a capital crisis: the 2006 florida property insurance market

A Capital Crisis:The 2006 Florida Property Insurance Market

John W. Rollins, FCAS, MAAACitizens Property Insurance CorporationPresented atCasualty Actuaries of the SoutheastBoca Raton, FL April 11, 2006

April 11, 2006 John W. Rollins, FCAS, MAAA 2

Overview

Citizens 101 2004-05 Recap and Market Effects 2006 Legislation How to Fix the Market


Citizens 101: Who are We? Citizens is the only property insurer of last resort

chartered by the state of Florida FRPCJUA – statewide all-peril insurer created after Andrew

1992 FWUA – coastal wind-only insurer created in early 1970’s

by insurance industry 2002 statute merged the two into Citizens

Citizens is a “real” insurance company but operates under special statutes and supervision

Board of Governors (8) appointed by Florida CFO (2), Governor (2), House Speaker (2) and Senate President (2)

Several Citizens-specific laws since 2002 govern operations

Board proposes and Office of Insurance Regulation (OIR) approves a Plan of Operation, Board makes most major decisions

Citizens is subject to all other insurance laws and regulations


What do We Insure? Three “accounts” maintained almost like separate

companies: Personal Lines Account (PLA)

Personal residential policies from FRPCJUA Homeowners, Renters, condo Unit-Owners forms All-perils, statewide eligibility

Commercial Lines Account (CLA) “Commercial-residential” policies from JUA Apartment building and condo Associations All-perils, statewide eligibility

High-Risk Account (HRA) Wind-only policies in defined eligible (coastal) areas

from FWUA Personal lines, commercial-residential and some

“true commercial” risks


What do We Insure?

PersonalCommercial-Residential

True Commercial

Inland PLA CLA n/a

CoastalPLA (all perils)

HRA (wind only)CLA (all perils)

HRA (wind only)HRA


HRA Eligible Areas


How are we Structured? – Points of View Actuarial/Products

Rates and Rules – PLA, CLA, HRA-PL, HRA-CR, HRA-TC all separate lines (to us and OIR)

PLA, CLA, HRA-CR subject to standard rate regulation

Financing Assessments and Debt – PLA, CLA, HRA Florida Hurricane Cat Fund (FHCF) – PLA+CLA, HRA Reinsurance – PLA, CLA+HRA

Operations Systems – PLA, CLA, HRA separate Policy Admin – PLA, CLA separate from HRA Claims – “Daily” (non-cat) and “Cat” separate

Public/Media Alphabet soup – all the rates are too high!


Actuarial - Rates and Rules All rates by statutes must be

“Actuarially sound” “Noncompetitive” with private market

Easier said than done When 80% or more of your fair premium is for

infrequent, severe cat events, what is the “right” rate (including cost of capital)?

With the diverse rate structures, underwriting and coverage in the private market, define “noncompetitive”?

Personal lines easier than commercial – standardized products, lots of competitors, good rate information Statutes also more specific about how to test rates


How are we Financed? - Needs By statute and Plan, Citizens must finance

100-year event PML, which varies with Exposure – market share and risk

attributes Which depends on private market health

and private reinsurance prices/availability Modeled hurricane losses FHCF coverage – set by statutes


Financing – Current Structure (1) Current financing comprises

Surplus (cash on hand) – zero right now Assessments

“Regular” – up to 10% of property written premium from private insurers (due 30 days)

“Emergency” – sell bonds for an additional amount, serviced by annual assessment to all property insureds (including Citizens’) for up to 30 years


Financing – Current Structure (2) FHCF

Coverage (and premium, at actuarially sound rate) proportional to exposure, one season aggregate amount, fairly high retention

Much cheaper than private reinsurance because FHCF’s capital also provided by its (separate) assessment authority on all P&C policies (except Work Comp and Med Mal)

Private reinsurance – “wraparound” FHCF cover the only current treaty

Debt (Pre-Event Notes) Fairly standard bonds with slight variations Outstanding notes due in 2007 for PLA, 2019-

2024 for HRA


2004-05 Recap and Market Effects 2004 – Four hurricanes affected every area of Florida

Millions of claims and logistical nightmare Costs borne by primary insurers and consumers

Multiple deductibles and retentions No one storm was a mega-event

Reinsurers and FHCF relatively unscathed 2005 – Four hurricanes affected Florida and Katrina

blasted global reinsurers Wilma by far the most costly to Florida, driven by

demand surge in area Wilma struck “Citizens alley” in PB/Broward/Dade

2006 Results Massive Citizens (and smaller FHCF) deficits Modelers woke up and adjusted short-term outlook Global market saying “no mas” to Florida


2006 – Where does Citizens stand? $12 Billion projected PML during 2006 season

Financing only up to roughly $9.5B in place now $1.7 Billion deficit from 2005

“Deficit year” 2005 includes adverse runoff from 2004

Most of 2005 deficit in HRA (Wilma) FHCF also broke (but less broke - $1.5 Billion) Rapidly growing exposure in all accounts

Reinsurance capital disappearing for Florida-only “takeout” companies totally dependent on rental $$$

The few commercial-residential specialists also exiting due to lack of reinsurance


2006 Legislation “Reform” of property insurance inevitable

House and Senate both moving 100+ page bills (see next)

Much discussion about using general revenue to pay off Citizens and possibly FHCF deficits New revenue estimates arrive April 20 showing

size of state budget surplus Resumption of 2005 discussion about

lowering FHCF retention and providing more coverage in working layers


House Insurance Package Highlights Creates a new Citizens account for non-homestead

property with higher capital adequacy standards in rates Homestead rate standard reduced to 50-year PML Nonhomestead rate standard increased to 250-year Deficits in nonhomestead assessed to only nonhomestead

insureds – homestead still paid by everyone Limits home values eligible for Citizens to < $1 million Allows “flex rating” (small rate adjustments bypass OIR

approval) Removes “Panhandle exemption” from statewide Florida

Building Code Requires private insurers to adjust claims for Citizens

wind-only policies Requires Citizens Board and employees to adhere to State

Code of Ethics


Senate Insurance Package Highlights Allows cost of (internal) capital to be included in rates

Only actual reinsurance costs allowed before Imposes 25% premium surcharge on vacation homes

owned by nonresidents of Florida Tougher standards for depopulation by takeouts

Must retain policy for 5 years (up from 3) Limits home values eligible for Citizens

Started at $1M – now backing off Moves certain OIR oversight of Citizens to Florida Cabinet Makes Citizens more political and “ethical”

Director to be confirmed by Senate Many other strict audit/conflict provisions

Toughens standards for valid sinkhole claims


How to Fix the (Citizens) Market Make getting into Citizens a hassle

Require declinations from both admitted and surplus lines insurers

Quit automatically renewing HRA policies – reunderwrite annually

Require extensive and quality risk data on applications

Make getting into Citizens expensive Achieve actuarially sound rates in all accounts Monitor market concentration in all accounts and

allow “presumed” rate changes in uncompetitive places based on market share

A-rate large risks based on market prices


This is Just Too Easy

If you were an agent, and Citizens was not only cheaper, but required only a one-page document to allow entry, what would you do?


Market Concentration AnalysisRank Company_Name Policies in Force Market Share Written Premium Market Share Structure Exposure Market Share

# 1 State Farm Florida Insurance Company 849,708 20.1% $1,082,495,148 20.4% $292,984,985,472 25.5%# 2 Citizens Property Insurance Corporation 334,719 7.9% $455,791,687 8.6% $47,934,624,658 4.2%# 3 Allstate Floridian Insurance Company 278,552 6.6% $303,674,819 5.7% $39,918,889,901 3.5%# 4 Nationwide Insurance Company Of Florida 224,698 5.3% $212,299,394 4.0% $56,381,926,991 4.9%# 5 United Services Automobile Association 139,092 3.3% $141,375,157 2.7% $53,323,614,838 4.6%# 6 American Strategic Insurance Corp. 127,866 3.0% $118,542,951 2.2% $25,592,830,597 2.2%# 7 Atlantic Preferred Insurance Company, Inc. 115,400 2.7% $194,094,545 3.7% $26,550,580,629 2.3%# 8 Florida Preferred Property Insurance Company 107,247 2.5% $168,366,245 3.2% $29,017,396,717 2.5%# 9 Liberty Mutual Fire Insurance Company 102,667 2.4% $136,372,755 2.6% $38,661,483,850 3.4%

# 10 Allstate Floridian Indemnity Company 89,609 2.1% $94,841,227 1.8% $16,481,761,495 1.4%# 11 First Floridian Auto And Home Insurance Company 89,005 2.1% $114,168,061 2.1% $27,284,765,077 2.4%# 12 Tower Hill Prime Insurance Company 82,437 2.0% $98,468,320 1.9% $25,452,145,352 2.2%# 13 Vanguard Fire And Casualty Company 70,371 1.7% $78,679,766 1.5% $17,700,644,481 1.5%# 14 United Property & Casualty Insurance Company, Inc. 68,722 1.6% $123,984,263 2.3% $25,610,225,306 2.2%# 15 Florida Family Insurance Company 68,233 1.6% $53,823,813 1.0% $7,222,159,524 0.6%# 16 Tower Hill Preferred Insurance Company 66,766 1.6% $91,705,501 1.7% $20,854,266,617 1.8%# 17 Usaa Casualty Insurance Company 66,103 1.6% $84,486,475 1.6% $23,847,334,973 2.1%# 18 Gulfstream Property And Casualty Insurance Company 61,356 1.5% $115,108,862 2.2% $12,336,874,225 1.1%# 19 Universal Insurance Company Of North America 59,300 1.4% $75,292,842 1.4% $15,493,847,300 1.3%# 20 Clarendon Select Insurance Company 56,787 1.3% $81,204,300 1.5% $13,868,085,477 1.2%# 21 Florida Select Insurance Company 55,902 1.3% $62,046,117 1.2% $9,078,354,405 0.8%# 22 St. Johns Insurance Company, Inc. 55,554 1.3% $60,300,127 1.1% $17,339,726,996 1.5%# 23 Universal Property & Casualty Insurance Company 54,953 1.3% $69,722,051 1.3% $11,427,434,599 1.0%# 24 Hartford Insurance Company Of The Midwest 48,777 1.2% $62,759,899 1.2% $15,642,566,549 1.4%# 25 Florida Farm Bureau Casualty Insurance Company 48,026 1.1% $46,508,647 0.9% $14,468,118,572 1.3%

Many of the tools needed for better public policy are already available, such as this quarterly analysis from OIR.


How to Fix the (Voluntary) Market Stop letting Citizens compete for business (above) Streamline rate/rule regulation

Flex rating is a good start, with appropriate transition plans (phase-ins)

Restrict OIR use of “unwritten rules” to delay or disapprove Allow cost of internal capital to be included in rates Allow any cat model approved by Florida Commission on Hurricane

Loss Projection Methodology to be used freely Streamline post-disaster regulatory environment

Standardize emergency orders/requirements Reduce “exit barriers” to nonrenewals

Supersize FHCF It has superpowers nobody else has (all-lines assessment

authority) Long-term: turnover housing stock and mitigate what’s

left, and educate the public

Speaker Contact Information

John W. Rollins, FCAS, MAAAActuaryCitizens Property Insurance Corporation101 North Monroe Street, Suite 1000Tallahassee, FL 32301(850) [email protected]

a capital crisis: the 2006 florida property insurance market

Documents

cla hraoperationssystems

separate lines

insurance laws

hrareinsurance pla

debt pla

rules pla

property insurer

hra separatepolicy admin