A Capital Crisis: The 2006 Florida Property Insurance Market

1
A Capital CrisisThe 2006 Florida Property
Insurance Market

• John W. Rollins, FCAS, MAAA
• Citizens Property Insurance Corporation
• Presented at
• Casualty Actuaries of the Southeast
• Boca Raton, FL April 11, 2006

2
Overview

• Citizens 101
• 2004-05 Recap and Market Effects
• 2006 Legislation
• How to Fix the Market

3
Citizens 101 Who are We?

• Citizens is the only property insurer of last
  resort chartered by the state of Florida
• FRPCJUA statewide all-peril insurer created
  after Andrew 1992
• FWUA coastal wind-only insurer created in early
  1970s by insurance industry
• 2002 statute merged the two into Citizens
• Citizens is a real insurance company but
  operates under special statutes and supervision
• Board of Governors (8) appointed by Florida CFO
  (2), Governor (2), House Speaker (2) and Senate
  President (2)
• Several Citizens-specific laws since 2002 govern
  operations
• Board proposes and Office of Insurance Regulation
  (OIR) approves a Plan of Operation, Board makes
  most major decisions
• Citizens is subject to all other insurance laws
  and regulations

4
What do We Insure?

• Three accounts maintained almost like separate
  companies
• Personal Lines Account (PLA)
• Personal residential policies from FRPCJUA
• Homeowners, Renters, condo Unit-Owners forms
• All-perils, statewide eligibility
• Commercial Lines Account (CLA)
• Commercial-residential policies from JUA
• Apartment building and condo Associations
• All-perils, statewide eligibility
• High-Risk Account (HRA)
• Wind-only policies in defined eligible (coastal)
  areas from FWUA
• Personal lines, commercial-residential and some
  true commercial risks

5
What do We Insure?
6
HRA Eligible Areas
7
How are we Structured? Points of View

• Actuarial/Products
• Rates and Rules PLA, CLA, HRA-PL, HRA-CR,
  HRA-TC all separate lines (to us and OIR)
• PLA, CLA, HRA-CR subject to standard rate
  regulation
• Financing
• Assessments and Debt PLA, CLA, HRA
• Florida Hurricane Cat Fund (FHCF) PLACLA, HRA
• Reinsurance PLA, CLAHRA
• Operations
• Systems PLA, CLA, HRA separate
• Policy Admin PLA, CLA separate from HRA
• Claims Daily (non-cat) and Cat separate
• Public/Media
• Alphabet soup all the rates are too high!

8
Actuarial - Rates and Rules

• All rates by statutes must be
• Actuarially sound
• Noncompetitive with private market
• Easier said than done
• When 80 or more of your fair premium is for
  infrequent, severe cat events, what is the
  right rate (including cost of capital)?
• With the diverse rate structures, underwriting
  and coverage in the private market, define
  noncompetitive?
• Personal lines easier than commercial
  standardized products, lots of competitors, good
  rate information
• Statutes also more specific about how to test
  rates

9
How are we Financed? - Needs

• By statute and Plan, Citizens must finance
  100-year event PML, which varies with
• Exposure market share and risk attributes
• Which depends on private market health and
  private reinsurance prices/availability
• Modeled hurricane losses
• FHCF coverage set by statutes

10
Financing Current Structure (1)

• Current financing comprises
• Surplus (cash on hand) zero right now
• Assessments
• Regular up to 10 of property written premium
  from private insurers (due 30 days)
• Emergency sell bonds for an additional
  amount, serviced by annual assessment to all
  property insureds (including Citizens) for up to
  30 years

11
Financing Current Structure (2)

• FHCF
• Coverage (and premium, at actuarially sound rate)
  proportional to exposure, one season aggregate
  amount, fairly high retention
• Much cheaper than private reinsurance because
  FHCFs capital also provided by its (separate)
  assessment authority on all PC policies (except
  Work Comp and Med Mal)
• Private reinsurance wraparound FHCF cover the
  only current treaty
• Debt (Pre-Event Notes)
• Fairly standard bonds with slight variations
• Outstanding notes due in 2007 for PLA, 2019-2024
  for HRA

12
2004-05 Recap and Market Effects

• 2004 Four hurricanes affected every area of
  Florida
• Millions of claims and logistical nightmare
• Costs borne by primary insurers and consumers
• Multiple deductibles and retentions
• No one storm was a mega-event
• Reinsurers and FHCF relatively unscathed
• 2005 Four hurricanes affected Florida and
  Katrina blasted global reinsurers
• Wilma by far the most costly to Florida, driven
  by demand surge in area
• Wilma struck Citizens alley in PB/Broward/Dade
• 2006 Results
• Massive Citizens (and smaller FHCF) deficits
• Modelers woke up and adjusted short-term outlook
• Global market saying no mas to Florida

13
2006 Where does Citizens stand?

• 12 Billion projected PML during 2006 season
• Financing only up to roughly 9.5B in place now
• 1.7 Billion deficit from 2005
• Deficit year 2005 includes adverse runoff from
  2004
• Most of 2005 deficit in HRA (Wilma)
• FHCF also broke (but less broke - 1.5 Billion)
• Rapidly growing exposure in all accounts
• Reinsurance capital disappearing for Florida-only
  takeout companies totally dependent on rental
  
• The few commercial-residential specialists also
  exiting due to lack of reinsurance

14
2006 Legislation

• Reform of property insurance inevitable
• House and Senate both moving 100 page bills (see
  next)
• Much discussion about using general revenue to
  pay off Citizens and possibly FHCF deficits
• New revenue estimates arrive April 20 showing
  size of state budget surplus
• Resumption of 2005 discussion about lowering FHCF
  retention and providing more coverage in working
  layers

15
House Insurance Package Highlights

• Creates a new Citizens account for non-homestead
  property with higher capital adequacy standards
  in rates
• Homestead rate standard reduced to 50-year PML
• Nonhomestead rate standard increased to 250-year
• Deficits in nonhomestead assessed to only
  nonhomestead insureds homestead still paid by
  everyone
• Limits home values eligible for Citizens to lt 1
  million
• Allows flex rating (small rate adjustments
  bypass OIR approval)
• Removes Panhandle exemption from statewide
  Florida Building Code
• Requires private insurers to adjust claims for
  Citizens wind-only policies
• Requires Citizens Board and employees to adhere
  to State Code of Ethics

16
Senate Insurance Package Highlights

• Allows cost of (internal) capital to be included
  in rates
• Only actual reinsurance costs allowed before
• Imposes 25 premium surcharge on vacation homes
  owned by nonresidents of Florida
• Tougher standards for depopulation by takeouts
• Must retain policy for 5 years (up from 3)
• Limits home values eligible for Citizens
• Started at 1M now backing off
• Moves certain OIR oversight of Citizens to
  Florida Cabinet
• Makes Citizens more political and ethical
• Director to be confirmed by Senate
• Many other strict audit/conflict provisions
• Toughens standards for valid sinkhole claims

17
How to Fix the (Citizens) Market

• Make getting into Citizens a hassle
• Require declinations from both admitted and
  surplus lines insurers
• Quit automatically renewing HRA policies
  reunderwrite annually
• Require extensive and quality risk data on
  applications
• Make getting into Citizens expensive
• Achieve actuarially sound rates in all accounts
• Monitor market concentration in all accounts and
  allow presumed rate changes in uncompetitive
  places based on market share
• A-rate large risks based on market prices

18
This is Just Too Easy
If you were an agent, and Citizens was not only
cheaper, but required only a one-page document to
allow entry, what would you do?
19
Market Concentration Analysis
Many of the tools needed for better public policy
are already available, such as this quarterly
analysis from OIR.
20
How to Fix the (Voluntary) Market

• Stop letting Citizens compete for business
  (above)
• Streamline rate/rule regulation
• Flex rating is a good start, with appropriate
  transition plans (phase-ins)
• Restrict OIR use of unwritten rules to delay or
  disapprove
• Allow cost of internal capital to be included in
  rates
• Allow any cat model approved by Florida
  Commission on Hurricane Loss Projection
  Methodology to be used freely
• Streamline post-disaster regulatory environment
• Standardize emergency orders/requirements
• Reduce exit barriers to nonrenewals
• Supersize FHCF
• It has superpowers nobody else has (all-lines
  assessment authority)
• Long-term turnover housing stock and mitigate
  whats left, and educate the public

21
Speaker Contact Information

• John W. Rollins, FCAS, MAAA
• Actuary
• Citizens Property Insurance Corporation
• 101 North Monroe Street, Suite 1000
• Tallahassee, FL 32301
• [phone]
• john.rollins_at_citizensfla.com