Is Citizens’ Rate Hike Backlash a Case of Buyer’s Remorse With SB 408?

The following article was published in the September 2011 issue of PropertyCasualty360º:

Is Citizens’ rate hike backlash a case of buyer’s remore with SB 408?

By Christine Jordan Sexton

Earlier this year, Florida lawmakers vowed that they were finally taking the necessary steps toward fixing the state’s battered property insurance market. In their 2011 legislative session they passed a comprehensive property insurance bill that was meant to help insurers deal with some of the cost drivers impacting the market.

Now, just a few months later, a number of politicians—including several who backed the new law—are upset with some of the provisions that are being carried out.

The catalyst for this backlash was the recent decision by Citizens Property Insurance Corp. to seek sweeping rate hikes associated with its sinkhole coverage. SB 408 made a series of changes involving sinkhole risks, one of which gave Citizens the ability to raise its sinkhole rates above the normal 10 percent rate increase the carrier is allowed to enact each year.

The state-created carrier has asked state regulators to approve an overall rate hike—which includes sinkhole coverage—of 12.1 percent for its coastal accounts and 25.4 percent for its personal lines accounts. The sinkhole portion of the rate request varies greatly, from a 0 percent increase in Lake County to a 2,226 percent increase in neighboring Orange County. Hikes were also large for policyholders living in sinkhole-prone counties such as Hernando and Pasco. The new rates, if approved, would take effect in early 2012. The open question is whether state regulators will approve them as they are currently designed.

Lawmakers, Officials Push Back
State lawmakers and other officials, including CFO Jeff Atwater, wasted little time in questioning the rate hike. Atwater, who championed the 10 percent cap on Citizens’ rates when he was in the Florida Legislature, said that homeowners may need some sort of “glide path” to help them cope with the sticker shock that could come from the proposed rate hikes.

“How does a Floridian go from paying $350, $450 a year to $3,000, $4,000 a year?” Atwater asked, referencing the sinkhole percentage increases.

Atwater has asked Insurance Commissioner Kevin McCarty to consider forcing Citizens to phase in its proposed rate hike. He said that he did not think that Citizens has fully taken into account other provisions in SB 408 that are meant to crack down on sinkhole claims.

Rep. Will Weatherford, R-Wesley Chapel, who is line to become the next House speaker, wrote an opinion piece for newspapers that also criticized the proposed rate hikes, even though he voted for SB 408. “As a legislator who voted in favor of giving them flexibility, I am deeply disappointed in recent actions taken by Citizens,” Weatherford wrote. “Instead of striking a balance, it stuck Floridians with dramatic rate increases, in some cases as high as $4,000 per year.

“There is no doubt that Citizens faces an imperfect environment,” he continued. “It was designed to be the insurer of last resort, not a company holding the largest share of the market in the state. However, in recommending these exorbitant rates, Citizens apparently focused on historical data and did not adequately consider key components of the new law that should stabilize costs.”

Citizens Defends Request
Citizens, which has more than 1.4 million policyholders statewide, has defended the rate hike, particularly the portion reflective of sinkhole risks. The insurer noted that it took in $32 million in sinkhole premiums last year and paid out $245 million in claims.

Even McCarty has acknowledged that Citizens’ rates for sinkhole coverage has been suppressed and that there is a “pent up need” for rate hikes.

As the debate has heated up, the commissioner—while warning that his office will approve some level of increase—has said that he will look at the “full range of options” when considering the hikes. He further noted that his office will take into account projected savings from SB 408 in determining the increases.

Christine Turner Ashburn, a spokeswoman for Citizens, said that the rate hikes requested by Citizens included “a reasonable estimate of the impact of SB 408 on sinkhole losses.”

Opponents are not appeased, and the outcry has only grown louder over the dog days of summer. Sen. Mike Fasano, R-New Port Richey, remains a fierce critic of SB 408. He helped organize a protest in August in Pasco County that drew hundreds of opponents. Fasano called on the state to hold multiple hearings before it acted on the request from Citizens, and McCarty has agreed to hold a public hearing in Tampa on September 13 (rate hearings typically are held in Tallahassee).

Fasano also wants Atwater and Gov. Rick Scott to oppose the rate hikes.In a letter to Scott, Fasano said, “The outrageous and truly unconscionable increases being requested by Citizens for sinkhole coverage will do nothing but hurt honest homeowners and consumers who need this coverage to protect their homes or to comply with the requirements of their respective lending institutions.”

Scott has refused to criticize the hikes. The governor, who said on the campaign trail that he would like to scale back the size of Citizens, did say that he agrees with Atwater that the positive impacts of SB 408 should be considered.

However, he also said that Citizens has not been run in an actuarially sound manner. “The way it’s been managed it doesn’t make any economic sense,” Scott said. “When you have those things, there’s absolutely a day of reckoning.”

Changes on Citizens’ Board
This debate over Citizens and its rates is coming just as the 8-member board of governors is changing due to term limits.

Jim Malone, the outspoken board chair and Naples businessman appointed by CFO Alex Sink, is gone. At the July board meeting, Malone floated the idea of privatizing a large part of the company’s policies. The idea quickly found favor with Scott and others, and observers predict it will generate additional discussion at subsequent meetings.

Harold Knowles, a Tallahassee attorney appointed by Sink, also is no longer on the board.

Atwater replaced Malone and Knowles with former State Rep. Rob Wallace and Nancy Baily. Baily served as president and CEO of Travelers of Florida, the second largest provider of property & casualty insurance in the nation. While at Travelers, she had disagreements with regulators, such as in 2007 when the state claimed that her company did not roll back its rates enough after the passage of a comprehensive property insurance bill.

Baily is currently the executive director of the Florida Chapter of the ALS Association, a non-profit organization that helps patients and families struggling with Lou Gehrig’s disease.

Wallace is a civil and environmental engineer. When he served in the Florida House, he was a fiscal hawk who complained about growing state budgets passed by his fellow Republicans.

“With Nancy’s vast experience in the private insurance industry and Rob’s deep understanding of the financial impact of decisions made in Tallahassee, I am confident that they will be great assets to the board and Florida’s insurance consumers,” Atwater said.

Atwater is just one politician who makes appointments to the Citizens’ board. The governor, Senate president, and House speaker also appoint two members each, one of whom must have a demonstrated expertise in insurance.

Earlier this summer, Senate President Mike Haridopolos, R-Melbourne, reappointed Tom Lynch, president of Plastridge Insurance Agency in West Palm Beach, and Carol Everhart, vice president of insurance services at BB&T in Tampa.

House Speaker Dean Cannon reappointed former Rep. Carlos Lacasa, and appointed Christopher Gardner, an insurance broker with Kuykendall Gardner, LLC in Orlando.

Scott has yet to make his appointments. The next board of governors meeting is September 28.

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