The more I contemplated my vote afterward, the more concerned I became that while we had intended to do a good

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2 I was one of the legislators who voted for HB 1A in the January 2007 special session. I did not have any professional knowledge of the insurance industry and yet I was called upon to make policy decisions relating to that industry. The more I contemplated my vote afterward, the more concerned I became that while we had intended to do a good thing, it was going to have some terrible unintended consequences. I knew I needed expert advice from those knowledgeable of the insurance industry. The question at the forefront of my mind was What must we do to create an environment that will attract insurance companies to come to Florida and compete and offer the right coverage to Floridians? The obvious solution was to create the Mission Review Task Force. - Rep. Alan Hays 2

3 Citizens Mission Review Task Force Legislative Mandate 1. Mission of the Task Force is to develop a report setting forth the statutory and operational changes needed to return Citizens Property Insurance Corporation to its former role as a state-created, noncompetitive residual market mechanism. 2. The Task Force, at a minimum, is directed to provide recommendations on specific topics relating to a range of issues regarding Citizens including the availability of property coverage in the private market, rates for coverage, potential Citizens assessments, Citizens exposure and its purchase of reinsurance, among others. 3

4 Citizens Mission Review Task Force The membership of the Task Force was statutorily specified and consists of 11 members. Three Consumers Two Agents Two Domestic Insurers One Commercial Insurer One Excess & Surplus Lines Insurer One Representative of Office of Insurance Regulation One Representative of Citizens Property Insurance Corporation 4

5 Citizens Mission Review Task Force Member Occupation Member Type Braden Kirk Ball Sr. Vice President and COO, Fisher Brown, Inc. Agent J Scott Johnson Exec. Vice President, Florida Assn. of Insurance Agents Agent Senator Locke Burt CEO, Security First Insurance Co. Domestic Insurer Jason Schupp Sr. Vice President, Zurich North America Insurance Co. Commercial Insurer Russell Beck Executive Vice President, St. Johns Insurance Co. Domestic Insurer Gary Micetich Sr. Vice President, Markel Corporation Excess & Surplus Insurer Bruce Douglas Chairman, Emeritus Douglas Capital Management Consumer Teri Johnston Co owner, Affiliated Design & Construction Managers Consumer Chip Merlin Managing Partner, Merlin Law Group Consumer Sharon Binnun CFO, Citizens Property Insurance Corporation Citizens Property Ins. Corp. Belinda Miller Deputy Commissioner, Property & Casualty Office of Ins. Regulation 5

6 Citizens Mission Review Task Force Public Meetings October 10, 2008 Tampa, Florida November 20, 2008 Orlando, Florida December 10, 2008 Jacksonville, Florida January 6, 2009 Tampa, Florida January 22, 2009 Jacksonville, Florida 6

7 What Did The Task Force Learn? 1. Citizens insures more than single family homes One third of Citizens premium ($860 million) and over 50% of Citizens exposure to hurricane losses comes from providing coverage to 25,000 commercial residential risks. Citizens controls two thirds of the market for this type of business. 7

8 Citizens Property Insurance Corporation 2009EstimatedGrossWritten Premium Gross Written Premium Percent Multi Peril (HRA) $108,685,511, 4.2% Multi Peril (PLA) $1,131,481, % Wind Only (HRA) $450,237, % TOTAL $1,690,404, % RESIDENTIAL BUSINESS COMMERCIAL RESIDENTIAL BUSINESS Multi Peril (CLA) $289,949, % Multi Peril il(hra) $31,831,257 12% 1.2% Wind Only (HRA) $541,192, % TOTAL $862,972, % COMMERCIAL BUSINESS Wind Only (HRA) $36,675, % Multi Peril (CLA) $9,046, % TOTAL $45,721, % GRAND TOTAL $2,599,099, % 8

9 What Did The Task Force Learn? 2. The private sector has not abandoned the Florida insurance market Over 50 companies are actively writing new business. Private companies provide wind coverage to 83% of the homes in Florida. 9

10 Citizens PropertyInsurance Corporation Citizens Market Share PLA Account June 30, 2008 County HO3 HO6 DP1/DP3 (inc. MH) MO3 Broward 23% 10% 71% 72% Miami Dade 30% 11% 72% 85% Palm Beach 11% 5% 61% 76% Pasco 24% 15% 85% 15% Pinellas 27% 14% 76% 65% CPIC Statewide Market Share 9% 7% 43% 27% Total Market (Policies in Force) 3,611, , , ,015 Total Policies in Private Market 3,281, , , ,132 10

11 What Did The Task Force Learn? 3. Freezing Citizens rates at 2005 levels has made Citizens the lowest priced insurance company in many of Florida s most heavily populated counties 11

12 Average Dwelling Fire Rt Rates $150,000 Home Built in 1990 Citizens *Avg. Private Location/County Rate Co. Rate Difference Miami Dade $2,270 $2, % Broward $2,160 $2, % Palm Beach $2,223 $2, % Hillsborough $1,264 $1, % Pinellas $1,801 $2, % Pasco $1,695 $2, % Statewide Average $1,450 $1, % Source: Office of Insurance Regulation *Towerhill Prime, Royal Palm, ASI Assurance, Universal NA, Southern Fidelity, Universal P&C, Southern Oak, Florida Family, Gulfstream 12

13 Rate Comparison HO 3 Policy $200, Masonry Home Built in 1985 $1,000 AOP Deductible, 2% Hurricane Deductible Southeast Florida Rti Rating *7 Florida County Territory Citizens Co.'s Avg State Farm Dade Coastal $5,248 $6,089 $11,939 Dade Remainder $4,195 $5,098 $6,484 Dade Inland $4,104 $5,092 $8,984 Broward Coastal $4,686 $5,399 $12,613 Broward Remainder $3,657 $4,820 $9,074 Broward Inland $3,155 $3,980 $5,678 Palm Beach Coastal $3,784 $5,333 $14,381 Palm Beach Remainder $3,465 $3,781 $9,657 Palm Beach Inland $3,465 $3,500 $6,036 Source: Security First Insurance Company *Royal Pl Palm, Universal lna, St. Johns Insurance Company, ASI, Universal lp&c, United dp&c, Towerhill 13

14 Rate Comparison HO 3 Policy $200,000 Masonry Home Built in 1985 $1,000 AOP Deductible, 2% Hurricane Deductible West Coast Florida County Rating Territory Citizens *7 Florida Co.'s Avg State Farm Hillsborough Metro $2,136 $2,525 $3,302 Hillsborough Suburban $2,062 $2,530 $3,302 Hillsborough Southwest $2,062 $2,654 $3,302 Pinellas Coastal $2,476 $3,387 $5,034 Pinellas Exterior $2,342 $2,982 $3,713 Pinellas Inland $2,355 $2,815 $3,713 Pasco Coastal $3,317 $2,864 $6,788 Pasco Inland $2,924 $2,281 $3,973 Source: Security First Insurance Company *Royal Palm, Universal NA, St. Johns Insurance Company, ASI, Universal P&C, United P&C, Towerhill 14

15 Rate Comparison HO 3 Policy $200, Masonry Home Built in 1985 $1,000 AOP Deductible, 2% Hurricane Deductible Southwest Florida Rating *7 Florida County Territory Citizens Co.'s Avg State Farm Collier Coastal $3,970 $3,733 $7,925 Collier Inland $2,877 $2,893 $5,367 Lee Coastal $2,378 $3,104 $6,742 Lee Inland $2,260 $2,504 $3,070 Charlotte Coastal $2,495 $3,001 $5,600 Charlotte Inland $2,123 $2,395 $3,903 Sarasota Coastal $2,513 $2,967 $5,600 Sarasota Inland $1,975 $2,212 $3,512 Manatee Coastal $2,799 $3,225 $8,027 Manatee Inland $2,069 $2,200 $3,473 Source: Security First Insurance Company *Royal Pl Palm, Universal lna, St. Johns Insurance Company, ASI, Universal lp&c, United dp&c, Towerhill 15

16 Rate Comparison HO 3 Policy $200, Masonry Home Built in 1985 $1,000 AOP Deductible, 2% Hurricane Deductible Treasure Coast and Space Coast *7 Florida County Rating Territory Citizens Co.'s Avg State Farm Martin Coastal $4,112 $3,856 $10,193 Martin Inland $3,741 $3,026 $4,527 St. Lucie Coastal $5,163 $3, $7, St. Lucie Inland $2,802 $2,832 $3,740 Indian River Coastal $5,403 $3,505 $9,067 Indian River Inland $2,721 $2,918 $4,226 Brevard Coastal South $2,846 $3,184 $4,285 Brevard Inland South $2,012 $2,012 $2,841 Brevard Inland North $2,012 $1,992 $2,841 Volusia Coastal $2,110 $2,690 $3,384 Volusia Inland $1,372 $1,587 $1,834 Source: Security First Insurance Company *Royal Pl Palm, Universal lna, St. Johns Insurance Company, ASI, Universal lp&c, United dp&c, Towerhill 16

17 Bldg Risk Description Citizens Property Insurance Corporation Examples of Pricing for Commercial Residential Risks Fall 2008 Expiring Premium Renewal Premium 78% of Renewal Premium* (22% Acquisition Cost) Cost of FHCF Citizens Remaining Premium 1 2 Broward County, Joisted Masonry, $1,440,000 $8,512 $4,203 $3,278 $3,243 $36 Miami Dade, Fire Resistive (AAA), $2,048,400 $9,137 $4,523 $3,528 $3,037 $491 3 Broward, Fire Resistive i (AAA), $9,463,960 $23,038 $12,981 $10,125 $12,243 ($2,118) 4 Miami Dade, Fire Resistive (AAA), $6,658,000 $23,059 $13,576 $10,589 $10,481 $108 Citizens remaining premium is what s left to pay the retention for hurricane losses and all non-hurricane losses. 17

18 What Did The Task Force Learn? 4. The average Citizens customer pays $173/month for their HO-3 Homeowner policy. Other customers pay less. 18

19 Citizens Property Insurance Corporation Policies In Force Residential Policies Providing Full Coverage September 30, 2008 Line of Business Policy Count Total Premium Average Premium HO 3 344,868 $714,730,764 $2,072 HO 4 8,760 $3,662,961 $419 HO 6 50,947 $39,196,155 $769 DP 3 181,737 $236,066,129 $1,299 DP 1 26,936 $22,312,995 $828 MH/DP1 96,950 $57,992,910 $598 MH3 90,551 $113,313, $1,251 MH4 660 $241,665 $366 Total 801,409 $1,187,517,103 $1,482 19

20 Citizens Property Insurance Corporation Policies In Force Residential Policies Providing Wind Only Coverage September 30, 2008 Line of Policy Average Business Count Total Premium Premium HO 3 262,117 $546,846,598 $2,086 HO 4 3,218 $986,783 $307 HO 6 55,888 $41,401,093 $741 MH 3 14,688 $9,359,733 $637 MH 4 17 $4,146 $244 Total 335,928 $598,598,353 $1,782 20

21 What Did The Task Force Learn? 5. A significant portion of the personal residential business in the PLA account can be considered d non-standard. d The physical characteristics of the risks are significantly different from the risks found in the standard portfolios of private insurance carriers 21

22 Citzens PLA Account Distribution of Policies by Type of Risk, Policy Form, and Age % Built prior Product Policies % of PLA to 1980 HO 3 344, % 66.2% DP1/DP3 208, % 68.9% Condo (HO 6) 50,947 64% 6.4% 52.7% Tenants (HO 4) 8, % 35.5% Dwelling Total 613, % 65.5% % Built prior to 1996 MH3 90, % 84.8% DP1 96, % 83.4% MH % 77.1% MH Total 188, % 84.1% Grand Total 801, % 69.9% 22

23 Citizens Property Insurance Corporation Insurance to Value PLA Account September 30, 2008 HO 3 DP3 (xmh) Coverage A Per Sq. Ft. Count % Count % Less than or equal to $75 84, % 12, % $76 $100 51, % 29, % $101 $ , % 74, % $125 $150 $ 104, % 45, % Over $150 32, % 18, % Total 430, % 180, % A significant portion of Citizens risks appear to be insured for significantly less than replacement cost. 23

24 Citizens Property Insurance Corporation Average Total Insured Value PLA Account September 30, 2008 Private Policy Form Citizens Avg. TIV Market Avg. TIV Difference HO 3 $322,171 $454, % HO 6 $68,403 $107, % DP1/DP3 $160,943 $190, % MO 3 $77,507 $90, % Citizens insured homes are insured for less than the private market 24

25 Citizens Property Insurance Corporation Non Homestead Properties Insured October 31, 2008 Type of Dwelling PLA Account HRA Account Residential Dwelling 98,325 73,954 Condo 20, ,909 Mobile Home 75,219 8,609 Tenants Total Non Homestead 193, ,658 Percent of Account 30.5% 36.5% Citizens insures over 300,000 secondary or rental homes 25

26 Citizens Property Insurance Corporation Policyholder Retention PLA Account September 30, 2008 Years in Force Policies Percent 1 316, % 2 237, % 3 129, % 4 54, % 5 31,859 40% 4.0% 6 22, % 30% 7 8, % 8 2, % Total 801, % 30% of Citizens PLA policies have been in force for three years or more 26

27 What Did The Task Force Learn? 6. The rates charged by Citizens are not actuarially sound as required by law (FS (6)(m)5) 27

28 Citizens Property Insurance Corporation Incurred Loss Ratio by Account Period PLA HRA CLA 1/1/08 9/30/ % 21.0% 27.8% Budget % 11.3% 11.0% Budget % 11.3% 25.0% 28

29 Citizens Operating Budget 2009 All Accounts Consolidated Projected Gross Written Premium $2,599,079,163 Projected Net Income (Assuming No Hurricane Loss) $716,965,574, Estimated FHCF Premium $418,071,350 Private Reinsurance Premium $150,000,000 Total $1,285,036,924 Estimated Average Annual Hurricane Loss $1,730,000,000 Theoretical Deficit (17.1% of GWP) ($444,963,076) 29

30 Current law requires Citizens make its best efforts to procure catastrophe reinsurance at reasonable rates, to cover its projected 100 year probable maximum loss FS (6)(c)9 Citizens Property Insurance Corporation Cost of Purchasing Reinsurance to the 100 Year Event Account Amount Required Estimated Rate Online Estimated Premium PLA/CLA $2,900,000,000 10% 15% $290,000,000 $440,000,000 HRA $5,700,000,000 11% 16% $630,000,000 $910,000,000 Total $8,600,000,000 $920,000,000 $1,350,000,000 A reinsurance surcharge between 35%-52% of Citizens Written Gross Premium of $2.6 billion would be required to pay for this coverage in 2009 Source: AonBenfield 30

31 What Did The Task Force Learn? Citizens definition of actuarially sound: An actuarially sound rate is one that is adequate to cover expected losses and expenses for the time it is in effect, is not excessive, inadequate or unfairly discriminatory, and includes: A rating structure consistent with appropriate premium development and segmentation Underwriting expenses and commissions Administrative expenses Expected average non-hurricane loss and loss adjustment costs Expected average annual hurricane losses and loss adjustment costs The net cost of risk transfer to a PML level mandated or approved by Citizens Board from FHCF and private reinsurers, excess of surplus Liquidity costs for pre-event funding up through FHCF mandatory layer if Citizens does not have adequate surplus 31

32 What Did The Task Force Learn? 7. Citizens current surplus of more than $4 billion would be inadequate to pay all its claims after a large hurricane or a series of smaller events. 32

33 Citizens Property Insurance Corporation Potential Exposure to Aggregate Wind Losses June 30, 2008 (in billions) Return Time PLA HRA CLA 250 Years $ $26.10 $ Years $6.07 $15.69 $ Years $4.01 $10.00 $ Years $2.58 $5.97 $ Years $1.24 $2.77 $0.41 Avg. Annual Loss $0.46 $1.11 $0.16 *Amounts in billions of dollars according to RMS RiskLink Version

34 What Could A Hurricane Cost Citizens Policyholders? Citizens Gross Approximate Annual Citizens Policyholder Citizens Assessments on all Property FHCF Loss FHCF Assessment Hurricane Loss Probability Surcharge Policies in Florida (100%) 100% $3 Billion (Hurricane Ivan) 12.5% $17 Billion (plus $12 Billion (Hurricane 19% of Renewal interest) 6% of property premium for Andrew) 3.33 % Premium 0 $20 Billion 10 years $8.8 Billion (plus interest) 12% of property p ypremium $28 Billion (plus interest) 6% of $23 Billion % of Renewal for one year then 6% for several property premium for Miami Hurricane 1% Premium years $28 Billion 30 years 34

35 Excerpt from Memo to Task Force Today, state revenue is shrinking and unavailable to fund the potential loss. Debt financing, if available, would be limited. And, private reinsurance is expensive and in limited supply In short, in the event of a 100 year storm, Citizens policyholders would only be paid if there were a massive infusion of cash from the Federal Treasury after the event. This is a problem for Citizens current customers who expect to be paid in the event of a hurricane. This is a problem for every Floridian who will be asked to pay a portion of Citizens operating loss even if they don t have an insurance policy from Citizens. This is a problem for the U.S. Congress who might be reluctant to pay for losses that can be reasonably anticipated to occur. And this is a problem for Florida lawmakers who are uncomfortable about a state t sponsored insurance company making promises that t are going to be very difficult to keep in the event of one large hurricane or several smaller hurricanes in one season. - Senator Locke Burt 35

36 Citizens Mission The corporation shall provide insurance for residential and commercial property, for applicants who are in good faith entitled, but are unable, to procure insurance through the voluntary market (FS (6)(a)2) 36

37 Adopted Recommendations Limit the immediate impact of required rate increases by enacting a transition or glide-path so that Citizens Property Insurance Corporation can achieve actuarially-sound rates after the Legislatively-imposed l i freeze is lifted. The glide-path would include three separate rate limits: it No more than 10% per year statewide rate increase by product line No more than 15% per year increase by territory by product line No more than 20% per year rate increase for each policy 37

38 Adopted Recommendations Require Citizens new rates be implemented as soon as possible after approval by the Florida Insurance Regulation Beginning on July 15, 2009, and each year thereafter, the Corporation must make a recommended actuarially sound rate filing for each personal and commercial line of business it writes, to be effective no earlier than January 1, (FS (6)(m)5) 38

39 Adopted Recommendations Require a certification from all personal residential policy applicants and agents stating that they received no coverage offers from the private market, or that any offers received were for 15% more than Citizens rates for comparable coverage. This certification would be included in the policy application 39

40 Adopted Recommendations Require agents annually demonstrate an appointment with at least one other property insurer that is actively writing property business and is not engaged in non-renewals of policies in order to maintain their appointment with Citizens 40

41 Adopted Recommendations Require signed documentation for each Citizens policy each year confirming the agents search for alternative coverage. Documentation would be subject to periodic audit by Citizens staff. This recommendation was adopted in place of a recommendation to non-renew any Citizens policyholder who received a takeout offer. Current law allows takeout offers to be refused. 41

42 Adopted Recommendations Improve Citizens procedures for auditing agents to ensure compliance with Citizens certification requirement Adopt fines or other penalties (like losing Citizens eligibility) for agents or insureds that violate Citizens eligibility standards or make false statements on Citizens applications 42

43 Adopted Recommendations Expand Florida Market Assistance Plan to include listings for all in-force Citizens policies 43

44 Adopted Recommendations Operational Changes a) Require new applications from all homeowners who have had policies with Citizens for three or more years. b) Limit automatic renewals to two. 44

45 Adopted Recommendations Conduct a study to determine methods by which commercial residential risks can be depopulated from Citizens Repeal the statutory requirement that t Citizens offer commercial non-residential policies 45

46 Adopted Recommendations Require policyholders with existing homes lying within the 30-year erosion line to purchase flood insurance as the law allows Prohibit Citizens from writing policies for new construction within the 30-year erosion line 46

47 Adopted Recommendations Repeal the statute that prohibits agents from speaking to policyholders about the Florida Insurance Guaranty Association (FS ) 47

48 Adopted Recommendations Eliminate the statutory language in FS that allows companies to offer multi-policy discounts on automobile business when the same agent places a homeowners policy in Citizens 48

49 Adopted Recommendations Review the current boundary of the HRA because it s inconsistent and difficult to understand and administer 49

50 Defeated Recommendations Stop issuing personal and residential wind only policies for new business on July 1, Stop issuing for renewal business on July 1, (4 yes/6 no) 50

51 Citizens Property Insurance Corporation Distribution ib i of X Wind Plii Policies Personal Residential Business Policies Excluding Company Wind Percentage Citizens ii Property Insurance Corporation 92, % Direct & Captive Companies 96, % Florida Domestic Companies 156, % National & Regional Agency Companies 103, % Total Policies in Force 448, % Source: QSR 6/30/08 51

52 Defeated Recommendations A recommendation to clarify the term actuarially sound was defeated A recommendation to require OIR to consider the effect of Citizens rate changes on the private sector was defeated 52

53 Defeated Recommendations Repeal Consumer Choice Language in the Statutes a) The Consumer Choice Statute, t t FS , should be repealed b) Statutory t t changes should be made to the description of what must be included in Citizens Plan of Operation (FS (6)(C)5) (5 yes/5 no) 53

54 Next Steps Submit report to the Governor, President of the Senate, the Speaker of the House of Representatives Present findings to legislative committees if requested Task Force disbands March 31 st 54

55 Need More Information? All Task Force documentation can be found at com/about/mrtf meetings cfm or contact Christine Turner at (850) Additional Info Submitted by Senator Locke Burt: /Tab7-AdditionalInfoSenatorBurt.pdf 09/Tab7 55

56 Contact Information Senator Locke Burt President Security First Insurance Company 140 S. Atlantic Avenue, Suite 200 Ormond Beach, FL Phone: (386) Web Site: 56