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?

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.

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.

If you’ve purchased a home, chances are you have purchased title insurance…although you may not have known it.  Securing title insurance is a routine part of the home purchase process.  This type of insurance protects you from the possibility that the seller doesn’t have a free and clear title to the house and property, and therefore cannot rightfully transfer ownership.  For example, what if the seller is really just an unscrupulous renter?  Or, what if there is a lien against the house because the seller didn’t pay some homeowner’s association dues?

In fact, if you’ve financed your home purchase with a loan, you may have purchased not one but two title insurance policies: not only an owner’s policy, but also a lender’s policy.  The availability of a lender’s title insurance policy helps buyers to secure financing by offering this protection of the loan collateral to the lender.  In the event you’ve lost the house because of someone’s claim, a lender’s policy will reimburse your lender for the outstanding loan amount.   Your owner’s policy in this case will reimburse you for the loss of your down payment and other principal payments, even though you may no longer have the house.

A title insurance policy is issued after a title search has been performed.  A title search involves examining public records, e.g., the history of ownership, tax records indicating any assessments or delinquent taxes, and a search for any unsatisfied judgments against the current or previous owners.  Any identified defects in the title are cured. 

If the title policy is underwritten with proper care, an insured loss under the policy is highly unlikely.  Title insurance is unique in its high underwriting expense ratios and low loss ratios.  Up to 10 cents of every title insurance dollar is expected to pay for claims, whereas around 80 cents of every property and casualty insurance premium dollar is paid out in claims.  An average title insurance policy costs around $1,000, although this varies by state and home value.

Title insurance is also unique in that insureds usually don’t shop insurers as they might for an automobile or homeowners’ policy.  In fact, usually your closing agent or attorney picks your title insurer.  So there’s less competitive pressure in terms of price for this line of insurance.

Title insurance is a different animal in the insurance world.  What are your thoughts?  Are there any reasons to change the title insurance marketplace?  Should consumers be more involved in the choice of title insurer?  Should there be more competitive pressure?  Let us know what you think.

Recent court rulings, both for and against arbitration clauses, greatly impact the liability of a risk.  Some examples: 

• On an Alabama case, the Eleventh Circuit Court recently upheld that “an executor suing a nursing home for wrongful death is bound by an arbitration agreement that binds the decedent.” 
• The Illinois Supreme Court upheld the appellate court’s determination that an administrator can’t be compelled to arbitrate, but they reversed a panel’s finding that the arbitration agreements were unenforceable. 
• The Florida Supreme Court held that various arbitration agreements are void and unenforceable. 
• The Kentucky Supreme Court and West Virginia Supreme Court also had recent rulings.

In our work with alternative risk transfer mechanisms, we have witnessed many captives, risk retention groups, and similar alternative risk entities shifting toward requiring implementation of arbitration agreements. 

How about you?  Do your insured risks have underlying arbitration agreements?  Are you guided in your business decisions based on whether a state upholds your current or future arbitration agreements?   Has this been a recent topic of discussion within your insurance program or with your risk managers?  Let us know.

The board of Citizens Property Insurance Corporation, Florida’s insurer of last resort, voted in early September to award $350 million of its $6 billion surplus in low-interest surplus note loans to private insurance companies as an incentive to take some 300,000 policies from Citizens’ current book of 1.5 million policies.  

Under the Citizens’ loan program, private insurers could borrow up to $50 million for 20 years at a low interest rate of 2%.  Citizens President Barry Gilway has said that the surplus note program has various financial safeguards including that insurers would have to retain policies for at least 10 years, and the minimum total insured value an insurer must take to qualify for the program is at least $5.5 billion.  The participating insurers must also be actively writing property insurance and have a risk-based capital ratio of 300% and minimum surplus of $25 million.  They must also have Florida direct written premiums of at least $50 million and enough reinsurance to cover a one-in-100 year and two one-in-10-year probable maximum losses.

However, state Rep. Frank Artiles, R-Miami-Dade, is charging that the plan is being rushed without adequate oversight and a full understanding of its implications.   In a letter to Insurance Commissioner Kevin McCarty, Artiles took Citizens to task for not releasing the full details of its surplus note program until just days before the Citizens board gave its seal of approval.  He also questioned whether Citizens even has the statutory authority to implement the plan. 

While some state officials are looking to put the brakes on the surplus note depopulation programs, some of Florida’s largest pro-business groups have been expressing their support. Associated Industries of Florida, Florida Tax Watch and Americans for Prosperity-Florida have all issued statements supporting Citizens and its efforts to reduce the potential assessment burden on all state policyholders.  Advocates claim the plan would reduce the likelihood of emergency hurricane tax assessments to finance Citizens’ claims by 38% and reduce the potential assessment amount, which could reach as high as $3 billion, by roughly $1.2 billion.  To accomplish a similar reduction in exposure through traditional risk transfer, Citizens would have to purchase an additional $240 million annually in reinsurance, whereas the hope for the plan is that the shift will be somewhat more permanent.

So what do you think?  Should this plan be approved?  Would this plan help to reduce the potential assessment burden on all Florida policyholders?  What happens if the private insurers encounter financial difficulties that could prevent them from repaying a loan?

When I was young, my mother insisted that I take the five-year test anytime something seemingly traumatic happened to me.  That is, ask yourself, “Will this matter in five years?”  Fortunately, as a child the toughest life situations usually involved squabbles of he said, she said at the swing set during recess.   Thus, with an answer of “No” I usually passed the five-year test with flying colors.

So let’s take the “he said, she said at the swing set” dilemma, multiply it by 200 million, and tag a smooth $10 billion consequence to it.  That’s what some companies have to risk everyday in the tech-savvy world in which we live.  Simply substitute “he said, she said” for 200 million Twitter tweets, and substitute the swing set for a virtual playground as big as the Web will allow.  Bad publicity has always been bad publicity, but today negative opinion has the ability to spread like wildfire across the globe. 

Not only is it relatively easy for a consumer to voice their opinion over the Web, but the speed of delivery is almost instantaneous.   The amount of time that companies have to respond to and mitigate negative situations decreases with the ever-increasing reaction time of social media sources. 

Easy information sharing also creates an abundance of possible opportunities for reputational disasters.  According to a recent article from Business Insurance regarding a new reputational risk study, public companies can expect to have an 80% chance of losing 20% of their equity in a single month over a five-year period because of a reputational crisis.  Seemingly, a new five-year test has been established…but the question remains: Will your company pass?

Reputation can be a company’s best asset, which makes it all that more important to protect.  While protection for reputational risk is still considered avant-garde in the insurance world, some insurers are beginning to lay the groundwork for commercial coverage.  Recently companies like Zurich, Willis and Chartis have developed new insurance products to help their clients manage and protect against reputational crises.  These policies are intended to provide coverage for the costs associated with avoiding or minimizing the impact of negative publicity. 

While research and studies surrounding reputational risk are new, there aren’t too many companies that can’t claim to support a good chunk of their business on reputation.   Somewhere along the line small town word-of-mouth turned into a much more global platform, but the concept remains the same.  And as the world gets smaller through the Internet, a company’s reputation can grow that much bigger. 

What price is a business willing to pay to keep their reputation intact?  What do you think?  Will reputational risk insurance grow in popularity among carriers and policyholders alike?  Do insurance carriers know what they are getting themselves into?  Let us know.

Trends in insurer pricing strategies and insurer acquisitions are reshaping the non-standard personal auto market.  The use of broader pricing strategies designed to write a wider spectrum of personal auto risks, guided by the philosophy of “the right price for the right risk,” is one of the key driving forces.  Additionally, several large carriers have acquired smaller non-standard insurers to complement their existing books of business, including the recently announced acquisition of “The General” by AmFam. 

In recent years, increased competition, pressure to reduce expenses, general economic conditions, and lackluster underwriting results have strained the resources of many smaller stand-alone non-standard auto insurers.  The economic slowdown is certainly a large contributing factor to some of the changes seen in the non-standard auto insurance market. 

So, what does the future hold for the stand-alone non-standard auto insurer?  Will an economic recovery lead to better days for these companies?  Please let us know what you think.