|Date:||March 30, 2017|
|Source:||Palm Beach Post|
State-run Citizens Property Insurance Corp. posted its first loss since 2005, $27.1 million, board members heard this week — after more than six times that amount landed in the pockets of offshore firms for optional back-up coverage that covered no claims in a hurricane year.
It was little discussed at the meeting but available in financial records: The company shipped $181 million of its customers’ dollars offshore for private reinsurance, coverage that Citizens did not buy for most of its existence.
Without that spending, the company would have been comfortably in the black and could have added more money to its surplus.
A Citizens statement said, “The loss comes despite minimal damage from Hurricane Matthew, the first major hurricane to impact Florida in 11 years.”
Citizens officials preferred to focus instead on non-catastrophe claims they say are inflated by assignment of insurance benefits to a third party such as a roofer, or a contractor cleaning up water damage from a broken pipe. They seek state legislative action to curb what they call unsustainable abuses, especially when attorneys get involved.
“The tragedy here is that the ultimate loser is the policyholder,” board chairman Chris Gardner said. “Higher insurance costs simply make it more difficult for more Floridians to own a home.”
Citizens, which is backed by a surplus of more than $7 billion to help pay claims and a state catastrophe fund, spent nothing on private reinsurance as recently as five years ago. The $181 million went for back-up coverage to help avoid assessments to state insurance customers even after once-a-century megastorm, far worse than Hurricane Andrew. The chance of such a storm in any given year: 1 percent.
The surplus is like a savings account, a pot of money that can grow year to year in Florida to help cover claims without having to pay foreign companies. Citizens has a much bigger surplus than any private Florida-based insurer.
Private reinsurance, in contrast, involves yearly spending for coverage that lasts for short spans, such as 12 months. If coverage is not triggered by massive losses from rare storms, private reinsurers keep the money and negotiate a new bill for the next year.
Offshore reinsurance is common in the industry and helps make it possible for small private companies to offer coverage even if they have far less surplus or capital available in Florida than Citizens does. The question is whether it makes sense for Citizens, particularly when it contributes to an annual loss.
Much of the financial pinch at Citizens is related to its downsizing from 1.5 million customers several years ago to about 450,000 now, mostly through transfers to private insurers. Company president Barry Gilway has previously acknowledged “we were not ready” for a sudden drop in risk exposure with respect to the money it was sending offshore for reinsurance. Suddenly far fewer customers were paying premiums, but Citizens was still paying big dollars for offshore coverage.
A Citizens spokesman said private reinsurance was designed to help protect the surplus itself, by spreading some of the risk in the event of catastrophic storms. The company’s offshore spending has been falling and is expected to drop to about $70 million this year, the spokesman said.
Many factors contributed to the annual loss. As Citizens has shrunk, a significant proportion of remaining customers are paying rates lower than private insurers want to charge them because state law caps Citizens rate increases at 10 percent a year.
That may help explain why as few as one of four Citizens customers are taking offers to switch to private insurers in 2017, reports prepared before the board meeting Wednesday show.
That’s about half the 48 percent who accepted offers in 2016, a further tumble from higher acceptance rates in past years.
Take the 41,628 mail offers from private insurers made to individual Citizens customers in February. Though consumers are automatically transferred unless they actively refuse the offers, only 11,017, or 26 percent, actually left.
Citizens collected $974 million in premiums in 2016 and reported claim losses of $346 million and expenses related to those claims of $167 million.
Without significant change in state law regarding assignment of benefits, Citizens will be forced to pass higher costs on to its customers, Gardner said. Several bills await action to get out committees about a third of the way through a two-month session.
“Every year, we rely on standardized, accepted actuarial principles to set our rates,” Gardner said “Last year, the same principles that provided rate decreases to our customers in recent years translated into hikes for 84 percent of our policyholders. Without legislative changes, that trend will continue.”
Citizens could avoid court costs by paying claims promptly, said Chip Merlin, president of Merlin Law Group with offices including Tampa and West Palm Beach.
“Citizens management has its claims department take a tougher line to keep claims payments down so it can break even,” Merlin said. “Litigation goes up when claims are not paid.”
Check for updates on consumer news at protectingyourpocket.blog.palmbeachpost.com