Citizens Property Insurance Board of Governors Defers Action on Possible Coverage Changes for Short-Term Rentals; Approves Legislative Package

 

Condominium owners whose units are located in buildings where more than 25 percent of the units are short-term rentals could face significant insurance rate hikes under a proposal being considered by Citizens Property Insurance Corporation (“Citizens”) Board of Governors (“Board”).  Board members discussed the matter at length today, December 14, 2011, but agreed to seek additional input from industry professionals before making any changes.

Focusing on efforts to depopulate Citizens, the Board voted unanimously to move forward with a package of proposed legislative changes that would help to downsize the State-run “insurer of last resort.”  Among the key initiatives are increasing the current statutory “Glide-Path” on Citizens’ rates and requiring that Citizens be non-competitive.

The Board approved additional related action items and directed Citizens’ staff to begin implementing other depopulation efforts, among them being the elimination of ceding commissions for takeouts.

To view the Board meeting materials, click here.

Much discussion during today’s meeting focused on short-term rentals.  Under the proposed changes, buildings in which there are 25 percent short-term rentals or less would remain eligible for Citizens’ commercial residential program.  However, buildings with more than 25 percent in short-term rentals would be re-classified as commercial nonresidential risks and no longer be eligible for the commercial residential program. 

Other proposed changes include filing updates to Citizens’ manuals to clearly define the above-mentioned guidelines, and developing communication guidelines to address the changes.  The changes would ultimately have to be approved by the Florida Office of Insurance Regulation (“OIR”).

Board member Carol Everhart, who recused herself from voting on the issue, urged the Board to research the issue carefully, saying that re-classifying certain condominiums from residential to commercial could have enormous impacts on the premiums charged.

Putting the proposal into operation could also be tricky, she said, because determining how many units in a condo are rented is difficult because many of the condominium associations do not keep that information on file, or simply do not know if certain units are rented.  Using measures such as whether a building offers maid services, has a registration desk or is labeled a “resort” are not necessarily indicators that the building is mostly rented, Ms. Everhart stated.

“I really have a hard time with this whole issue and how it is going to affect the beaches of Florida,” she said.  She worried that significant rate hikes could hurt the Florida real estate market.

Board member Tom Lynch wondered why Citizens had chosen 25 percent as the cut-off, when the Florida Hurricane Catastrophe Fund (“FHCF”) used the term “predominantly” to define how much of a building had to be comprised of short-term rentals for its classification to change.

It was noted that 25 percent is “kind of any industry rule,” and if Citizens switched to using “predominantly” that would mean more than 50 percent and encourage population.

Ms. Everhart urged the Board to continue with the existing rules, continue with inspections and evaluate the impact of the mitigation changes in order to give clients and policyholders more information.

Board Chairman Carlos Lacasa said the topic needs more discussion.

“I see issues that go beyond our underwriting issues as to the impact it has on the real estate market,” Mr. Lacasa said.

Brian Squires, chairman of Citizens Market Advisability Committee, said the proposed changes do not address how the current customer base would be affected by the changes.

“Our Committee is concerned that we want to ensure any changes made to the underwriting rules are applied not only to new insurance submissions but also applied fairly to the current Citizens policyholders within Citizens,” he said.

Citizens President Scott Wallace lauded Chairman Lacasa for the presentation he gave on December 6, 2011 to Florida Governor Rick Scott and the Florida Cabinet on the package of legislative changes Citizens will undertake as part of its initiative to downsize.  Mr. Lacasa’s presentation included:

• Operational changes Citizens will implement independently of statutory changes
• Additional items for projects Citizens will research further
• Statutory changes Citizens will recommend to the Florida Legislature

Key statutory changes that will be submitted to the Legislature to return Citizens to the
“insurer of last resort” include:

• Increasing the current statutory Glide-Path on rates
• Requiring Citizens rates be non-competitive
• Allowing Citizens to pass through the cost of risk transfer outside of the Glide-Path
• Revising statutory eligibility requirements
• Removing statutory barriers to depopulation

Additional items under Board consideration include the aggressive pursuit of additional risk transfer, enhanced depopulation efforts, evaluating new business inspection criteria, evaluating agent related issues, conducting an evaluation of Citizens’ book of business, commissioning a wind mitigation study, reviewing the legal authority to limit public adjuster involvement and expanding application of A-rates.

The Board voted unanimously to move forward with all the initiatives.

The package of changes presented to Governor Scott will result in a seven percent reduction in Citizens 100-year Probable Maximum Loss (“PML”), or measure of peak storm risk across all accounts, it was noted.   In the highest risk Coastal Personal Residential Account, the recommended changes could make over a 15 percent reduction in the PML. 

“That is a dent in the problem,” Board member John Rollins said.  “I do think we are looking at potentially significant progress.”

That action would eliminate approximately $1.5 billion in Citizens PML, which is an actual reduction in estimated storm risk during that severe 100-year storm, he stated.  In the Coastal Personal Residential Account, PML would be reduced by approximately $1 billion, Mr. Rollins said.

Currently that account has a PML of $6.3 billion just for that subset of Citizens risk, and that would decrease to an estimated $5.3 billion, he added.

Mr. Wallace gave the following update on Citizens policy counts:

He said the current in-force policy count is 1,467,000 as of last Friday, down from 1,483,000 policies earlier this month.  Last week there was a depopulation of 20,000 policies, he added.

He spoke briefly about Louisiana’s depopulation program, explaining that the recent activity had shrunk Louisiana Citizens down to a 4.3 market share, effectively putting it in a sixth place ranking statewide.  He pointed out that three of the five companies involved in the depopulation were from Florida, indicating that differing market dynamics and geography make it preferable for private insurers to operate in Louisiana instead of Florida.

“It does reinforce benefits derived when all parties work in a collaborative manner and focus on those actions necessary to become an insurer of last resort,” Mr. Wallace stated.  He said Citizens’ management in Florida will focus on taking appropriate actions that are within its operating authority to reduce the insurer’s size.

In other action, the Board heard an update on the FHCF.

The FHCF’s obligation is set by statute each contract year, Scott Wallace explained.  For contract year ending May 2012, the FHCF’s maximum claims-paying obligation is $18 billion. But the FHCF may have a potential shortfall of $3.2 billion in bonding during the initial season, he stated.

“The FHCF plays such an important role in Citizens financial projections and reinsurance and quite frankly for the rest of the voluntary market,” Mr. Wallace added.

In a November 16, 2011 letter to Louisiana State Representative Chuck Kleckley, Florida Insurance Commissioner Kevin M. McCarty called the FHCF a “primary reason the homeowners’ insurance market exists today in Florida . . . there would be no market to improve without the state Cat fund.”

Board member Tom Lynch said that, in order to stabilize the market and bring new insurance companies into Florida, a reinsurance program is necessary.

“That is what is going to allow the companies to have stable insurance rates.  I would like to see us go on record saying we think the Cat fund ought to be properly funded. This Board has never gone on record that the Cat fund needs to be funded,” he stated.

The Board also approved several consent agenda items, most of them related to information technology issues.  Because the Board ran short on time, several Committee reports will be heard at the next scheduled meeting.

With no further business before the Board, the meeting was adjourned.

 

 

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