not subject to the rate cap, the new sinkhole rates were proposed at a relatively large increase.  The proposed 29.6% rate increase is larger than the 14.8% proposed change to Wind rates and the 3.2% increase to All Other rates.  However, the indicated required change is 239.6% for Homeowners alone, after taking into account recent changes to the sinkhole policy.  The recent changes considered include the impact of the implementation of SB 408, last year’s 40% rate increase, and a proposed mandatory 10% Sinkhole Deductible.  The reduction in the indication was large, over 700 percentage points in the homeowners subline.  The reductive effects of SB 408 (approximately a 54.7% drop in 2013 losses and LAE) were determined by Paul Erikson of ISO in an actuarial analysis of 104 sinkhole claims.

Other minor changes in the filing include an elimination of coverage for dropped objects, a restriction on coverages to under $1 million dollars, and a limit on personal liability to $100,000. However, a proposed $15,000 sub-limit on water losses was voted down and is not being proposed in the current filings.

What do you think about the controversy surrounding the proposed rate changes? Do you agree with pro-10%-cap state senator Anitere Flores of Miami Dade County who says, “I thought insurance companies were in the business of risk, not a guarantee of NO risk”?  Or, do you think that the Board of Governors should have filed without the 10% cap for new policies?  Should the OIR approve or disapprove the risk load?  And what do you think of the indicated reduction in sinkhole losses and LAE? Will loss activity change with the 10% deductible and two year reporting window, or will people just adjust their reporting behaviors upward and keep sinkhole losses high in 2013?  Let us know.

Most of the world knows Florida as a major tourist destination.  Over the last 20 years Florida has become a hotbed of insurance-related issues, too.  When Florida and insurance is combined, most thoughts immediately turn to the hurricane/catastrophe issue.  This issue is a major driver in the Florida marketplace as hurricanes are a major peril and account for a majority of the catastrophic risk potential for the state.  But in addition to hurricane risk, Florida faces major issues that impact the entire property and casualty insurance industry. 

The year 2010 generated significant issues for the P&C industry in Florida even though the state was spared from any major catastrophic wind events in 2010.  Normally, that would cause a breather for the P&C industry and give companies the ability to post profits.  However, the roller coaster of insurance issues did not stop.  2010 brought Florida a new ride: Insurance Fraud Capital.  As Mother Nature decided to vacation elsewhere, the industry faced new threats, including: staged accidents, filing of sinkhole claims in regions that have never experienced activity, and a flurry of claim activity on events that took place 5 years ago.

On top of those issues, Florida is impacted by defective Chinese drywall and a legal system that twists the typical claims adjustment process.  All of these issues sit on top of the huge risk of financing of catastrophe risk through expensive reinsurance measures that create an up-and-down amusement park marketplace with too many “downs” in the recent 5 year history.

There is hope in sight.  Freshly-minted Florida CFO Jeff Atwater, along with the entire new Florida cabinet, is committed to fighting a culture of insurance fraud and enforcing the laws to promote a healthy insurance marketplace.  Atwater is committed to fighting the fraud culture that, though entrenched statewide, has a particular stranglehold on southeast Florida.  He has used the power of government to make arrests of culprits of staged accidents with fraudulent care claims along with public adjusters who are scamming the system.  The Florida legislature is currently discussing new laws that will create tougher punishments and put roadblocks in place to reduce insurance fraud.

Florida faces some major obstacles to reaching a healthy and efficient marketplace.  Some issues are physical to the geography of the state and can’t be avoided.   But 2011 brings a year of hope and optimism for change.  Florida’s cabinet positions are now filled with people committed to bringing Florida’s economy back to a growth phase.  A major part of that plan requires creating a healthy insurance market, and that market will not be healthy until the culture of fraud and entitlement in the insurance claim process is gone.

We all know that Florida will experience another major natural disaster at some point.  The state should promote insurance innovation by combining the best laws with a solid regulatory environment.  Florida needs an environment that will attract capital and the best possible talent in the private and public sectors to create solutions for all the issues facing the state.  Then, Florida can go back to enjoying being a place where dreams come true.

Tell us what you think about the current state of the Florida insurance market place, and what you think the future holds.