citizens assessments

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1 citizens assessments A Consumer White Paper Describing the Impact of Defi cits on the Policyholders of Citizens Property Insurance Corporation Prepared by The Florida Association of Insurance Agents Florida Association of Insurance Agents 3159 Shamrock South t PO Box Tallahassee, FL Telephone: t Web site:

2 EXECUTIVE SUMMARY As this paper describes and concludes, the most important thing for a Citizens policyholder or applicant to understand is 1. If there is a defi cit in any account of Citizens, you will pay substantially more in assessments than those insured in the voluntary market who, in most instances, won t have to pay anything. 2. Since the voluntary market assessment base was expanded to all lines (except Medical Malpractice and Workers Compensation), including Auto and Excess & Surplus lines, any assessment of the voluntary market will pale to those levied against a Citizens policyholder. 1

3 CONSUMER ASSISTANCE Information in this paper is for insurance consumers seeking coverage from, or already insured in, Citizens Property Insurance Corporation (Citizens). Offered as a public service, it concerns the nature and extent of policyholder assessments due to defi cits that could occur in one or more of Citizens three accounts: the High Risk Account (HRA), the Commercial Lines Account (CLA), or the Personal Lines Account (PLA). To help you understand the full picture, we ve provided background and history on residual markets as well as the development of the assessment concept generally. Citizens has been given a high profi le of late and is certainly an option to standard market coverage; but, there are differences with the coverage you receive (possibly) and with respect to policyholder assessments. These differences need to be taken seriously by all consumers. While other government entities, such as the Florida Hurricane Catastrophe Fund (FHCF or CAT Fund) and the Florida Insurance Guaranty Association (FIGA), are also subsidized with consumer assessments and, thus, are covered briefl y here, Citizens assessments are given emphasis because recent changes make assessments for its policyholders signifi cantly more substantial and likely. Conversely, the same changes, impacting Citizens policyholders negatively, reduce both the likelihood and amount of any assessment for consumers who purchase their insurance in the standard market. The purpose of this paper is to bring that difference to light so consumers can make a fully informed decision before purchasing a Citizens policy. We recognize this is a complicated subject and every attempt has been made to simplify it while maintaining absolute accuracy and completeness. Should questions remain, you can access the Offi ce of Insurance Regulation, the Department of Financial Services, or the Offi ce of the Insurance Consumer Advocate, or call your insurance agent. Web addresses appear on page 10. RESIDUAL MARKETS Many states have established Residual Markets government or quasi-government insurance facilities that provide coverage to individuals and/or businesses that cannot fi nd it in the private marketplace. These facilities can be for any type of risk or exposure; however, the most common are usually automobile or high risk property coverage. Medical malpractice, fl ood, workers compensation, and earthquake are other examples of residual market coverages provided in Florida and other states, or by the federal government. Residual Markets can also be 2

4 referred to as: FAIR Plans; Beach, Windstorm Plans, or Pools; Joint Underwriting Associations or JUAs; or may even be given names styled after the private sector like Citizens Property Insurance Corporation. FLORIDA BACKGROUND Florida established the Florida Windstorm Underwriting Association (FWUA or Wind Pool) in 1970 to insure wind only in Monroe County and the Florida Keys. Over time, the FWUA was expanded to include all or parts of 29 of Florida s 35 coastal counties. The tri-county area of Dade, Broward, and Palm Beach came on board after Hurricane Andrew struck in Like many residual markets, whenever losses exceeded available funds (creating a defi cit), Florida s wind pool would assess insurance companies who recouped the assessments from their policyholders by defi nition, then, those paying for wind pool defi cits were those not insured by the wind pool. After Hurricane Andrew, there was a need to create another residual market for coastal wind exposure, which could provide protection beyond just wind a full homeowners policy. Thus, the Florida Residential Property and Casualty Joint Underwriting Association (FRPCJUA or Homeowners JUA) was created in 1992 and structured similarly to the FWUA; that is, defi cits were cured by levying assessments on insurance companies who passed them on to their policyholders. In 1995, the FRPCJUA absorbed another property residual market, which insured commercial residential or condominium and apartment buildings, called the FPCJUA. In August 2002, the Florida Legislature merged the FWUA with the FRPCJUA, creating Citizens and retaining the ability to levy Regular Assessments on insurers based on defi cits in any one of its three accounts. It also maintained the existing ability to levy Emergency Assessments whenever Regular Assessments weren t enough. Emergency Assessments fl ow direct to policyholders rather than to insurers who then recoup from policyholders and are used as collateral for loans to pay down the defi cit. At the time, Citizens defi cits had to be calculated separately, and assessments levied separately, for each of its three accounts. Those accounts are as follows: 1. High Risk Account (HRA): provides wind-only policies in limited coastal areas of the state (formerly known as the Wind Pool); 2. Personal Lines Account (PLA): provides multi-peril policies throughout the state of Florida (formerly known as the FRPCJUA); 3

5 3. Commercial Lines Account (CLA): provides commercial residential policies throughout the State of Florida (this is the condo and apartment building coverage of the former FPCJUA, which merged into the FRPCJUA in 1995). Note: See Chart #2 on the back page for a complete timeline of Florida s Property Residual Markets. ASSESSMENT BACKGROUND Before looking at the 2004/2005 seasons, some review of the factors impacting assessments by the FWUA and FRPCJUA prior to that time is appropriate: The FWUA did not provide coverage in Dade, Broward, and Palm Beach Counties when Hurricane Andrew hit in 1992 and therefore it did not incur a defi cit or levy an assessment. It has since been expanded to include Dade and Broward Counties, east of I-95, and parts of Palm Beach, Pasco, and Hernando Counties as well. Again, the FWUA is nothing more than the current HRA of Citizens. The last FWUA assessment was $100 million in 1998 due to losses sustained by hurricanes making landfall outside the tri-county area in Southeast Florida. There were no assessments from the predecessor organizations (the FWUA or FRPCJUA) or Citizens between the 1998 assessment and the defi cit incurred by Citizens in The 1980s and 1990s were a down cycle for hurricanes. Meteorologists now unanimously agree the US has entered a period of increased frequency and severity, which could last several decades. 2004/2005 SEASONS During the 2004 hurricane season, four major hurricanes made landfall in Florida. Over 1.7 million claims were fi led impacting all 67 counties. One in every fi ve (20 percent) of Florida residences suffered damage. Citizens incurred a $516 million defi cit, which meant, on average, that every non-citizens property policyholder in Florida received a 6.8 percent assessment. The exact amount varied by company, and a few companies even decided not to immediately assess their policyholders, recording a loss to be recouped in future rate increases instead. Then, in 2005, most attention was directed to the damage Hurricane Katrina brought to New Orleans and neighboring Gulf Coast states. However, another four hurricanes made landfall in Florida that year, including Wilma; the third most expensive insured hurricane loss in U.S. history. More importantly, Wilma hit Southeast Florida where Citizens had signifi cant, 4

6 concentrated exposure, causing defi cits in all three accounts, including a $1.7 billion defi cit in the HRA. At the end of the sixteen month period, which included parts of two hurricane seasons, Florida had averaged one landfall hurricane every 60 days. The Florida Legislature appropriated $715 million to cure the defi cits in Citizens PLA and CLA accounts, using any funds remaining to lower the HRA defi cit. For the HRA defi cits in plan year 2005, Citizens levied a Regular Assessment of 2.07 percent and an Emergency Assessment of 1.4 percent to be charged for 10 years. Note: See Chart #3 on back page for a complete description of all assessments currently being levied; including FIGA and the CAT Fund ASSESSMENT CHANGES The Legislature made signifi cant changes to the assessment approach of Citizens during the 2006 session. In particular, instead of only assessing those in the standard marketplace (then having to surcharge Citizens rates to keep it non-competitive), lawmakers brought Citizens policyholders into the overall assessment formula, dividing them into two categories: homestead and non-homestead. The former are those with a homestead exemption as defi ned for purposes of Citizens assessments and the latter was everybody else non-homestead residential policyholders and commercial policyholders in any of Citizens three accounts. The 2006 Legislature also established an assessment payment priority with some groups of Citizens policyholders paying before others. For example: subject to a maximum of 10 percent of premium, Citizens non-homestead policyholders pay assessments fi rst for a defi cit in any (or all) of Citizens three accounts. Then, everyone in Citizens pays, including non-homestead policyholders, again. And fi nally, if there is still a defi cit in any account, a Regular Assessment is levied on all assessable policyholders, including those in the voluntary market (including Excess and Surplus Lines), and all Citizens policyholders (in fact, the Regular Assessment is reduced by the amount of the Citizens Policyholder Surcharge ), both homestead and non-homestead, pay one more time. This approach was approved by the Legislature again during the 2007 Special Session when the effective date was clarifi ed as applying to defi cits occurring in 2008 and after. Lawmakers also reduced assessments that might ultimately accrue to the voluntary market by expanding the assessment base (those who can be assessed) to include auto and other lines, except for medical malpractice and workers compensation. 5

7 LET S RECAP While the Assessment Computation Formula for a defi cit in any of Citizens three accounts remains unchanged for 2007, the requirement that Citizens assess its own policyholders in a specifi ed order and amount, based on homestead status, becomes effective for the year Let s assume a $1,000 annual premium and a defi cit in all three accounts substantial enough to include voluntary market policyholders up to 10 percent. Here s generally how it would work: Chart #1 CITIZENS ASSESSMENTS Citizens Policyholders Non-Homestead Policyholders Non-Homestead Assessment Additional Citizens Policyholder Assessment Citizens Accounts HRA PLA CLA Sub-Total for Non-Homesteads $ $ $ Total for Non-Homesteads $ Homestead Policyholders Additional Citizens Policyholder Assessment Sub-Total for Non-Homesteads Total for Non-Homesteads $ If a defi cit still exists: t Citizens policyholders will receive another assessment the Citizens Policyholder Surcharge before insured policyholders in the voluntary market are ever called on to help repay Citizens defi cits. [Note: A Regular Assessment is determined, minus the Citizens Policyholder Surcharge, and then the Regular Assessment is levied.] If a defi cit still exists: t After the levying of a Regular Assessment, Citizens may levy an Emergency Assessment, which may be spread over multiple years. It s easy to see that, without regard to the actual policyholder premium, a non-homestead policyholder of Citizens, which includes all commercial as well as defi ned single family homeowners, mobile homes, renters, and condo dwellers, could be subjected to an assessment greater than 60 percent of their premium before non-citizens policyholders are assessed at all. This would be for coverage that was, in many instances, less than that provided in the voluntary market (see FAIA s Citizens Coverage Comparisons at: 6

8 OTHER APPLICABLE ASSESSMENTS 2008 THE CAT FUND The Florida Hurricane Catastrophe Fund is a form of state-sponsored reinsurance, which all property insurers are required to purchase up to specifi ed limits. It comes at a price usually substantially lower than the global reinsurance market and is also subject to defi cit assessments on insurers that are passed on to policyholders, including those of Citizens. Also as a result of previous hurricanes, the CAT Fund is currently levying an Emergency Assessment of one percent, beginning on January 1, 2007, and continuing for six years. In addition, it could issue another Emergency Assessment for defi cits that might occur in The CAT Fund is also permitted to levy Emergency Assessments of up to six percent annually; subject to an aggregate annual assessment limitation of ten percent. So, again, assuming the circumstances generating the assessments in Chart #1 above, Citizens and voluntary policyholders would quite likely be assessed by the CAT Fund as well. This would bring an additional burden on those insured in Citizens. THE GUARANTY FUND The Florida Insurance Guaranty Association (commonly called FIGA or the Guaranty Fund ) handles the claims of insolvent property and casualty insurance companies. While insurer insolvencies are not certain to occur under the circumstances that create the assessments in the diagram above, judging by past experience, it s likely that some would occur. For example, in June 2006, the Board of Directors of FIGA certifi ed to the Offi ce of Insurance Regulation (OIR) that losses from the liquidation of the Poe Group of companies (Southern Family Insurance Company, Atlantic Preferred Insurance Company, and Florida Preferred Insurance Company) would exceed FIGA s balance by more than $200 million and, in fact, would be the largest insolvency in Florida s history. FIGA requested an assessment of two percent to be levied on insurers, which, like Citizens and the CAT Fund, would be passed on to policyholders. Two other, smaller insurers, Vanguard and Florida Select, also became insolvent. In December 2006, FIGA levied a Special Assessment to cover the shortfalls of these insolvencies. The FIGA assessments, totaling four percent, were approved by the OIR; insurers, which includes Citizens, are now collecting it from policyholders. So, again, assuming the circumstances generating the assessments in the diagram above, Citizens and voluntary policyholders would quite likely be assessed by FIGA as well as the CAT Fund. This would bring another additional burden on those insured in Citizens. 7

9 SUMMARY It must be stressed that this paper does not address the likelihood that a defi cit-creating scenario might, or might not, occur. Nor does it attempt to predict the size of such a defi cit. It only describes the results of a loss scenario, generating defi cits in all three Citizens accounts that are substantial enough to penetrate through to the voluntary market. Likewise, it s important to keep in mind that any Citizens assessments for defi cits in 2008 would be in addition to existing Citizens assessments already being collected, and in addition to assessments from the CAT Fund and FIGA for prior years (see Chart #3). Additionally, more would likely accrue from the CAT Fund and FIGA as a result of the event that triggered any 2008 Citizens assessments. In other words, under the above scenario, a non-homestead Citizens policyholder could potentially pay assessments exceeding 100 percent of his/her premium. It is acknowledged that some 2007 legislative changes could either reduce or, in the case of the Citizens rate rollback and freeze, increase the amount or likelihood of a defi cit in any of Citizens three accounts. However, since all policies, including Excess & Surplus lines (other than workers compensation and medical malpractice) are subject to assessment, the most important thing for Citizens policyholders or applicants to understand is 1.) If there is a deficit in any account of Citizens, you will pay substantially more in assessments than those insured in the voluntary market who, in most instances, won t have to pay anything. 2.) Since the voluntary market assessment base was expanded to all lines (except medical malpractice and workers compensation), including Auto and Excess & Surplus lines, any assessment of the voluntary market will pale to those levied against a Citizens policyholder. 8

10 Chart #2 DEVELOPMENT OF CITIZENS AND ITS ASSESSMENTS FWUA created to insure wind in Monroe County Policyholders nonassessable FRPCJUA created for full homeowners coverage Policyholders nonassessable FPCJUA merged into FRPCJUA, creating the CLA FWUA, FRPCJUA merged to form Citizens: t FWUA = HRA t FRPCJUA = PLA t FPCJUA = CLA Policyholders non-assessable Legislative changes: t Make Citizens competitive t Lower and freeze its rates t Expand voluntary market assessment base t Delay assessment and homestead changes until FPCJUA created for condo and apartment buildings Policyholders nonassessable FWUA expanded to include parts of Dade, Broward, and Hernando Counties Portions of Palm Beach and Pasco Counties added to FWUA Deficit assessments revised to include Citizens and homestead changes Policyholders assessable The 2006 changes become effective: t Citizens included in assessment base t Segmented by homestead status Chart #3 CURRENT ASSESSMENTS FROM ALL SOURCES Entity with Defi cit Defi cit Year Assessment Type Percent of Premium Assessed Effective Date Policyholders Paying Citizens 2004 Regular 6.8% 8/05 Voluntary Market Citizens 2005 Regular 2.07% 7/07 Voluntary Market Citizens 2005 Emergency 1.4% 7/07 (recurs for 10 years) Voluntary Market CAT Fund 2005 Emergency 1.0% 1/07 (recurs for 6 years) Voluntary Market & Citizens FIGA 2006 Statutory 2.0% 7/06 Voluntary Market & Citizens FIGA 2006 Special 2.0% 1/07 Voluntary Market & Citizens 9

11 STATE WEB ADDRESSES You can contact: The Florida Department of Financial Services dfs.com The Florida Office of Insurance Regulation oir.com The Office of the Insurance Consumer Advocate dfs.com/ica Citizens Property Insurance Corporation a.com/index.cfm 10

12 Florida Association of Insurance Agents 3159 Shamrock South t PO Box Tallahassee, FL Telephone: t Web site: