By: Chris Graham
Daytona Beach News-Journal
With the June 1 start of hurricane season just weeks away, Ann Crane didn't know what to think about a letter informing her the Daytona Beach Shores condominium her realty firm owns would no longer be covered by the state-backed Citizens Property Insurance.
Facts - By the numbers
198,049 — Residential insurance policies in Volusia
26,479 — Volusia policies held by Citizens Insurance
13 — percentage of Citizens policies in Volusia
43,214 — Residential insurance policies in Flagler2,525 — Flagler policies held by Citizens Insurance
6 — percentage of Citizens policies in Flagler
Instead, as part of a move to lessen Florida's exposure, the unit would now be covered by Weston Insurance — a company Crane has heard little about.
"I'm just waiting to see what happens," she said.
That wait-and-see attitude is shared by the local lawmaker who hopes to push bigger reforms on the state's largest insurer; private insurers who think their companies can offer policyholders a better deal; and some industry observers who fear new start-ups may be even more vulnerable in the event of a big storm than Florida's insurer of last resort.
State lawmakers this month approved a bill that will allow Citizens Insurance to shed some of its 1.3 million policies — about 27,000 of which are in Volusia and Flagler counties — by forcing customers to shop for cheaper policies where they are offered. The bill is still awaiting Gov. Rick Scott's signature to become law.
Bill sponsor Sen. David Simmons, R-Altamonte Springs, had sought more stringent reforms that would have potentially raised rates for new policyholders to lessen the insurance corporation's exposure in the event of a catastrophic hurricane. Annual rate hikes for current customers are capped at 10 percent.
"It's a good first step, but it does not go as far as I wanted it to go," said Simmons, whose district includes southwest Volusia County. "We do need to address these problems in the future. It is the Achilles' heel to the financial integrity of this state."
Created in 2002, Citizens was meant to serve as a last-resort insurer and wrote policies for residents where private companies were unwilling to go. But those policies were given out with a rate below market value, meaning the company has been selling something for less than it costs to make, Simmons said. Citizens' CEO Barry Gilway recently testified that only 10 percent of the company's coastal accounts were actuarially sound.
Simmons and others worry should a disaster strike like Hurricane Andrew, which caused $26 billion in damages in 1992, Citizens wouldn't be able to cover the costs and would end up having to charge all of Florida's insurance policyholders.
Financial models show after depleting its funds and $4 billion in the Florida Hurricane Catastrophe Fund, Citizens would start tapping its policyholders for surcharges — up to 45 percent — and, eventually, even non-Citizens policyholders could be assessed 2 percent of the cost of their premiums. Emergency assessments of 1.22 percent could be applied even to policies for cars, pets and boats.
"We don't want the people of the state of Florida to be the re-insurers for any kind of large hurricane in this state," Simmons said. "It will be devastating for us."
That's where the proposed law could come into play.
Insurance agents currently can place customers with Citizens if private insurers an agent represents do not offer rates within 15 percent of the state-run company. Under the new legislation, a clearinghouse program would mandate Citizens customers leave the company if a private insurer offers an equal or lower rate. Renewal policies would also be entered into the clearinghouse program. The new law would go into effect in January 2014.
But with large national insurers such as State Farm and Allstate continuing to drop customers in Florida and restricting new business, shifting policies out of Citizens makes homeowners and the real estate industry more dependent on a raft of Florida-based insurance start-ups.
Robin Westcott, the state's Insurance Consumer Advocate, warned that many smaller insurance companies could struggle to stay afloat if after taking on Citizens' policies the state were hit by a storm with a strength comparable to Andrew or Katrina.
"Insurance companies can only take on so much risk," she said. "They are going to have to be careful to make sure they can afford it."
Since 2004, at least eight Florida property insurers — 11 when considering multiple insurers operating under holding companies — have failed. Other weak companies were purchased or merged before going broke.
Insurance policyholders across Florida will pay a 1 percent assessment this year to cover claims of failed Tampa-based Homewise Insurance. Citizens is also levying a 1 percent assessment to help pay claims from the 2004-05 storm season.
Still, many companies will be able to offer cheaper policies than Citizens, said Locke Burt, president of Ormond Beach-based Security First Insurance.
"People could save money by shopping around," he said.
Burt's insurance company recently conducted an analysis that examined more than 500,000 Citizens policies. The study found that nearly 40 percent of the policies received an insurance quote from a private company that was less than Citizens' price.
Westcott and Burt, however, share concerns over how the clearinghouse program would be implemented.
"There's a big question mark in the new law," Burt said.
Westcott said companies who are willing to take Citizens' policies should be studied to see how they would fare under certain circumstances and whether they could afford re-insurance in the event of a hurricane hitting a populous area.
The number of policies that will be turned over to the private market also remains to be seen.
"I'm going to reserve judgment until I see how they set up this clearinghouse," Westcott said.
Michael Peltier, a spokesman for Citizens Insurance, said the company is still in the process of working on the mechanics of the clearinghouse program. After the passage of the bill, Gilway said in a statement he believes the company will be able to return to being the "insurer of last resort."
"Through the clearinghouse, many policyholders will be able to find more comprehensive coverage at a lower price in the private market," Gilway said. "That, in turn, reduces the likelihood and amount of assessments on all Florida policyholders face in the event of a major storm."
Citizens Insurance in January began the process of shedding some of its policies. In January, the company agreed to transfer 31,000 of its wind-only policies like ones for Crane's condominium to Florida-based Weston Insurance Co.
Simmons hopes the clearinghouse will lessen Citizens' exposure, but he believes more reform will be needed. He promised to bring forth more legislation during the next session.
"This is how you eat elephant: one bite at a time," he said. "If you bite off too much it will cause the Legislature to choke."