What if everyone had Citizens Insurance for their home? [South Florida Sun-Sentinel]

Why not just expand state-run Citizens Property Insurance Corp. to cover all homeowners in Florida?

It’s a timely question for the fast-growing state-owned insurer of last resort after a run of costly hurricanes and heavy litigation have resulted in five straight years of collective insurance industry losses, failure of 15 insurance companies since 2020, and huge rate hikes for homeowners.

Created in 2002, Citizens is meant to provide insurance coverage only to homeowners who cannot otherwise obtain it at an affordable price.

But fast-rising private market rates have made Citizens coverage comparatively cheaper for many Florida homeowners. The company’s policy count has increased from about 420,000 in 2019 to 1.16 million at the end of 2022, and Citizens estimates it will increase in 2023 to nearly 1.7 million.

Lawmakers are trying to strengthen private market companies while making Citizens less appealing. In December, the state Legislature passed a series of reforms intended to reduce litigation costs for private insurers. It also passed a law barring homeowners from getting Citizens if private-market coverage is available priced 20% or less higher than Citizens.

Yet Citizens coverage is available in many areas of Florida for about half the price of competing private insurers.

Security First Insurance CEO Locke Burt says he’s losing 2,500 policies a month to customers who are opting for cheaper Citizens policies.

Whether insurers are publicly or privately owned, Florida policyholders end up paying for their losses one way or another with higher premiums, special assessments, surcharges, or transfers from state coffers.

Private market insurers recover their losses from surpluses and reinsurance. Costs of both are recovered by raising premiums. They are also backstopped by the $17 billion Florida Hurricane Catastrophe (CAT) Fund, bankrolled by surcharges on homeowner policies, and a taxpayer-funded $2 billion reinsurance fund created last year. Claims filed against companies that go bankrupt are covered by the Florida Insurance Guaranty Association (FIGA), which recovers its costs from private market insurers that pass them along to policyholders.

Publicly-owned Citizens can recover losses greater than its surplus and reinsurance by imposing special assessments on their customers, and if that’s not enough, on nearly all insurance customers in the state.

So if Florida’s insurance customers are ultimately on the hook for the costs of insurance, can a case be made for sidestepping the private insurance market and letting everyone buy coverage from a supersized Citizens?

The South Florida Sun Sentinel posed that question to numerous insurance industry experts. None thought the idea desirable or politically possible. Some acknowledged that it could be feasible, but would require changes to Citizens’ organizational structure, coverage levels and eligibility.

Below is what the experts said, edited for length and clarity:

John Rollins, former Citizens Chief Risk Officer

Rollins offered the pros and cons of each argument, summarized below.

The case for “Citizens for All:”

1. The state’s promise is more secure than any private insurer’s, as it is backed by the entire Florida economy rather than a small pool of private capital.

2. We know what we are buying, a standard policy contract at predictable rates with tightly-governed customer service, rather than a proliferation of poorly understood private options with annual rate shocks.

3. The state has outsize negotiating power with global reinsurers, getting the best of both worlds - private capital backing our risk, but at fair equilibrium costs - instead of dozens of small insurers who are out of business without it approaching a spot market each year with little leverage.

4. If further public capital is needed, the state can work with the federal government to backstop our risk, whereas private insurers would find it difficult or impossible.

The case against “Citizens for All:”

1. Private insurer promises are just as secure as Citizens. The worst case is your claim is paid by FIGA after insolvency, and you never get a Citizens surcharge.

2. Private insurers constantly innovate to customize policies to reflect risk profiles of customers. You may not need identity theft or service line coverage, but your neighbor does, and the contract is still tightly regulated by the state.

3. Private insurers compete (viciously, in soft markets) to target the risk they want at the lowest rates, so you can shop around if your profile is a poor match for a particular insurer. A state-made rating plan could never keep up. It’s the same with customer service — insurers compete and innovate, particularly in technology, without the cumbersome state-agency procurement process of Citizens, so you shop for the best “user experience.”

4. Private insurers have longstanding reinsurance relationships that buffer their costs in hard markets and after a string of unlucky weather, whereas Citizens gets a by-the-book “technical price” because reinsurers know they don’t have to come back year after year. Private insurers use brokers and a syndication approach to “auction” their risk to global reinsurers at the best price for the customer paying the premium.

Scott Johnson, owner of Johnson Strategies insurance consulting firm

Consumers pose this question because Citizens rates are lower, suppressed and supported by assessments on other consumers. If Citizens charged an actuarially sound rate (a rate that reflects the actual cost of covering losses and handling claims), consumers would never have voiced this opinion.

It might make sense for Citizens and/or the CAT Fund to provide wind-only coverage [where] the private market can’t provide it, but the government shouldn’t compete by forcing people to buy a product made cheaper via assessments on private individuals for affordable coverages that the private market is willing to provide.

Locke Burt, founder and CEO, Security First Insurance

The problem with government-supported insurance entities is there’s a tremendous political incentive for them to charge less than they should charge. The National Flood Insurance Program was $40 billion in the hole until the federal government wrote off $20 billion of the debt.

What [the question] proposes really is: “Should we tax people for the purpose of paying for insurance?” That’s not an unreasonable proposal. But then you still have to say: “What’s the reasonable price?” The history of government insurance would tell you that politicians are going to make them charge less than actuarily sound rates.

Also, what happens when a big storm hits and you have just one insurance company? After Ian, the big companies brought in people from all over the United States [to process claims]. It’s very difficult to adequately service that many claims.

Paul Handerhan, president of the Federal Association for Insurance Reform

If you have one big insurance company, massive numbers of people will lose their jobs. It would be massively disruptive. There are 165 property insurance companies doing business in Florida. All have CEOs, agents, adjusters, etc.

I don’t know how I would feel if I were to lose my job, lose my house, and get a divorce — say “thanks for the $100 discount?”

Besides, the state will never do it. What the state needs to do is fix the reinsurance [affordability and availability] problem and get quick capital into the hands of the insurance companies. It wouldn’t be a bailout, but it would be paid back after the reforms enacted last December allows them to become financially healthy again in 24 to 36 months.

Barry Gilway, president and CEO of Citizens Property Insurance Corp.

You would be creating a facility for over seven million households with over $4 trillion in exposure. I think that if you were to reduce options and continue to build technology the way we have been then it is possible and could work.

Many have brought up the concept that wind insurance should be centralized because the rates there are determined by modeling companies and the [National Hurricane Center] catalogue of storms vs. actual loss history. It of course would take a completely different infrastructure and approach to the product itself but could be done.

I would really have to think about the reinsurance considerations as this would be key to doing something like that. It would throw out traditional reinsurance and demand use of new products like [loss warranties] and parametric [coverage with predefined payouts tied to specific events] approaches. It could also us a reciprocal approach [defined as an exchange of insurance contracts between policyholders who pool together resources when one experiences a loss] so policyholders become “owners” and the profit motive is removed from the insurance side.

It could be done, but what an undertaking and [would be] politically volatile by changing structure, product and distribution.

However, the primary reason I do not support the concept is that I firmly believe that competition ultimately provides the most competitive rates for the homeowner and provides many more options and alternatives to manage the exposures they have. When the market was healthy and profitable in 2013 to 2016, rates dropped like a rock. Even Citizens reduced rates in 2015.

I admit that today the insurance industry in Florida is facing some unprecedented pressures, but I do not believe the answer is consolidation. I am optimistic that when we get through this crisis — and it is a crisis — the reforms that have been passed finally will reduce litigation costs and we can get back to a private market that offers better pricing and more options to consumers.

Ron Hurtibise covers business and consumer issues for the South Florida Sun Sentinel. He can be reached by phone at 954-356-4071, on Twitter @ronhurtibise or by email at [email protected].