Reform Citizens Insurance to consistently operate on actuarially sound rates

"Rick Scott will work with the Florida Legislature" to "ensure that Citizens consistently operates on actuarially sound rates."


After take-outs and rate hikes, Citizens rates more 'actuarially sound'

Gov. Rick Scott blazed into office with big talk about minimizing taxpayer risk with state-run Citizens Property Insurance Corp.

Since Scott took office, Citizens has shed hundreds of thousands of policies and increased rates for consumers. While that may not sound like happy news for, say, Citizens policyholders, it's helping Scott meet his goal to revive private insurance as the first option for hard-to-cover properties.

During his 2010 campaign for governor, Scott promised to work with the Legislature to "ensure that Citizens consistently operates on actuarially sound rates."

"Actuarially sound" is a turnoff of a term that just refers to when an insurer's premium payments are enough to cover projected claims during a major storm without turning to extra "hurricane taxes" levied on everyone, not just Citizens customers.

For Citizens to move in the direction Scott wants, the company would need to raise rates up, up and up, more in line with the private market. The holdup is the company is not allowed to raise rates by more than 10 percent a year.

We moved Scott's pledge to Compromise on our Scott-O-Meter in August 2011, just a few months after Scott signed a law that allowed Citizens to lift a 10 percent cap on sinkhole rates. It was a move in the direction Scott wanted, even though the company could not do the same for premiums across the board.

A lot has happened since that update, with Citizens executives making controversial decisions that include firing Office of Corporate Integrity employees and spending lavishly on corporate trips. Much has happened to reduce the company's policy load and increase rates, too.

August 2012 saw a peak of 1.5 million ratepayers in Citizens. As of August 2013, the count is down to about 1.2 million. Citizens spokesman Michael Peltier says the number has not been below 1 million since 2006.

How? More Citizens policyholders have been pushed into the private market through the company's efforts to entice private companies to take out policies. And Scott signed a 2013 law that will result in a "clearinghouse" for Citizens that will work to redirect policyholders to comparable private coverage starting January 2014.

Citizens will still retain the worst properties to insure, which Peltier said makes sense given the insurer's original mission as a last resort.

While the clearinghouse option does not exactly create more actuarially sound rates, Peltier said, moves like it leave the company in better fiscal shape by reducing its exposure, or the value of all it insures.

Plus, Citizens data show the company is managing to offer rates that are closer to "actuarially sound" than they used to be.

In 2011, the company would have needed to hike homeowners' rates by about 57 percent to be actuarially sound. That fell to 48 percent in 2012, to 32 percent in 2013, and to 18.3 percent in 2014, according to the company's most recent rate filing with the state.

"The 2014 filing continues our steady progress towards actuarial soundness while moderating the actual premium increases by no more than the allowable 10 percent per-policy glide path," wrote company Paul Kutter, Citizens actuarial research manager.

Based on recent developments, we've decided to move Scott's promise back to In the Works.


Interview with John Tupps, Gov. Rick Scott spokesman, May 10, 2013

Interview with Jackie Schutz, Scott spokeswoman, Sept. 27, 2013

Interview with Michael Peltier, Citizens spokesman, Sept. 26, 2013

Citizens Property and Casualty Insurance Corp. rate filing, 2014

Gov. Rick Scott signs law that eliminates Citizens' cap on sinkhole rates

Gov. Rick Scott said during his 2010 campaign that Florida's government-run "insurer of last resort" had become the "insurer of first resort" — and he wanted to fix that, encouraging private insurers to take on more of the state's risk.

Part of the problem, he argued, was that Citizens Property Insurance Corp.'s artificially low rates made it hard for private insurers to compete. 

Florida law requires Citizens rates to be "actuarially sound," said Jack McDermott, a spokesman for Florida Office of Insurance Regulation. As we've reported previously, generally that means charging enough that premium payments and interest income earned from them will cover projected claims and other costs without additional assessments.

But to protect rate-payers, Citizens couldn't legally increase its rates by more than 10 percent a year. So if soundness required raising rates more than 10 percent? Tough.

Citizens wasn't entirely hamstrung -- there are some exceptions for things like "cash buildup" -- and its reserves put it on stronger footing than the state's private insurers. Still, lawmakers say that the insurance company, now Florida's largest with more than a million policy holders, may not have enough money to pay all the anticipated claims if a large storm hits. If Citizens comes up short, it can assess extra fees to all home, car and business policies -- even those who aren't Citizens customers.

That means uncertainty Scott didn't like.

He promised to work with Florida's Legislature to "eventually eliminate the government-run program's reliance on assessments following a major disaster and ensure that Citizens consistently operates on actuarially sound rates."

In May 2011, he signed a bill that eliminates the 10 percent cap for sinkhole coverage. That falls short of his goal of across-the-board change, but is a notable step toward his campaign promise. Indeed, it may lead to a significant increase in sinkhole policy premiums.

The St. Petersburg Times reported that rate increases requested by Citizens in the wake of SB 408, if approved by the state's Office of Insurance Regulation in September 2011, would mean the average premium for a sinkhole policy in coastal Pasco County would increase from $1,270 to $3,598. In coastal Hernando County, premiums would rise from $1,356 to $5,734.

(Pasco Rep. John Legg, R-Port Richey, sent a letter to Florida insurance commissioner Kevin McCarty arguing SB 408 also reduces costs for insurers, and that Citizens' proposed rate increases fail to take that into account. The office has yet to rule on Citizens' request.)

Now, other than signing the law, is there evidence that Scott worked with the Florida Legislature to make this happen?

We asked Sen. Garrett Richter, R-Naples, who along with Rep. John Wood, R-Winter Haven, sponsored the legislation. Richter said he met with the governor throughout the 2011 legislative session, as well as with his staff, and that Scott was engaged in the "promotion and construction" of the bill.

"He was supportive of the section that permitted Citizens to request actuarially sound premiums for the sinkhole portion of their policies," Richter said.

Scott's deputy communications director, Amy Graham, said much the same thing: "The governor and his staff worked closely with Sen. Richter and the House and Senate to pass meaningful legislation in order to begin addressing property insurance cost drivers. We are supportive of the ability to charge appropriate rates for sinkhole coverage."

Scott had pushed for much more. The Sarasota Herald-Tribune reported in April that documents showed he wanted to shut down the government-run insurer. (He clarified that he wanted Citizens to be a "last resort.") Meanwhile, another bill supported by Scott, SB 1714, would have allowed Citizens to raise rates by up to 25 percent a year, but that didn't pass.

But Scott got part of what he wanted: Citizens may now ask for rate increases large enough to make its sinkhole coverage pay for itself, no matter how big an increase that requires. And according to Scott's office and the lawmaker behind the change, he worked with the Legislature to get it done. We're now rating this promise a Compromise.


Rick Scott campaign document, "Blueprint to Secure Our Economic Future: Insurance and Tort Reform"

E-mail interview with Jack McDermott, director of communications, Florida Office of Insurance Regulation, Aug. 25, 2011

E-mail interview with Brittany Perez, deputy director of communications, Florida Office of Insurance Regulation, Aug. 25, 2011

Office of Insurance Regulation, 2011 Legislative Summary, July 2011

Sen. J.D. Alexander, "Citizens Insurance far from 'strong,'" May 2, 2011

Herald-Tribune, "State-run Citizens continues to make a profit," April 13, 2011

Governor's Press Office, "Governor Scott Signs Bill to Strengthen Florida's Insurance Market," May 18, 2011

St. Petersburg Times, "Gov. Rick Scott signs sweeping property insurance changes into law," May 18, 2011

Laws of Florida, Chapter 2011-39, accessed Aug. 25, 2011

St. Petersburg Times, "Pasco, Hernando residents' sinkhole coverage outrage on display," Aug. 17, 2011

Rep. John Legg, letter to Florida Office of Insurance Regulation Kevin McCarty, Aug. 1, 2011

E-mail interview with Rep. John Legg, Aug. 25, 2011

Florida Senate, "CS/CS/CS/SB 408: Property and Casualty Insurance," accessed Aug. 25, 2011

E-mail interview with Sen. Garrett Richter, Aug. 26, 2011

E-mail interview with Amy Graham, deputy communications director for Gov. Rick Scott, April 26, 2011

Herald-Tribune, "Documents show a Scott push to shutter Citizens," April 23, 2011

Herald-Tribune, "Scott: Citizens should be 'insurance of last resort," April 26, 2011

Florida Senate, "CS/SB 1714: Citizens Property Insurance Corporation," accessed Aug. 25, 2011

St. Petersburg Times"Citizens rate increases marching to legislative approval in Tallahassee," March 31, 2011

E-mail interview with Christine Ashburn, director of legislative and external affairs, Citizens Property Insurance Corp., Aug. 25, 2011

Citizens Insurance officials, legislators start talking about changes

On Jan. 12, 2011, officials with Citizens Property Insurance Corp. delivered a presentation to the Florida House Banking and Insurance Subcommittee on the challenges facing the state-run program.

The main problems are well-reported: Citizens, now Florida's largest insurance company with nearly 1.3 million policy holders, may not have enough money on hand to pay all the anticipated claims if a large storm hits. But its ability to raise rates is limited by state statutes. And if Citizens comes up short, it can assess extra fees to everybody's home, car and business policies – even those who aren't Citizens customers.

That has Gov. Rick Scott worried because it could slow his drive for more jobs. In his "Blueprint to Secure Our Economic Future: Insurance and Tort Reform," he said the insurance uncertainty hurts the state's business climate and discourages companies from making new investments here.

Scott pledged during the campaign that he would "work with the Florida Legislature to eventually eliminate the government-run program's reliance on assessments following a major disaster and ensure that Citizens consistently operates on actuarially sound rates."

The House subcommittee meeting gives us a chance to measure the governor's progress on the Scott-O-Meter.

Among the challenges noted in Citizens' report to the lawmakers:

• Citizens' non-catastrophe loss ratio has escalated in the last two years.

• Though Citizens currently has a $4.6 billion surplus, should a 1-in-100-year storm hit it would cost a projected $22.2 billion, wiping out Citizens' coffers and would require Floridians to foot the rest of the bill through assessments.

• Because Citizens is an alternative insurer, it does not have the same ability as private insurance companies to turn away property owners in riskier areas such as coastal zones more prone to hurricane damage.

By raising rates only 10 percent each year (the legal limit), it would take several years before Citizens reaches the rates required to be actuarially sound, Deputy Insurance Commissioner Belinda Miller told the committee, according to the Sun-Sentinel.

Generally, an "actuarially sound" insurance program will set rates at a level where the premium payments and the interest income earned from them will cover the projected claims and other costs of business -- without additional assessments.

Several factors -- from previous weather patterns to building codes in a particular area -- are used to create computer models that formulate a sound rate, said Citizens Chief Financial Officer Sharon Binnun.

Binnun told the panel that in order to catch up to an actuarially sound rate, Citizens would have to hike its premiums dramatically -- 55 percent more for homeowners, 20 percent more for condominium associations, and roughly 118 percent more for businesses.

If rates are not raised, Binnun told subcommittee members, should a 1-in-50-year storm hit (like the Category 5 Hurricane Andrew that ripped through South Florida in 1992), Citizens would not have enough money to compensate claims. It would have to pass the cost on to private insurance customers through increased assessments.

(To see how the assessments could affect you, check out this calculator produced by the Florida Office of the Insurance Consumer Advocate.)

The early discussion between Citizens and the House insurance subcommittee signals to us that Scott's pledge is a work in progress. We rate this In the Works.


Citizens Property Insurance Corp.: An Introduction and Overview, presentation to Florida House Insurance and Banking Subcommittee, Jan. 12, 2011

Orlando Sentinel, "Officials: Citizens would need 55% rate hike to be fully sound,” Jan. 12, 2011

Sun-Sentinel, "Legislators: It's time to deregulate home insurance and cut insurers' sinkhole costs,"  Jan. 7, 2011

Sun-Sentinel, "Lawmakers target $445 billion state insurance programs," Jan. 12, 2011

Sun-Sentinel, "Bills would allow property insurers to raise rates in Florida," Feb. 23, 2010

Sun-Sentinel, "Rick Scott calls for raising Citizens insurance rates," Sept. 21, 2010

Rick Scott campaign document, "Blueprint to Secure Our Economic Future: Insurance and Tort Reform"

Citizens Property Insurance website, viewed Jan 13, 2011

Capitol News Service, "Citizens grows to 1.3 million policies," Jan. 12, 2011

Sharon Binnun, Chief Financial Officer, Citizens Property Insurance Phone Interview, Jan. 14, 2011