Many homeowners will soon be unable to stay
with state-backed insurer Citizens
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Article Courtesy of The Sun Sentinel
By Kathleen
Haughney and Maria Mallory White
Published
November 7, 2013
Come January, tens of thousands of Floridians who
have Citizens property insurance will no longer have the power to decide
whether to stay with the state-backed insurer.
The plan is years in the making, as the state has steadily pushed to
steer consumers away from Citizens to smaller private companies intended
to help carry the burden should a hurricane strike.
It's a daunting dilemma for homeowners, who know little about these
private companies. The Sun Sentinel examined the regulatory records of
these companies to shed light on this emerging insurance market.
Consider:
Most of the companies that have taken over Citizens policies in the
past 10 years have never weathered a major hurricane.
Six of the 29 companies at one point endorsed by the state have gone
belly up -- even without a costly storm forcing the state to cover
$400 million in unpaid claims that eventually trickled down to Florida
policyholders.
Almost all of the 29 companies authorized by the state to take over
the Citizens policies -- and which don't face the same rate caps imposed
on Citizens -- can seek to raise consumers' rates as much as they choose
at renewal. Only two have promised to hold annual increases within the
10 percent cap that is placed on Citizens.
The state does not disclose the process for how it vets the companies
that take over the policies.
Photos: Fort Lauderdale International Boat Show - 2013
"There is no one watchdog or independent evaluator of a takeout deal who
is both fully informed and fully independent. That's a problem," said
former Citizens board member John Rollins, who became the company's
chief risk officer in September. "It's the Achilles' heel of the
system."
Insurance Commissioner Kevin M. McCarty's office would not provide any
internal documentation, written standards or benchmark information on
how the Office of Insurance Regulation evaluates companies applying to
take over Citizens' policies. Instead, the office points to an outline
of requirements on the agency's website and a state law requiring the
companies to have $15 million in capital, up from $5 million in 2011.
"There's a comprehensive, qualitative and quantitative analysis that we
go through," McCarty said. "A company has to demonstrate it has the
financial wherewithal, the management team and the business plan to put
forward that makes sense."
In the years after Hurricane Andrew (a Category 5 storm that hit South
Florida in August 1992), established national insurers pulled out of
Florida or stopped writing new policies. Citizens was then created by
the Legislature as a government-owned company that would safeguard
property as a last resort if private insurers would not. It subsequently
grew into the largest home-insurer in the state, with a high of 1.6
million policies in 2012.
Such a large state-run agency comes with certain risk: If an
Andrew-sized storm hit Florida now, Citizens would fall $10 billion
short in covering the claims, lawmakers argue.
If Citizens can't pay claims, its customers then face extra fees up to
45 percent of their typical bills. If that still isn't enough to cover
claims, Citizens can collect the rest from all Florida taxpayers.
Shedding Citizens policies through these so-called takeout companies has
been the state's primary tool for shrinking Florida's insurance
liability. The companies are coined takeouts because they pick up
policies turned over by Citizens.
The program so far has been optional: Policyholders could choose to
remain with the state-backed insurer.
That will change in January, when many of Citizens' current customers
will have no choice but to insure their properties with a private
carrier.
Next year, all renewing policyholders and new customers seeking coverage
with Citizens will be first sent through the newly created Consumer
Choice Clearinghouse electronic bidding system.
If a private company submits a quote within 15 percent of Citizens'
quote for a policy, "the agent and the insured gets a letter [saying]
that they are no longer eligible for Citizens," said Citizens CEO Barry
Gilway.
Like the takeout program, the clearinghouse is meant to place Floridians
with private insurers.
Many consumers, who are required by mortgage lenders to carry property
insurance, have opted to stay with Citizens because they have doubts
about the new companies they know little about.
Untested companies
The bottom line for a Florida homeowner is simple: If a storm hits the
area and damages my property, will my insurance company have enough cash
to pay my claims?
McCarty, the insurance commissioner, said his office does its best to
vet companies and weed out those that appear to have a shaky future. But
none of these firms have faced a major storm or been rated by the
national agencies that examine more established companies.
Elements Property Insurance Co. is one recent example.
On Sept. 27, the Tallahassee-based company received a state license to
do business in Florida. On the same day, it received state insurance
regulators' approval to take on 45,000 Citizens policies. The swift
consent came even before Elements received approval to sell the
catastrophic coverage required by Fannie Mae and Freddie Mac, the
nation's federally-backed mortgage lenders.
It's hard to know exactly what carried the day for Elements or any
other takeout company, for that matter because the process for vetting
the companies is done confidentially.
Though regulators consider a company's projections for how it would
withstand storms of differing severity, nothing tests an insurer like an
actual hurricane.
"The best gauge of how much damage is after a storm hits. Not before.
After," said State Rep. Frank Artiles, R-Miami.
Companies collapse
Even without the pressure of a major storm, six companies endorsed by
the state to replace Citizens subsequently went out of business.
Atlantic Preferred Insurance Co. went insolvent in 2006, American
Keystone Insurance Co. in 2009, followed by Magnolia Insurance Co. and
Northern Capital Insurance Co. in 2010. In 2011, Homewise Preferred
Insurance Co. and Homewise Insurance Co. also failed.
The cost of those failures $400 million in outstanding claims was
recovered through assessments on the remaining solvent companies selling
property insurance, many of whom passed the expense on to consumers.
The state is trying to recoup some of that money by suing Allianz, the
$6 billion parent company of Magnolia. According to documents filed in
the Second Judicial Circuit Court in Leon County, the state accused
Allianz of draining Magnolia's assets, putting the company's customers
and ultimately the state of Florida at risk. Allianz lost its bid to
have the case dismissed, and the company declined to comment on ongoing
litigation.
The Florida Insurance Guaranty Association handles the settlement of
outstanding claims when an insurance company fails. If the company can't
pay, the state agency assesses all property insurance companies with a
fee, which is then often passed on to policyholders insured by other
companies in the form of a higher bill.
In response to the failure of the six insurance companies even without a
hurricane, McCarty said his agency has done its part, but insurance
companies are "in the business of assuming risk" and some simply won't
succeed.
Where's the watchdog?
The state's Office of Insurance Regulation regulates insurance
companies, approves licenses for carriers to sell insurance in the state
and approves their participation in Citizens' takeouts. These takeout
companies were vetted by the agency and approved by the Citizens board
of directors.
Florida's authority over insurers doesn't stop once regulators have
licensed a company to do business here. The state is empowered to take a
close look at insurance company performance at any time but regulators
have yet to disclose doing so with more than two-thirds of the companies
they approved to take on Citizens customers in the past decade.
The state Office of Insurance Regulation said it does not reveal when or
if it is conducting a review. The only information that is released is a
final report.
These "market conduct examinations" are regulators' most thorough way of
investigating if a company is abiding by the law and treating Florida
homeowners properly. State law used to require periodic exams but now
allows insurance regulators to do the reviews whenever they want.
Artiles, the legislator from Miami, said he has been asking the state
for the past year to conduct such an review of Tower Hill, a prominent
insurer in the state that has taken out policies in the past and won
regulators' approval to take out 82,948 Citizens policies in November.
"I have not received one iota of information. Not one response," Artiles
said.
Eight of the 29 companies that have taken over Citizens' business in the
past 10 years have faced that type of investigation. The state accused
two of them Florida Peninsula Insurance Co. and United Property and
Casualty Insurance Co. of violating state insurance regulations. They
were cited, but not fined.
In Florida Peninsula's case, the state found 36 violations of state
insurance code, including failing to give a reason for canceling a
policy, enacting bad underwriting practices and failing to respond to
complaints.
Regulators found 26 violations of state statute at United Property and
Casualty, which included not following procedures to return unearned
premium, failing to maintain records and not properly handling
complaints.
Despite the troubles, the two companies won state regulators' approval
to take a total of more than 174,000 former Citizens policies so far in
2013.
Florida law permits companies to make a certain number of errors.
"It is a rarity when violations are not found in a market conduct
examination," Florida Office of Insurance Regulation spokeswoman Amy
Bogner said. "... The issue raised in the examinations [of Florida
Peninsula and United Property and Casualty] did not rise to a level of
concern that would stop a takeout of policies from Citizens."
Rising rates
During the past few years, the state has shuttled more than 473,000
homes from Citizens to private insurers. This month, up to 200,000
Citizens customers will get letters from insurance companies asking for
their business.
The state's pitch to consumers highlights the fact that exiting Citizens
means leaving behind the threat of a 45 percent "hurricane tax" if
Citizens can't pay its claims.
Jay Pellis was rattled when he got his takeout letter in March. "The way
it was marketed, you'd think a used-car salesman was selling something,"
he said.
The Coral Springs homeowner was among the 60,000 Citizens policyholders
earmarked to go to Heritage Property & Casualty Insurance Co., a St.
Petersburg firm that's only a year old. In the end, he decided to give
Heritage a try.
The state hasn't required most companies receiving Citizens' policies to
commit to the 10 percent rate cap, so they will be free to request rate
increases of their choosing at renewal time. The Office of Insurance
Regulation reviews and decides if rate increases are justified. It
rarely denies the increases, but sometimes approves less than the
companies request.
Only Heritage Property and Weston Insurance Company have written in
their takeout agreements with the state that they will hold renewals
within the 10 percent state-mandated rate cap.
Bruce Lucas, Heritage's chairman, said his company is run by experienced
managers who are confident enough to tell policyholders upfront what
premium increases they'll face upon renewal after leaving Citizens.
"We are the first company in Florida ever to voluntarily calculate what
your rate would be with Citizens and with Heritage," he said. Consumers
don't want surprises, he added, so "if the answer is 'No, I can't tell
you the price,' they're going to say, 'No, I'm going to stay with
Citizens.'"
But beginning Jan.1, all of Citizens' new and renewal business will be
run through the clearinghouse without exception. Consumers no longer
will have the option of staying in Citizens if a private insurer offers
a rate within 15 percent of the state insurer's rate.
The program is also expected to curtail one of the biggest problems the
state has faced in shrinking Citizens the thousands of policies
funneled into Citizens weekly by agents who work exclusively for such
big-name firms as State Farm, USAA and other national carriers no longer
writing new homeowner policies in Florida.
"Every single time they try to put a policy into Citizens, they're going
to be stopped," CEO Gilway said.
The irony in Florida's beleaguered insurance market is that the company
many consumers love to hate Citizens is the company many prefer to
trust with paying a claim.
The last thing Denise "Dee Dee" Owens, of Pembroke Pines, wants to worry
about is whether she can get a check to rebuild after a storm. Owens
fought a nine-month battle to recover discounts that Citizens revoked
after reinspecting her property. And though she eventually was
reimbursed, Owens said she had to do a loan modification to afford the
most recent rate increases in her Citizens policy.
Yet, despite "all of the bull I went through," Owens has rejected offers
to shift her policy to Universal Property and Casualty.
Citizens, for all its problems, is at least a familiar entity. "Nobody
pays like Citizens does. I will say that in their favor," Owens said.
"Nobody pays like Citizens pays."
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