MINUTES OF THE ACTUARIAL AND UNDERWRITING COMMITTEE MEETING Tuesday, June 24, 2014

Transcription

1 CITIZENS PROPERTY INSURANCE CORPORATION MINUTES OF THE ACTUARIAL AND UNDERWRITING COMMITTEE MEETING Tuesday, The Actuarial and Underwriting Committee (A&U) of Citizens Property Insurance Corporation (Citizens) convened at the Alfond Inn in Winter Park, FL on Tuesday, at 10:00 a.m. (EDT). The following members of the A&U were present. John Wortman (Chairman) Gary Aubuchon (Board) Chris Gardner (Board Chairman) The following members of the A&U were present telephonically. Fred Strauss The following members of the Board were present: Juan Cocuy The following Citizens staff members were present: John Rollins Randy Wipf Barbara Walker Barry Gilway Karen Holt Brian Donovan Paul Kutter Curt Overpeck Dan Sumner Kelly Booten Jennifer Montero Michael Peltier Cindy McVay David Woodruff Christine Ashburn Jay Adams Steve Bitar Joe Martins Roll was called. Call Meeting to Order

2 1. Approval of Prior Meeting s Minutes (February 20, 2014) A motion was made and seconded to approve the February 20, 2014 A&U meeting minutes. All were in favor. Motion carried. 2. Single Building Definition Randy Wipf stated, we are endeavoring to change the single building definition and how it applies to wind-only policies. We also want to eliminate all the references to the peril of fire in the wind manuals. In the proposed definition, we want it to be simple and will be put under two classifications: frame and masonry or semi-wind resistive and wind resistive. The proposed new rule allows the separation of buildings for the windstorm peril based specifically on the building construction, wind resistance level of construction, and means of connection to any adjacent building. This removes all references to the combustibility of the building materials, fire protection, or separations of space which are present in the current rule. We also spent time cleaning up fire references in any of the wind-only manuals. Changes resulting from the revision of the single building definition in the Commercial Wind-Only Manuals will primarily be to the 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 individual review of each policy, the number of policies impacted cannot be determined. Chairman Wortman commented, it makes sense to reference the definition of the coverage you provide. A motion was made and seconded to approve staff s recommendation to get approval from the Board on the single building proposal. Upon approval, appropriate rule changes will be filed with the Office of Insurance Regulation (OIR). Supporting system changes will be incorporated into the first feasible future release. 3. Product Changes Legislative Session 2014 Karen Holt stated, these changes are updates only and do not require A&U and/or Board approval. Coastal Construction Control Line (Personal & Commercial Lines) Prior legislation 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 coverage by the corporation 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, Adverse Action Based on Publicly Available Credit Information Senate Bill 708 states the following: For residential property insurance, 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. After a poli cy or contract has been in effect for more than 90 days, the insurer may not cancel or terminate the policy or contract based on credit information available in public records. Citizens does not use credit reports in underwriting and does not engage in postclaim underwriting based on credit reports. To provide clarity to agents, specific language may be added to underwriting manuals. Citizens Property Insurance Corporation Actuarial and Underwriting Committee 2

3 Exemption of Reinspection for Authorized Mitigation Inspectors Senate Bill 1672 provides that a mitigation form provided to the Corporation is not subject to independent verification or reinspection, absent material changes to the structure, if the form was signed by an authorized mitigation inspector and reviewed by and verified by a quality assurance program approved by the Corporation. Citizens current practices will be updated to reflect any impact from this provision. Commercial Residential Wind Transient Occupancy Eligibility House Bill 1089 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 a rental agreement period of less than 30 days. This legislation requires changes to Commercial Residential Wind Only eligibility from the current transient standard of more than three (3) rentals per year for periods less than thirty (30) days, or held out to the public as a place regularly rented out to guests for periods of less than thirty (30) days, to the new standard described above. The legislation applies only to commercial residential condominiums. Commercial Residential Multi-Peril Eligibility Senate Bill 1672 requires changes to Citizens coastal account eligibility to state that the corporation shall cease offering new commercial residential policies providing multi-peril coverage for risks located in the wind-only eligible area and shall instead continue to offer commercial residential wind-only policies. This change applies only to new business and specifically states that the corporation may continue to renew existing policies in force as of July 1, 2014.This change does not affect current eligibility for ex-wind policies written in the commercial lines account. 4. Personal Lines Coverage Limits Change Karen Holt stated, Senate Bill 1770, passed in 2013, modified Citizens personal lines coverage limits to provide maximum eligible limits for structures and for condominiums, maximum combined dwelling and contents coverage. The limits were established at $1,000,000 effective January 1, 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). The legislation does not specifically address policies that provide coverage for contents without corresponding structure coverage, such as renters policies. For consistency, staff recommends that the same coverage maximums be applied to all personal lines 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. Chairman Wortman stated, I ve heard several people comment that a maximum limit might conflict with the mission of Citizens to provide coverage where people can t get it through the market. This is the statue and we are governed by that. A motion was made and seconded to approve staff s recommendation to get approval from the Board on the personal lines coverage limits change. Upon approval, appropriate rule changes will be filed with the Office of Insurance Regulation (OIR). 5. Clearinghouse Rule Changes Karen Holt stated, for the Clearinghouse Renewal Eligibility (Personal Lines), Senate Bill 1770 provides that an applicant for coverage with the corporation who was declared ineligible for Citizens Property Insurance Corporation Actuarial and Underwriting Committee 3

4 coverage at renewal through the Clearinghouse during the previous 36 months, and has been insured by an authorized insurer, shall be subject to the renewal eligibility test (premium comparison) 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. Karen Holt continued, for new business and Renewal Business: Period of Ineligibility (Personal & Commercial Residential Lines), Florida Statutes provide that a risk offered coverage from an authorized insurer that is comparable to coverage offered by Citizens is not eligible for coverage with Citizens if either of the following applies: New business: Premium is not more than 15 percent greater than the premium for a Citizens policy; Renewals: If the offer is equal to or less than Citizens renewal premium. To clarify the eligibility requirement, 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. A motion was made and seconded to bring before the Board for approval the appropriate rule changes be implemented to support Senate Bill 1770 and the Citizens Clearinghouse. Changes include those listed above, and any other necessary changes that do not have a substantive effect on eligibility or coverage. Any future changes that are substantive will be presented to the Actuarial and Underwriting Committee and Board of Governors for approval. Upon approval, appropriate underwriting rule changes will be filed with the Office of Insurance Regulation and system changes will be implemented. All were in favor. Motion carried. 6. Rate Filing for 2015 John Rollins stated, I m going to ask Brian Donovan and Paul Kutter to come up with me if there are any questions during the presentation. It s important to note that our rate filings are recommendations. The OIR has statutory authority to set Citizens rates. However, Citizens is required to make an annual rate filing for each product line. Importantly, the methodology of that filing and the recommended filing must be actuarially sound except where indicated in Florida law. Florida law requires an actuarially sound rate, as measured by Citizens, excepted where indicated such as with the glide path. That means that these rates are calculated in accordance with actuarial standards of practice; they are not excessive, inadequate or unfairly discriminatory. We do have to use the Florida hurricane public model as the basis for a minimum benchmark for the windstorm portion of rates. We do have to pass through the rates any additional charges levied by the Florida Hurricane Catastrophe Fund (CAT Fund), which is currently at 25%. If the inidcated rate, for example, is $1, then they will charge us $1.25. That additional $0.25 gets passed through outside of the glide path. John Rollins continued, none of the statutes changed this year, so we are following the same procedures, data, and methods we ve used since the glide path has been established. The major cost factors that make up or cost structure has to be funded by the rates we charge. We have five factors: non-cat losses other than sinkhole; sinkhole; modeled CAT losses; administrative expenses; risk-transfer costs. When we do buy reinsurance, we do pass through as much as we can of the cost of the risk transfer. The overall indications by line of business were determined using these cost facts, including multiple hurricane models. In keeping with the spirit of providing a recommendation to the OIR, we try to provide as much information as possible. We looked at four or five accepted models, and we selected an indication based upon the models. The exception is Citizens Property Insurance Corporation Actuarial and Underwriting Committee 4

5 the condominium owners line of business where we found the Florida Public Hurricane Model became the minimum benchmark. John Rollins continued, this year for the wind-storm portion and the other expenses the cost structure added up to something that was less that rates we are currently charging. Citizens rates have reached actuarial soundness or we are near the end-game of the glide path to get us to actuarially sound rates. We ve taken into account capping individual policies in the glide path. We did try to cut back on the amount material presented this year, but we do have some exhibits I d like to show you. Exhibit one is the summary of statewide indications. What you ll see there is a tale of two accounts. Multi-peril rates have, in general, reached actuarial soundness with the exception of condo owners. The multi-peril indications cover around zero or small negative amounts. Because these are the actuarially sound rates for Citizens in those product lines, we ve selected an indication that goes with those numbers. You ll see that in column two of the exhibit. In commercial residential, you ll still see a positive but you ll also see a zero. We ve achieved actuarial soundness on an overall basis. John Rollins continued, individual policyholders have rates that are modified by deductibles, age of home, construction types, etc. so it s possible that individual owners could have rates capped due to the glide path even when we have an overall actuarially sound revenue. That is why you see in column three that the proposed rate does not match the uncapped indication. The proposed changes give us about 5% less revenue than we would have had in the prior year. Our look-back period for rates is five year, so it s accident year 2009 and extending through accident year John Rollins continued, if you look at the identical numbers in columns four, five, and six, those numbers are part of our wind-only policies. For here, the news is not the same. The uncapped indications in wind-only are still in the positive and are in the teens, meaning a double-rate change were we not subject to the glide path. The average is right around 20%. We are about 20% away for adequate rates in the wind-only accounts. When you apply the glide path to the wind rate increases, the proposed change is 3.9% across the personal lines policies for wind only. Gary Aubuchon inquired, when you look at the indication of the wind-only, at it averages upcapped at 20% and the glide path allows us to go to 10%, why is the proposed the change 3.9%? John Rollins responded, it has to do with the fact that the glide path applies to and individual policy. When a variety of customers buy a variety of products that are rated differently, there are many customers in the wind-only account that will see less than a 10% increase that is actuarially sound. The only way to average a 10% rate change would simply to say to every policyholder, It doesn t matter how you re rated. You re getting a 10% hike. If we did that, it would not be actuarially sound for the entire population. I printed out a couple things. They are not in your book but Barbara is handing them out to you. These are histograms that drill down into your question. In each personal line, we looked at every policy and applied a proposed recommended rate change. In the homeowners and dwellings lines of business, about 50% of them will see a 10% decrease. About 15% of the homeowners will get maxed out with the 10% increase. These are the people in older homes, near the coast, etc. We are not as sound in the coastal territories as we are with some of the inland accounts. John Rollins continued, for condos, 54% will see the maximum increase. Mobile homes will have a more even distribution. You see about 80% of them seeing some form of rate decrease. If you see the second page of the handout, you ll see some time perspective. You ll see that the gap Citizens Property Insurance Corporation Actuarial and Underwriting Committee 5

6 between indicated rates and what we are able to charge is closing and the line is going down. In condo, we have not yet rate adequacy yet. The bottom three lines show the wind-only products. We can see light at the end of the tunnel when it comes to rate adequacy in wind-only but the condos are somewhat are far away. HO6 policies are a bit further away. John Rollins continued, I m not going to go through each sheet, but we are hoping we gave you some eye-friendly maps by county if you are interested in regional numbers. The scale is different on the different maps. Chairman Wortman commented, the definition of rate adequacy for us is different than a normal insurance company as established by the OIR. Where a normal insurance company has to build in the full cost of risk transfer up to 1-in-100 year event, we don t do that. We insure up to 70% of a single event. That s all the cost we build into our rate adequacy. We continue to discuss this difference with OIR. John Rollins commented, that s correct and a good segue on how reinsurance and risk transfer did impact the rate indications. We re not terribly close to rate adequacy but we are getting there. If you look at the timeline, you see the indications for wind-only policies dropped from well over 40% to the low teens. Wind-only is driven by the cost of reinsurance. As we ve seen in the placement of reinsurance earlier this year, risk transfer costs have come down dramatically in the last year. Though we ve spent on a gross basis $300 million on risk transfer this year, the bang for the buck was so high that we net off the expected hurricane losses and we lowered the rates. As you pointed out, that does not mean we are not reinsuring the same way a private company would. The OIR is clear that they believe the laws allow us to pass through only what actually buy. A private company would buy a lot more. We have another exhibit that mimics exhibit one for the personal lines, as if we reinsured the entire company for a 1-in-100 year event. We would have to buy a $10 billion program to completely protect ourselves to a 1-in-100 year event and expose 30% of our surplus. We would have to spend about an additional $600 million. Our net income will be about $600 million and we can have that debate later. A $10 billion program for a concentrated book of coastal business is possible but no private company would take that concentration and build a business model around that. It would tack on another 20% in the wind-only account and another 8% to 10% in the multi-peril account. Chairman Wortman stated, I think this is a great exhibit and really does outline the differences. John Rollins continued, we also have to make a decision on sinkhole rates. Sinkhole rates are exempted from the glide path. There is tremendous uncertainty right now in seeing a corner being turned in the sinkhole market due to SB 408. Claims being reported are down by over 60% and the closure rate of those claims is 80% without payment. That is phenomenal news, if it holds up based on two caveats. This news is based on claims after SB 408. Most claims coming in are trying to get into the system in accident years 2009, 2010, etc. Also, how much of the new data will hold up when many of the SB 408 provisions are under court challenge. The actuaries prepared indications which indicate that certain areas are actuarially sound to ask for a zero percent change until we know more information on how everything will shake out. The exception is Hernando County, which is not actuarially sound. We think it reasonable to ask for a 10% increase which will fall under the glide path. We can take that 10% to relieve the Board of the duty to ask for a phase-in for that county. Citizens Property Insurance Corporation Actuarial and Underwriting Committee 6

7 Fred Strauss asked, if I m following on the homeowner piece, it appears that some of the comments made about the way the reinsurance is calculated in the voluntary market and Citizens tax exempt status relative to the voluntary market, it seems that these rates might be potentially competitive with the market. Would that be correct? John Rollins responded, while I cannot speak to the cost structure in the voluntary market, our risk transfer costs are favorable to the private industry in the absolute sense. We do not transfer enough risk to mimic what a private insurer would do because we have the power to assess. The administrative expenses for Citizens tend to be lower as a percentage of premium. We also enjoy a tax exemption. The statute does require us to be actuarially sound, no more, no less, and follow the glide path. Fred Strauss responded, which over time, this will have some kind of impact on the depopulation efforts taken place as well as with some of the work in the Clearinghouse. John Rollins responded, the Clearinghouse is not necessarily in my department. But, clearly the Clearinghouse statute requires a comparison between our rates and a private insurer s rates for comparable coverage. If there is a gap, it ll show up there. [inaudible] John Rollins responded, we do them ad hoc and upon request. You re correct to say that since January 2007 when HB 1A was enacted, I believe references to a competitive standard like the Top 20 rates had been eliminated. Chairman Wortman stated, I think the old statute required that our rates should be higher than the private sector. That went away in Chris Gardner commented, Great presentation, I appreciate you and for all the work you ve done. We don t control the rules we play by. We aren t the final decider on what these rates will be. Do you want to walk the process with us? John Rollins stated, the actuaries calculate the rates once we have year-end data over the past five months. We present the rate indications and rate recommendations to the A&U and to the Board for authorization. We then prepare the individual rate filings for every account and every product line. There are about 14 of those. We submit those to the OIR in the mid- to late-july timeframe. They have 45 days to act on each filing. They are not required to have a public hearing on the rate filing but they typically do. Any modifications will be itemized in the consent order by the OIR and Citizens must implement the results of the Consent Order by the following year. We re looking at another six months before this hits the street. A motion was made and seconded to bring before the Board for approval the recommended rates and rating factors to be made to the OIR. Submissions will be made in mid-july. All were in favor. Motion carried. NEW BUSINESS Chris Gardner stated, it s a gift to have John Rollins on staff. It s a great job. Citizens Property Insurance Corporation Actuarial and Underwriting Committee 7

8 John Rollins responded, it s a team effort. I prefer to defer the credit to the Actuarial and Product units. [meeting adjourned] Citizens Property Insurance Corporation Actuarial and Underwriting Committee 8