Shrinking Citizens Signals Progress in Florida Property Market

Florida remains focused on recovery of its property insurance market. But new rules for reinsurers, a national catastrophe plan and the use of occupational rating in insurance are also on the radar of Florida Insurance Commissioner Kevin McCarty, who discussed these and other issues with Insurance Journal‘s Ken St. Onge during the most recent National Association of Insurance Commissioner meeting.

Let’s start by talking about the big picture of the property casualty landscape in Florida. What’s happening now?
McCarty: Well, obviously, we are still focused very much on our recovery in the property market in the state of Florida. We have instituted some significant changes in legislation to expand the Florida Hurricane Catastrophe Fund, to provide low-cost reinsurance for our marketplace, and try to ensure that companies pass those savings on to their policyholders.

Moreover, we have done a lot to do a business development in our state, to bring new capital to our state. So we’re very pleased to announce that since Hurricane Season 2004-2005, we’ve brought 28 new companies to Florida with three and a half billion dollars of new capacity. We have shrank the recent market of last resort, Citizens, from 1.3 million policies to just over a million policies, successfully taking 400, 000 policies out of Citizens in just over a year.

So we’re cautiously optimistic, and fortunately we have been blessed this year with a relatively mild hurricane season. A couple of them came close, close calls, but we have yet I think gotten through another hurricane season.

As we get through season, the couple of the seasons behind us, we see a softening in the insurance market. Hopefully the combination of the efforts that we’ve done to rebuild the marketplace, strengthen the Florida Hurricane Catastrophe Fund, and having mild seasons in softening of the market; that we are on the mend with our property market.

It sounds like Citizens Property Insurance is shrinking. What impact is that having, and what’s the outlook for Citizens?
McCarty: Well, part of our recovery in terms of our marketplace is to provide a marketplace that encourages people to take policies out of Citizens Property Insurance, and that’s a real challenge. Citizens has really moved from a market of a last resort to an alternative market, with rates that are very competitive with a voluntary market…

As I mentioned, we have through our efforts, through business development, we have brought new companies, new capital, and have been very active in both taking policies out and preventing policies from going in. So, Citizens has worked like a safety valve to provide relief as pressure and rates are going up. We’re finding that many companies are coming in and charging at or below Citizens, so it has been very successful strategy at stabilizing our marketplace.

What about the changes to reinsurance law in Florida under which reinsurers can now come in without putting up 100% collateral?
McCarty: Well, we’re really looking at this as a long-term issue, and really looking at it as part and parcel to a regulatory state modernization plan. As you know, if a company is an American domiciled company it does not have to post collateral, foreign domiciled companies do. I think that there’s inequity in that system, and I don’t think it makes a lot of sense in the global reinsurance market.

The 2007 Legislature gave the Office of Insurance Regulation the ability to develop rules to establish a new framework for allowing companies to do business in Florida, without having to put up the same collateral and requirements as is required other states.

Many of our companies are Florida-only companies, so we’re really focusing on that aspect of our business. Meanwhile, of course, we are working with our partners in New York. New York has been working on a rule. Our rule and their rule are very similar.

We think this also makes a very good blueprint for the National Association of Insurance Commissioners. I commend Commissioner [Steven] Goldman of New Jersey for really moving the ball down the field, in terms of developing a new national framework that recognizes some of the modernization efforts that Florida and New York have been putting forward.

Where do you stand on the national catastrophe proposals that have been offered by companies like the Hartford and Travelers?
McCarty: Well, first of all I think it’s very encouraging. We’ve really moved a long way from when I first started to testify before the Congress, when I felt like I was the lone voice out there talking about a national catastrophe plan. So it’s great now that we have Travelers, and we have Nationwide among others, that are talking about a continuum of plans.

You have everything from a complete federal backstop that has been put forward by some of our large carriers that would allow the federal government to provide a reinsurance mechanism in the private sector, to some smaller plans that have been put forward. They really tried to address the issue of rising water and wind, and some of the problems that we’ve seen in the aftermath of Katrina.

One of the things that I’ve quickly recognized is there’s a lot of commonality of goals and objectives. First of all, there’s a recognition that mitigation works. We want to encourage mitigation in personal responsibility. We want to encourage states and local governments to enact building codes, strong building codes, but more importantly to enforce those building codes.

More prudent land use planning, to ensure that we’re not putting too much exposure where we’re putting it in harm’s way; we don’t have a good plan in terms of protecting property, but more importantly protecting peoples lives.

So, we see there is a commonality of those interests. Unfortunately, many of the plans that have been put forward really are looking at the peril of wind, and we’re completely concerned as well about other perils that we haven’t heard about very much, and that of course is earthquake risk.

I just recently met with Commissioner [Steven] Poizner of California, and then the new executive director of the California Earthquake Authority, and want to make sure that they’re very much part of the solution to the national catastrophe plan, because earthquake is not a covered peril. Less than 11 percent of the policyholders in California have earthquake coverage, and it’s not a matter of “if” but “when.” We’re in a period of increased seismic activity worldwide, and we know that’s going to translate into seismic activity in heavily populated, heavily exposed uninsured areas of the United States.

So, we want to work shoulder-to-shoulder with those commissioners in those states to ensure that whatever plan we put forward, it is pre-funded, is rational, it makes some sense to collect some premium upfront, and to encourage people to act prudently before an event occurs, rather than just pumping billions of dollars after the fact.

The relationship between your department and Allstate has been somewhat contentious. Can you update us on that?
McCarty: Well, part of what was enacted in Florida legislature was the rollback of rates based upon the increased capacity of Florida’s catastrophe fund. We were concerned that companies were putting forth the full benefit of that reform package and committed to the people of Florida and to the governor of our state that we’ll use whatever resources necessary to ensure that those cost savings were passed on to Floridians.

As part of that investigation we asked for certain documents, books, and records from Allstate Insurance Co. and they refused to provide, fully cooperate, with our requests. We had a public hearing. They showed up to the hearing totally unprepared for the hearing as well as without the documents that were requested.

We then used the tools available to us through the judicial system to get compliance with our request for documents and opening their books and records as required under the Floridian Insurance Code. Several efforts were made and we were successful in the District Court of Appeals to get those books and records.

Since that time we have entered into a limited agreement with the company. We had charged them with a number of offenses. In addition to refusing to cooperate with our investigation there were other charges. We’ve settled those issues. We are still investigating in terms of some of the underlying issues of collusion and market conditions.

But Allstate has committed to infusing $175 million into the Florida marketplace, writing 100,000 new policies, and further reducing rates in Florida by another 5.6 percent. So their total rate reduction as a result of the changes in legislation in Florida is about 20 percent. So we look at this as a victory for the people of Florida. It was a validation of a law that was enacted by Florida Legislature. And I think it’s also an opportunity for Allstate to put its best foot forward, to be good corporate citizens and stand up and sell some policies in Florida.

How do you think the problems with AIG filter down and effect Florida, if at all?
McCarty: Well, I think the one take away from this week in our meetings with AIG and with federal regulators is that the state-based regulatory system and some of the much-maligned state-based regulatory system is principally responsible for the capital or the resources that are in the 71 companies that are in the AIG Group. And it’s probably that reason that the federal government felt confident that they had any realistic hope of getting back their $85 billion loan is that they were valuable assets and those valuable assets of the company were not the other financial sectors, but were, in fact, the insurance companies… Prospectively, we’ll have ample opportunity to do a post analysis on the holding company to see what could have done better, what did the federal agencies that are principally charged with that regulatory regime do, what could have been done, what should have been done, and what the regulatory framework should look like in the future.

But clearly, that has got to be, in part, recognition that state regulatory system is a key fundamental, sound system and should be an integral part of any future system we have regardless of whether it’s a holding company or an individual insurance company.

What’s on your agenda for the next year?
McCarty: Well, we’re looking forward…this year, we’re looking at doing something about stranger-owned or stranger-initiated life insurance policies. Our concern, of course, first and foremost, is protecting Florida policyholders, particularly Florida seniors from being victimized in some potential scams that we have. We recently held a public hearing and it really raised the level of concern that we have. And we’re coming forth with a report in the next month with several recommendations.

Secondly, I think of great importance to us is the use of occupational rating and the use of education as a standard of determining your auto rates in Florida. A number of companies have used that as a critical piece of their underwriting tool.

And we’re deeply concerned, not only on the fundamental of fairness…we’ve done some study on this where we actually took a policy holder and the only thing we changed was their occupation and held everything else constant. And from just changing their education/occupation, you could see as much as a 300 percent rate differential.

So that strikes us as fundamentally unfair and also potentially has the unintended consequences of serving as a proxy for race. And obviously, we want to do whatever we can to ensure that policyholders are protected from that unfair trade practice.

Topics California Florida Trends Catastrophe New York Legislation Reinsurance Hurricane Property Market Earthquake