Surplus Insurance Agencies May Get Citizens’ Dropped Policies

The largely unregulated nature of the surplus lines industry has led consumer advocates and lawmakers from both parties to question whether such companies should be allowed to assume thousands of homeowner policies from Citizens, Florida’s largest insurer with nearly 1.5 million customers.

Citizens is currently well capitalized, with more than $6 billion in surplus last year — more than enough to withstand a repeat of the eight hurricanes that struck Florida in 2004 and 2005 without having to trigger special assessments on all Florida insurance policyholders to cover a shortfall.

But Gov. Rick Scott and top lawmakers consider Citizens a financial risk and have made shrinking the number of customers a priority. The legislation appears headed for a full House and Senate vote after passing several committees in both chambers.

Scott also is pushing to expand the list of property types Citizens will not cover. New policies exclude homes valued at more than $1 million, pool cages and carports.

By gobbling up policies in bulk, the surplus lines companies could limit Citizens’ liability after a major hurricane.

Supporters of the bill say surplus lines companies are some of the largest and most reliable insurers in the world and could help stabilize Florida’s troubled property insurance market.

“It’s not the end-all, be-all for Citizens’ depopulation but it’s an option we could give consumers for a choice,” said Bradenton Republican Rep. Jim Boyd, the bill’s House sponsor.

Boyd said the bill includes consumer protection.

To participate, surplus lines companies need $50 million in reserves — compared with $15 million for regulated companies — a high rating from industry analysts and enough reinsurance to cover damage from two once-per-century storms.

The surplus lines rate must be within 15 percent of what Citizens offers, and the coverage must be equivalent.

Citizens customers who want to stay will not be forced out. Those who do leave Citizens can come back if they are unhappy, Boyd said, although some lawmakers and industry experts worry about teaser rates and question how easy it would be to return.

But critics of the legislation say customers could be left with nothing after a storm or subject to arbitrary rate hikes.

They note that surplus lines policies are not backed by the Florida Insurance Guarantee Association — which covers claims if an insurer becomes insolvent — are not subject to state prompt payment rules and the companies do not have to apply to the state Office of Insurance Regulation for a rate increase.

The legislation “is an experiment that we as legislators should not risk,” said Rep. Frank Artiles, R-Miami, a public insurance adjuster who voted against the bill in the House Economic Affairs Committee.

Florida already allows regulated insurers to conduct “take outs” from Citizens. Customers who want to return have not had a problem “up to this point,” said Michael Clarkson with All Lines Insurance Group in Clearwater.

“But who knows in the future, with all the goofy stuff Citizens is doing,” Clarkson said.

Still, Clarkson agreed that surplus lines companies are generally some of the largest, most reliable and best capitalized insurers in the world. He does not have a problem with such companies’ playing a more active role in the market, but wonders how they will compete on price.

Because they follow fewer regulations and offer less consumer protection, surplus lines companies are not allowed to compete with so-called “admitted” companies like State Farm and Allstate that agree to the hurdles and expenses of regulation.

Surplus lines insurers cannot underbid admitted insurers in the residential market, but if no admitted companies offer quotes — a major problem throughout Florida in recent years — the only alternatives are Citizens and the surplus lines industry.

Most homeowners choose Citizens because the rates are significantly cheaper.

But the surplus lines industry still has a strong presence in the high-end property market and among commercial property owners.

The trend means surplus lines companies could play a much bigger role in Florida’s insurance future, but so far policymakers have been reluctant to push all but the wealthiest property owners into the industry.

Allowing the industry to take large numbers of policies from Citizens all at once could provide a broad enough revenue base that the companies will be more willing to drop rates, Boyd said.

“This gives them some scale opportunities,” he said.

The legislation is being driven by a single insurer, GeoVera Insurance Company, that has expressed interest in taking out upwards of 30,000 to 50,000 policies from Citizens, Boyd said.

GeoVera is the California-based subsidiary of a Cayman Islands holding company. The company, which sells only high-risk earthquake and hurricane insurance, has a top rating from industry analyst AM Best, although the report notes that high dividend payments have limited surplus growth in recent years.