Florida Senator Alan Hays Joins Florida Association of Insurance Agents in Media Conference Today; Calls Citizens Property Insurance ‘Fraudulent’

 

Joining representatives from the Florida Association of Insurance Agents (“FAIA”) in a teleconference with media members today, April 11, 2011, Senator Alan Hays called Citizens Property Insurance Corporation (“Citizens”) a “fraudulent company that is state-owned” and said that it would be “irresponsible to continue what we’ve been doing” with regard to Citizens.

FAIA President Jeff Grady, who opened the discussion, reported that progress on behalf of insurers is being made in the Florida Legislature as insurance marketplace conditions continue to deteriorate with regard to consumers facing fewer private choices for homeowners’ insurance and fierce competition between private companies and state-sponsored Citizens.  He added that this situation is troubling, considering that five years have passed without a storm in Florida. 

Traditionally, he continued, storm-free periods allow private insurers to build reserves and gain better ability to pay claims, with private marketplace choices proliferating.  However, because they have experienced negative financial results in Florida, many private carriers have withdrawn from the State’s private market, in addition to those who have closed or become insolvent. 

Mr. Grady stated that Citizens has become a more viable option for many consumers, which is “perilous for Florida.”  The liability of Citizens continues to grow as a result of inadequate rates.  Members of FAIA are hopeful that bills before the Florida Legislature will put Citizens back in the position of being the insurer of last resort, rather than first resort, he said, and that consumers will ultimately see more choices and stabilized prices.

Kyle Ulrich, FAIA’s Senior Vice President of Public Affairs, then provided an update on the various property reform packages currently before the Legislature.  He first addressed CS/CS/CS/SB 408 and CS/HB 803, which he referred to as the “new version” of SB 2044, which was vetoed by former Governor Charlie Crist.  According to Mr. Ulrich, these bills are designed to address the cost drivers that have been identified by “everyone involved in the property insurance market.”  He noted that HB 803 has passed one committee of reference and that SB 408, having passed all of its referred committees, has been placed on the Senate calendar for second reading.

Mr. Ulrich then discussed “Citizens reform packages,” CS/CS/HB 1243 and CS/SB 1714.  He reported that HB 1243 has passed the committee process and its next step is the House floor, while its Senate companion, sponsored by Senator Alan Hays, has passed the Senate Committee on Banking and Insurance. 

Senator Hays said that after the 2004/2005 hurricanes, Citizens applied for and was granted a 23 percent rate increase by the Florida Office of Insurance Regulation (“OIR”).  However, the Legislature passed HB 1A in 2007, which denied Citizens that increase and froze its premiums for the following three years.  According to Senator Hays, this decimated Citizens’ ability to build up a surplus. 

He said that, at the very least, if Citizens were a private company, it would have been shut down by the OIR and not allowed to conduct business in Florida.  At worst, he continued, Citizens’ officers and directors would have been charged with fraud, which is a third-degree felony carrying a maximum of five years in prison per count.  Senator Hays concluded that, with 1.3 million policies in Citizens, that would amount to perpetrators spending over six million years in prison.

Senator Hays said that the top 500 homes insured by Citizens represent over $2.5 billion in exposure and that the most expensive of those homes has a value in excess of $26 million. 

Calling the current Citizens situation a “terrible condition,” Senator Hays said that within the last two weeks, the OIR determined that a particular private company needed a 40 percent rate increase and that the company chose not to ask for it because it wanted to be competitive with Citizens’ low rates.

Senator Hays said that his bill, SB 1714, takes a dual approach to fixing the problems – first, it would limit the value of homes that can be insured by Citizens and would decrease that value over the next few years.  Second, it would increase Citizens’ premiums by no more than 25 percent per policy each year until Citizens becomes financially solvent. 

Recalling the 2007 failure of three insurers under the Poe Financial Group, Senator Hays said that particular event cost Florida taxpayers approximately $750 million for about 300,000 policies.  He said that, in the event of a 1-in-100 year storm, Citizens would face a deficit of about $14 billion for 1.3 million policies. 

Jay Brady of the Gulf Coast Business Review asked for an estimate of how many years it would take for Citizens to become solvent with the 25 percent premium increase per year.  Senator Hays said that the best guess is approximately three years.  A call participant said that the 25 percent figure is a limit that not all policyholders would see, with some facing only a modest increase.

Senator Hays said, “I’d much rather explain to a person now why their premium might go up and hear their displeasure rather than try to make an excuse when there’s no money to repair their home and listen to their screams.”

Responding to a question from Brian Bandell of the South Florida Business Journal about whether the new legislation would make sinkhole coverage optional, Mr. Ulrich said that one of the bills provides for a mandatory offer of sinkhole coverage by Citizens.  He said that Senator Garrett Richter told him that he believes if certain reforms relating to sinkhole coverage are implemented this year, private markets will be more willing to write that type of insurance. 

Mr. Grady said that there is an important distinction between sinkhole activity and a sinkhole.  He said that “catastrophic ground collapse” will always be offered in every single policy, but that “sinkhole activity coverage” is unique to the Florida market and that most other markets do not have coverage for shifting sands or settlement.  “This coverage in Florida has been exploited by a public adjuster element to make claims out of things that are traditionally not claims, like cracks in sidewalks,” he said.

In response to a question from a media member regarding the affordability of potential rate increases for Floridians, Mr. Grady said that there have been 100 to 150 private rate increases over the past 18 months, many of which have been in the double digits, and that these increases are happening at a pace which has been previously unseen.  He said that only about 15 percent of Florida homeowners are insured with Citizens.  Senator Hays said that to bring Citizens’ rates to an actuarially correct point, an immediate 44 percent increase would be needed.   “We’re not coming down with a sledgehammer,” he said. “We’re being kind to policyholders.”

The call was then adjourned.

 

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