Florida’s Citizens Property Insurance June 2014 Board and Committee Meeting Recaps

 

In opening the Citizens Property Insurance Corporation (“Citizens”) Board of Governors (“Board”) meeting yesterday, June 25, 2014, Citizens President and CEO Barry Gilway reviewed a list of the State-run insurer’s accomplishments over the last year.   These included the ongoing search for a Vice President for Vendor Management, a complete re-organization of Citizens’ claims and litigation management to reduce excessive costs, unprecedented depopulation, placement of a history-making $3.1 billion in catastrophe bonds, and improved transparency. 

To view the list of accomplishments, click here.

Citizens’ Chief Financial Officer Jennifer Montero discussed Citizens’ risk transfer program, explaining that, for the first time, the Personal and Commercial Lines Accounts (“PLA” and “CLA”) are covered for a 1-in-100 year storm from 2014 through 2015 without triggering assessments (for damage estimated at $5.4 billion).  Citizens’ Coastal Account can now cover a 1-in-70 year storm prior to triggering assessments for damage estimated at $9.5 billion.  Ms. Montero reported that the assessment risk for the Coastal Account has been reduced by 80 percent since 2011. 

Kelly Booten, Citizens’ Chief of Systems and Operations, briefed the Board on her department’s consolidation progress.   All Systems and Operations Department staff members are being relocated to Citizens’ Jacksonville office in an attempt to better link functional units and increase information sharing, thereby improving customer service.  This equates to 18 positions in Tampa and 131 in Tallahassee–primarily in information technology (“IT”). 

Ms. Booten updated the Board on the implementation of Citizens’ CORE Program that governs new policy, billing and claims systems.   Citizens’ PLA claims operation transitioned to the CORE-based ClaimsCenter in March.  PLA policy and billing are anticipated to be transitioned in November of 2014. 

Also, Citizens’ data center consolidation project is on time and on budget.  The project will converge the data centers to a CSX facility, where production systems are already up and running.  Telephone systems will be relocated this fall.  Movement of development and test systems will commence next month, and the overall program will be completed by June 2015.

Ms. Booten also presented Citizens’ 2014/2015 strategic plan to the Board, explaining that individual department planning sessions have been conducted to define corresponding tactical initiatives.  Guided by the strategic plan, Citizens seeks to operate as an efficient residual market; ensure a strong financial operating environment in a streamlined, scalable and customer-focused organization; and protect the public interest and maintain its corporate integrity. 

Charles Johnson, Chief of Human Resources for Citizens, also briefed the Board on the effort to consolidate Citizens’ physical footprint by reducing its leased office space.  The goal is to maintain a physical presence in Jacksonville, Tampa and Tallahassee, while operating within a single building in each city-a plan expected to save Citizens approximately $13.4 million before 2020.  The procurement process has already been initiated for this project, yielding responses that were described as “solid.” 

Citizens’ General Counsel Dan Sumner presented a new statutory procurement process to the Board.  Effected in 2014 by the enaction of SB 1672, it subjects Citizens to the same procedure as every other state agency.   Further, the bill removes oversight of procurement protests from Citizens’ Board and places it under the jurisdiction of the Florida Department of Administrative Hearings. 

Accordingly, the Board approved the repeal of Citizens’ now-former procurement process and adopted the revised version required by SB 1672. 

Joe Martins, Citizens’ Director of Internal Audits, reviewed five audits that have been completed since the most recent Board meeting.   These covered Legal Defense Billing, Citizens Data Warehouse Database, Security Access Audit, P-Card Pre-Implementation Audit, and Agency Audit and Investigation Management.   A brief summary of the audit findings follows:

Legal Defense Billing (Unsatisfactory)–Given the number of legal firms and attorneys utilized by Citizens during the audit period (70 total firms available, active and inactive), Citizens selected four attorneys from three firms who were highlighted as submitting the most billings in excess of 18 hours a day.  It was determined that billing transactions processed for the four attorneys audited were not effectively managed and monitored, which led to certain unethical and egregious litigator behavior.  The audit also noted potentially unethical or improper billing practices that drove excessive charges  including:   value billing, double billing, billing for duplicating work, billing for unnecessary or unneeded work or work never performed, inflating time per task, associates billing their time utilizing more expensive senior attorneys’ higher billing rate, and billing on cases that were already closed and/or settled.

Security Access Audit (Needs Improvement)–Citizens assessed certain IT general computer controls, the objective of which was to evaluate their adequacy and effectiveness.  The audit found the user account provisioning processes to be well controlled, although complex in nature.  Citizens’ “privileged access” application was found to be acceptable and the annual account recertification process has improved over the last few years with no issues noted in the current review.   However, Citizens was determined to have need for improving its logging and monitoring of system administrator account usage, along with regular validation of system configuration settings.  It was suggested that Citizens also consider additional hardening of its database servers.

Agency Audit and Investigation Management (Needs Improvement)–With the objective of evaluating the overall structure, operational effectiveness and efficiency of Citizens’ Agency Audit and Compliance function, this audit sought to ensure that corresponding activities are carried out in a manner that meets Citizens’ business and organizational expectations.  Results from the audit highlighted some operational inefficiencies and unmitigated risk exposures resulting from inadequate process design and allocation of resources.  Areas for improvement noted include the need to segregate the agency management and investigative functions in order to ensure independence and objectivity, and the need for improved alignment of business units’ fraud management with investigation strategies and resources.

Citizens Data Warehouse (Needs Improvement)–The objective of this audit was to assess whether the input, processing, output and security controls of Citizens’ Data Warehouse is available, accurate, accessible to only authorized individuals, and if it meets Citizens’ own information requirements. 

P-Card Pre-Implementation Audit (Satisfactory)-This audit found that the planned implementation of Citizens’ P-Card processes is being designed conservatively.  The controls developed for the issuance and use of P-Cards are similar to the current corporate credit card process, while taking maximum advantage of the tools (such as integrated transaction reconciliation and reporting) provided by the P-Card vendor to strengthen the management and monitoring of employee spending.

Randy Wipf, Citizens’ Vice President of Underwriting, explained the current definition of “Single Building” in Citizens’ Commercial Wind-Only programs. 

The Board approved the proposed Rule and containing the definition.  For a complete explanation of the revised definition, please refer to the Actuarial and Underwriting Committee recap below, which includes a review of new 2014 laws effecting changes to multiple Citizens underwriting rules, systems and processes–also approved by the Board yesterday.

John Rollins presented Citizens’ annual recommended rate filings for 2015, an overview of which is also provided in the Actuarial and Underwriting Committee recap below.  The Board approved the recommended rates with little discussion and no public comment.

Jay Adams, Citizens’ Vice President of Claims, updated the Board on Citizens’ Claims Committee activities, including litigation re-organization, catastrophe mock testing and a recent solicitation for additional sinkhole managed repair vendors. 

He explained that “non-litigated re-organization” focuses on providing more leadership and oversight to Citizens’ claims handling process, which is largely supported by its independent adjuster workflows.  Citizens recognizes the need for an organizational change in this area due to the continued increase and complexity in litigation claims, he said.  The recommended changes would include creating teams where similar claims can be combined to create consistencies in strategy and handling. 

He also updated the Board on Citizens’ off-site mock catastrophe testing activities for the 2014 Hurricane Season, in which over 190 independent adjusters received training.   The only issue that arose during the tests was a satellite-related malfunction.  The problem has since been resolved. 

Insofar as sinkhole claims, Mr. Adams reported that the volume continues to trend down after the enactment of SB 408.   The Board approved pursuing multiple contracts with sinkhole stabilization vendors worth $50 million over three years.

Citizens’ Vice President of Consumer and Agent Services Steve Bitar updated the Board on Citizens’ Clearinghouse operational activity from its first day on January 27, 2014 to May 31, 2014.  During that time, there were 79,849 requests for coverage.  Of those, 3,320 risks were deemed to be ineligible for Citizens coverage, representing $833 million in Coverage A that was averted.   Of those, 1,791 risks were confirmed as having been bound with participating insurers.  Eleven insurers are now quoting HO-3 business through the Clearinghouse, with two additional carriers targeted to be added for September 2014.  Five carriers have committed to participate in Clearinghouse renewals.  There has been a 46 percent decrease in Citizens HO-3 policies bound between January 27, 2014 through May 31, 2014, compared with the same period last year. 

Mr. Bitar said he was concerned that only 20 percent of the submissions are receiving offers from other insurers.  The majority (80 percent) of the submissions only receive a Citizens quote. 

Christine Ashburn, Citizens’ Vice-President for Communications, Legislative and External Affairs, updated the Board on Florida’s 2014 Legislative Session, reminding that only a very small number of bills passed this year.  Among those, Senate Bill 1672 requires that Citizens stop offering new commercial residential multi-peril polices in its Coastal Account and instead continue to offer commercial residential wind-only policies.  Under the provisions of the bill, Citizens may offer ex-wind policies in the Coastal Account. 

She noted that Senate Bill 846, a bill relating to governmental ethics, specifically provides that Citizens’ Executive Director of Citizens Property Insurance is subject to a Code of Ethics.  It further prohibits Citizens’ Executive Director, senior managers and Board members from having any employment or contractual relationship with an insurer that has entered a take-out bonus agreement with Citizens for a period of two years after their retirement or termination of service to Citizens. 

Quipping that 90 percent of what she does during the Session is “play defense,” Ms. Ashburn touched on some major bills that did not pass.  For example, SB 416 by Senator Wilton Simpson and State Representative Jake Raburn would have created a mandatory Citizens sinkhole managed repair program.  However, Citizens will offer a similar voluntary program in the future. 

A bill that would have mandated Citizens to utilize certain appraisal language to determine “scope” as part of the appraisal process did not pass in 2014.  Nor did another bill that would have prohibited Citizens from considering pending litigation of perspective vendors under the sinkhole managed repair program. 

Citizens’ next Board and Committee meetings are scheduled for September 23 and 24, 2014. 

To access the complete packet from yesterday’s Board meeting, click here.

 

Following are recaps of Citizens’ Committee meetings held this week on June 24:          

 

Market Accountability Advisory Committee

Citizens’ Market Accountability Advisory Committee’s  (“MAAC”) June 24 agenda included an update on Citizens’ CORE Insurance System, described as a next-generation insurance operating system combining a number of current systems into one integrated, user-friendly platform.  Expected to increase capabilities and improve productivity, the CORE system has been implemented for Citizens’ Commercial Lines Account claims, policy and billing, and for the Personal Lines Account (“PLA”) claims.  Implementation for the PLA policy and billing areas is scheduled for November 2014. 

In a discussion on Citizens’ Clearinghouse status, it was reported that 11 insurers are currently participating, with the addition of two carriers expected in September 2014.  Five carriers have agreed to participate in Citizens renewals through the Clearinghouse during a target date of August through October 2014.  (The Board voted the next day to delay implementation of the Clearinghouse expansion until November 2014).

From January 1, 2014 until May 31, 2014, Citizens’ Clearinghouse has received over 79,000 requests for coverage.  Of those, over 3,000 were deemed ineligible for Citizens coverage, which represents approximately $830 million in coverage that would have otherwise been absorbed by Citizens. 

Over 1,700 of those policies have been confirmed as having been bound by participating insurers.  From January 27, 2014, through May 31, 2014, there was a 46 percent decrease in Citizens HO-3 policies bound when compared with the same period in 2013. 

Citizens’ analysis of current trends indicates the primary factor impacting private market offers through the Clearinghouse is limited agent access to participating insurers.   Mr. Gilway said that carrier interest is due to their profitability through the Clearinghouse program. 

It was explained that Citizens is communicating with its current policyholders about the Clearinghouse process by sending them letters at least 60 days prior to the expiration of a policy.  If a policyholder is deemed to be no longer eligible for Citizens coverage because of a participating carrier offer, the policyholder will receive an explanatory letter.  Even if the policyholder is still eligible for Citizens coverage, Citizens will still make other offers from participating carriers available. 

Some MAAC members were concerned that policyholders may simply seek out a different agent for Citizens coverage if they are deemed ineligible.   Citizens’ staff members on hand at the MAAC meeting indicated that the computer system used to implement the Clearinghouse is configured to “catch” an ineligible policyholder seeking to circumvent the Clearinghouse process.

It was reported that Citizens’ Agent Roundtable (“ART”) has met five times in 2014, with six more meetings scheduled this year.   There are currently 14 active ART members representing the five largest agent associations, along with the two largest captive companies and the largest direct agency.  The ART has 60 issues under consideration, of which it has resolved 28.   A brief description of the resolved issues follows:

Clearinghouse:

• The Web site has been updated to indicate whether participating carriers are offering voluntary products or products used for depopulation.
• Agents will receive notification at their preferred email address when the Clearinghouse determines an ineligible offer has been made.
• Citizens is working with carriers to ensure that they have adequate information needed to prevent future non-renewals.
• Data on eligibility is being captured on new business Clearinghouse submissions and transmitted to renewal Clearinghouse submissions, thereby reducing the need to collect additional information.
• To help agents gather information before starting a Clearinghouse request for coverage, Citizens has created a Clearinghouse Application Worksheet.
• Improvements have been made to the process of bringing customers back to Citizens if they are canceled by a Clearinghouse carrier in first 60 days.

Depopulation:

• The communication of a takeout insurer’s “Wish List” of policies to an agent of record cannot be eliminated from the assumption process. A Consent Order issued by the Florida Office of Insurance Regulation mandates that a takeout company communicate this information to the agent, copying the agency principal with “a list of policies specific to the agent that it [the takeout company] would like to assume” along with other relevant information.

Personal Lines Underwriting:

• For new business home closing, it has been confirmed that the homeowner or his or her authorized representative must be present for an inspection. Signature of the homeowner or the representative is required.
• The Uniform Mitigation Verification Inspection Form (OIR-B1-1802) was revised effective February 1, 2012. Technical revisions were made to the Form on May 22, 2012 and April 10, 2014.

Commercial Lines Underwriting:

• Citizens’ CORE Training and Education Team members will alert agents of a defect in the “Add Location” screen until it is remedied with a GuideWire “Version 8” upgrade in 2016. They will also address how to manipulate to operate the site and review common errors with agents.
• Citizens’ Personal Lines PolicyCenter will have an integrated hyperlink to the “Knowledge Base.”
• Citizens has sent a survey on its commercial PolicyCenter to 100 agents.
• Citizens’ commercial Agent of Record process has been implemented.

To access the June 24, 2014 MAAC meeting materials, click here.

 

Actuarial and Underwriting Committee

During its meeting, Citizens’ Actuarial and Underwriting Committee (“AUC”) discussed Florida’s 2014 Legislative Session, PLA coverage limits changes, changes to the “single building” definition, Clearinghouse Rule revisions and Citizens’ 2015 recommended rate filings. 

Mr. Wipf explained the current definition of “Single Building” in Citizens’ Commercial Wind-Only programs.  A proposed alternative definition would allow the separation of buildings based specifically on the windstorm peril being covered and eliminate all references in Citizens’ underwriting manuals pertaining to the peril of fire. 

Inasmuch as the revised “single building” definition focuses on the peril of wind, Citizens fully reviewed its wind-related manuals to eliminate all unnecessary references to fire.  The definition contained within the proposed Rule provides for the separation of buildings for purposes of windstorm peril underwriting based specifically on building construction, wind-resistive level of construction and the manner of connection to any adjacent building.  The new definition removes all references to the combustibility of building materials, fire protection or separations of space that are present in the current Rule. 

Mr. Wipf explained that changes resulting from the revision of Citizens’ “single building” definition in the Commercial Wind-Only Manuals will primarily be to policyholders’ benefit.   For example, some individually risk rated (A-rated) buildings may now be written using manual rates, releasing them from the generally higher rates used in A-rating. 

Without an individual review of each policy, the number of policies impacted can not be determined, he added.   All additional changes to the Wind-Only Manuals are cosmetic only and there is no policyholder impact. 

AUC members approved this item without discussion. 

Karen Holt, Citizens’ Senior Director of Product Development, updated AUC members on 2014 legislation that requires changes to multiple Citizens underwriting rules, systems and processes.   All changes are effective July 1, 2014. 

Insofar as Citizens’ PLA, the Coastal Construction Control Line previously mandated that any major structure for which a permit is applied on or after July 1, 2014, for new construction or substantial improvement, is not eligible for Citizens coverage if the structure is seaward of the Coastal Construction Control Line, or is within the Coastal Barrier Resources System.  House Bill 1089 changed the effective date for permits from July 1, 2014 to July 1, 2015. 

Senate Bill 708 relates to adverse action based on publicly available credit information.  In regard to residential property insurance, it provides that, if a policy or contract has been in effect for more than 90 days, a claim filed by the insured cannot be denied based on credit information available in public records.  Ms. Holt explained that Citizens does not use credit reports in underwriting or engage in post-claim underwriting based on credit reports.  This new law does not impact Citizens current operations. 

Senate Bill 1672 relates to the exemption of re-inspection for authorized mitigation inspectors and provides that a mitigation form submitted to Citizens is not subject to independent verification or re-inspection, absent material changes to a structure, if the form was signed by an authorized mitigation inspector, and reviewed and verified by a quality assurance program approved by Citizens.  Ms. Holt stated that Citizens’ current practices will be updated to reflect any impact from this provision, but added that she expects little change. 

In regard to Citizens’ CLA, House Bill 1089 relates to commercial residential wind transient occupancy eligibility and mandates that commercial residential condominiums shall be deemed ineligible for coverage if 50 percent or more of the units are rented more than eight times in a calendar year for rental agreement period of less than 30 days.  Ms. Holt explained that this legislation requires changes to Commercial Residential Wind-Only eligibility from the current transient standard of more than three rentals per year for periods less than 30 days, or a residence held out to the public as a place regularly rented out to guests for periods of less than 30 days, to the new standard described above.  The legislation applies only to commercial residential condominiums. 

SB 1672 requires that Citizens’ Coastal Account eligibility requirements state that Citizens shall cease offering new commercial residential policies providing multi-peril coverage for risks located in the wind-only eligible area and must continue to offer commercial residential wind-only coverage instead.  However, Citizens may continue to renew existing policies in force as of July 1, 2014.  Ms. Holt stated that this change does not affect current eligibility for ex-wind polices written in the CLA. 

She also updated Committee members on Citizens’ PLA coverage limits.  Senate Bill 1770, enacted in 2013, provides eligible limits for structures and condominiums’ maximum combined dwelling and contents coverage of $1,000,000, effective January 1, 2014.  Maximum limits will be reduced each year to $900,000 (January 1, 2015), $800,000 (January 1, 2016) and to $700,000 (January 1, 2017).  Ms. Holt explained the legislation does not specifically address policies that provide coverage for contents without corresponding structure coverage, such as renters’ policies.  For consistency, Citizens’ staff recommends that the same coverage maximums be applied to all PLA products, except where lower coverage limits already exist.   Any future modifications to rules addressing these statutory coverage limits will be applied to maintain consistency across product line, region or account.  The Committee members approved this item without discussion.  

Ms. Holt reviewed Citizens’ Clearinghouse Rule changes.  Senate Bill 1770 provides that a Clearinghouse applicant who was declared ineligible for Citizens coverage at renewal during the previous 36 months, and has been insured by an authorized insurer, shall be subject to a “renewal eligibility test” if Citizens determines that the authorized insurer increased the rate of the policy in excess of that which is allowed by the statutory “glide path.”

Citizens’ underwriting rules will be revised to indicate that the period of ineligibility is the length of the policy term for which comparable coverage is offered.   The Committee approved implementation of the appropriate Rule pursuant to Senate Bill 1770 without discussion.   

Mr. Rollins gave an update on Citizens’ annual analysis of recommended rates for 2015, which are used by the Florida Office of Insurance Regulation to establish Citizens’ rates and policy effective dates.   He said that major cost factors in Citizens’ 2015 rate analysis include:

• Non-catastrophic losses other than sinkhole
• Sinkhole losses
• Modeled catastrophic hurricane losses
• Administrative expenses
• Risk transfer costs

The total statewide indication for Citizens’ PLA is 1.6 percent.  The premium impact after the application of the policy level Glide-Path cap is (-2.9) percent.  The total statewide indication for Citizens’ is 27.8 percent.  The premium impact after the application of the policy level glide-path cap is 6.3 percent.  These results vary by product line. 

Mr. Rollins also explained Citizens’ sinkhole indications, adding that the number of reported sinkhole claims has been steadily declining since the end of 2011.  In 2011, over 4,500 claims were reported.  In 2012, that number decreased to around 3,100.  In 2013, the number was further reduced to around 1,200.  This declining trend has continued into 2014, attributable largely to the impact of SB 408.  In addition, Citizens has increased sinkhole rates by close to 90 percent in the most sinkhole-prone areas of the state over the same three years.  The combined effect has led to an overall statewide sinkhole indicated change of +87 percent for 2015–an all-time low. 

Mr. Rollins explained the impact of private reinsurance costs.  Due to lower rates for traditional private reinsurance and catastrophe bonds, Citizens was able to transfer substantially more risk away from Florida policyholders without a significant impact to the rate indications.  Last year, Citizens transferred $1.851 billion of its Coastal Account risk to private investors and reinsurers at a new cost of $253 million.  This year, it transferred $3.269 billion at a net cost of $191 million. 

Mr. Rollins explained that the 2014 net cost represents around 9.8 percent of the total premium from the 2014 indication and the 2015 net cost represents nine percent of the total premium from the 2015 indication.  Therefore, while the amount of private reinsurance purchased has increased from last year to this year, the net costs and thus the impact to the 2015 indication actually decreased slightly. 

Further, the impact of the Florida Hurricane Catastrophe Fund (“FHCF”) buildup premium charge that commenced in 2010 included a risk factor of an additional five percent per year for five years.  This is known as the “FHCF rapid cash build-up factor.”  By law, Citizens is required to pass on this increase to the policyholder, irrespective of the 10 percent glide-path cap. 

Mr. Rollins said that this result in 2015 indicated premium changes of slightly more than 10 percent for some policyholders.   He noted the added impact of the Florida Public Hurricane Loss Model (“Public Model”), which serves as the minimum benchmark for determining the windstorm portion of Citizens’ rates.  For PLA condo unit owners (H06/HW6) in particular, the indication based on the Public Model was considerable higher than that of the other three private models.  For one of the private models, the indications ranged from (-10) to 10 percent, whereas the Public Model indication was 36.5 percent–ultimately selected as the overall indication for this line of business. 

With little discussion, the Committee authorized the recommended rates for approval by Citizens’ Board.

To view the AUC materials, click here.

 

Consumer Services Committee

Ms. Ashburn reviewed Citizens-related 2014 legislation with the Consumer Service Committee (“CSC”), focusing on SB 708, which is also known as the Florida Chief Financial Officer/Insurance Consumer Advocate bill or the “Homeowners’ Claims Bill of Rights.” 

She also outlined the provisions of HB 1089, which delayed the prohibition of Citizens writing policies for new construction or homes with substantial improvements seaward of the Coastal Construction Control Line or within the Coastal Barrier Resources System.  HB 1089 also created a new definition for “transient rentals” and prohibited Citizens coverage for certain condominiums that are rented.

Mr. Bitar gave an update on catastrophe preparations and emergency operations for the 2014 Hurricane Season, together with Citizens’ Claims Manager Craig Sakraida.  They reported that related training exercises were completed in May 2014.

The CSC also heard a report on customer care key performance indicators from Jeremy Pope, Citizens’ Director of Consumer Services, who indicted that call volumes decreased 21 percent from 2012 to 2013 and noted that 60 to 70 percent of the calls are from agents.  Most of the agent calls deal with underwriting questions and status, whereas most of the policyholder calls deal with payment questions and status, they said.

The Committee reviewed customer correspondence and complaint trends.  The top reasons for complaints from 2011 through the first quarter of 2014 were claim delays or denials, unsatisfactory settlement offers, nonrenewals and cancellations.  Citizens’ quality assurance key performance indicators were also reviewed.

Ms. Ashburn then updated the Committee on the mobile home actual cash value project, noting that Citizens began a mobile home re-underwritng project in 2012, with the goal of updating Coverage A to current actual cash value for all insured mobile homes.  Citizens has processed 53,905 policies as of May 2014 and expects to complete the project by the end of 2014.

To view the CSC meeting materials, click here.

 

 

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