Citizens Property Insurance Corporation Board of Governors examines short-term rentals, eliminates ceding commissions

 

Condominium owners who live in upscale buildings where more than 25 percent of the units are short-term rentals may face significant insurance rate hikes under a change approved today, February 23, 2012, by Citizens Property Insurance Corporation (“Citizens”) Board of Governors (“Board”).  The measure re-classifies those buildings as commercial non-residential risk and applies to new business and renewals with policies over $1 million.

In an effort to promote depopulation, the Board also voted to eliminate all ceding commissions for takeouts retroactive to contracts signed during the fourth quarter of 2011.  Citizens’ ceding commissions have historically ranged from 6 to 16 percent of unearned premium.  The Board also approved a recommendation to remove the word “Residential” from the term “Commercial Residential Non-Bonus Takeout Plan,” thus making it applicable to all commercial policies.

Additionally, the Board agreed to move forward with a pre-event liquidity program of $750 million to $1.25 billion for Citizens’ Personal and Commercial Lines Accounts, citing skyrocketing growth in policy count. 

The Board also will explore capital markets for a portion of risk transfer.  Capital market risk transfer involves bonds that are multi-year and fully-funded, explained Citizens’ Chief Financial Officer Sharon Binnun.  The notion of using external risk transfer for the Coastal Account was approved in concept by the Board in December.  Provisions were made last year to purchase $1 billion in risk transfer. 

All three initiatives will be up for Board consideration again in April 2012 when transactional information is available. The measures need to be in place before the start of the hurricane season or shortly thereafter, it was noted.

During discussion of coverage for short-term rentals, Board member Carol Everhart, who recused herself from voting, continued to voice opposition to the reclassification, saying it is difficult to determine how many units in a condo are rented because many condominium associations do not keep that information on file.

“Unless it is clear . . . I don’t think it’s fair to ask the (condo) board to make that determination,” Ms. Everhart said.  “Short-term rentals can change year to year.”

The approved measure requires Citizens to apply the requirementsto both new business and renewals.  It leaves policies of $1 million or less in the residential program, regardless of transient occupancy.

In other business, the Board voted to:

• Approve a new notice form that will include a notation on potential policyholder assessments.
• Designate timeshares in the underwriting manual as Commercial Non-Residential risks and clarify their eligibility for the Commercial Non-Residential Program only.
• Change Non-Financial Sector long term ratings from A2/A-/A to A3/A-/A- (Moody’s/Standard and Poor’s/Fitch) and allow Agency Mortgage Backed Securities and Notes issued by GNMA, FNMA and Freddie Mac. The changes are expected to increase the investment returns by approximately 10 basis points and also increase the universe of eligible securities for the portfolio.
• Extend vendor contracts for two one-year renewals for Cutwater; RBC Global Asset Management Inc.; UBS Global Asset Management Inc.; US Bancorp, Wellington Management Company, LLP; and Wells Capital Management Company.
• Approve the Finance and Investment Committee and Audit Committee Charters, neither of which had any major changes.

 

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