Lots of work ahead for Citizens

Article Courtesy of The Miami Herald

Published  April 9, 2007

No crystal ball is needed to see the future of Citizens Property Insurance, the state-run insurance pool.

It will be getting bigger, possibly much bigger, in coming months.

The massive insurance reform bill passed during the legislative special session in January will let Citizens compete with private insurers for homeowner business in the state's windstorm area. It also allows Citizens to expand commercial coverage.

Now, during the regular session, Gov. Charlie Crist and several lawmakers would like to see a Senate bill move forward that paves the way for Citizens to be a full-fledged insurer. In making a case for Citizens, the bill claims the state's economic health and public safety are at risk without affordable property insurance.

Citizens will be moving far beyond its original concept as a market of last resort for home, condo owners and renters who couldn't find available policies from private insurers.

''It's no longer a residual market. It's an alternative market,'' says Kevin McCarty, Florida's insurance commissioner.

By far, the biggest change for Citizens will be on the commercial side, where it will begin writing policies of up to $10 million on business property throughout the state, starting Sept. 1. It had been limited to writing up to $1 million policies in the state's windpool area -- east of I-95.

On June 1, it also will absorb a poorly conceived commercial joint underwriting set up last summer to help alleviate the insurance crisis many businesses faced when they couldn't find coverage at any price in the private market.

''We know we're going to get a lot of business, and we're preparing for that,'' says Bruce Douglas, chairman of Citizens' board of governors.

Already gearing up, Citizens is setting up an operations center for its commercial business in Tampa. It now has 800 staffers and hopes to have about 1,000 by year-end.


Citizens already has undergone a major growth binge since four hurricanes crisscrossed the state in 2004.

As private insurers pulled back, stunned by losses from those storms and another four hitting the following year, Citizens' policy count jumped 50 percent since December 2004. It's now the state's largest residential insurer with more than 1.3 million policies on its books.

But its risk remains concentrated in South Florida's four counties, where it has nearly 600,000 policies and $220 billion in exposure.

''Citizens is big in all the bad places,'' says Robert Hunter, director of insurance for the Consumer Federation of America and a former Texas insurance commissioner. 'If a hurricane hits, Citizens no doubt will get clobbered. If it can spread its risk, that will help with Citizens' exposure.''

Hunter notes that other state-run pools -- such as those providing workers comp coverage in other states -- have been allowed to be competitive with the private market with good results.

Yet, he cautions Citizens shouldn't get ''too fat,'' noting it's essential that the company be run efficiently and maintain competitive rates with private insurers.

Part of the rationale for Citizens' expansion is to allow the insurer to spread its risk. As it competes with private insurers to write a total homeowners policy, the company will take on premiums for coverage on fire, theft and liability.

''If we pick up more policies in the middle of state and we can combine policies, we'll be able to better diversify our risk,'' says Christine Turner, Citizens' director of consumer and legislative affairs.

Some consumers, as well as some lawmakers, have no qualms about letting Citizens take on the private market.

''Competition reduces rates for consumers -- nothing else!'' says Jan Bergemann, president of Cyber Citizens for Justice, a consumer advocacy group that follows insurance issues for condo associations.


Sen. Rudy Garcia from Hialeah and Rep. Julio Robaina from Miami have introduced bills in their respective houses that would put Citizens on more equal footing with private insurers, requiring the company to have competitive rates.

The bill is scheduled for a hearing before the Senate Banking and Insurance committee today.

During the special session, Gov. Charlie Crist was a big proponent of letting consumers choose Citizens if a private insurer was charging rates that were higher than the state-run company. Legislators settled on allowing homeowners to opt for Citizens if the rates they were offered were more than 25 percent higher than Citizens.

Daniel Baptista, a principal with Sol Insurance in Miami, says he's had a few clients who have chosen to go with Citizens because rates with other carriers were too high.

''We will exercise every alternative out there for our clients -- even Citizens,'' adds Baptista.

The concept of Citizens as a massive operation does give some agents pause.

Last fall, Crist, then attorney general, and the Florida Cabinet, took Citizens to task for not being customer-oriented and responsive. Citizens held three public meetings around the state to learn from consumers where it could improve its operations. It will hold more of these meetings this year, with one in South Florida.


To alleviate problems with claims handling, Douglas says Citizens now has more than 2,000 adjusters under contract. Their first priority is to work for Citizens in the aftermath of a big storm. The company is also working to update its computer systems to eliminate needless paperwork and automate as much as possible.

Many acknowledge that while Citizens has made some improvements in systems and customer service, work remains to be done.

Alex Soto, president of InSource, a Dadeland insurance agency, and currently president of the Independent Insurance Agents & Brokers of America, says the company is still slow to respond to routine matters such as issuing policy endorsements for additional coverage or posting payments.

Soto and other agents say customer service reps could use more training, finding they often are not very well versed on what a policy covers or they lack the knowledge to craft solutions in unique situations.

''Ask two different people the same question, and you get two different answers,'' says Soto.


As with all insurers, 2006 was a good year financially for Citizens. With no major storms battering Florida, the company ended the year with $855 million in surplus and net income of nearly $2.8 billion, based on unaudited results.

It's anticipating net income of nearly $2 billion in 2007.

In contrast, Citizens finished 2005 with a deficit of $1.4 billion, hence assessments on all the state's policyholders -- plus $715 million from the state's tax revenue -- were needed to make up the shortfall.

At last week's board meeting, officials said the company should have $1.4 billion in surplus by the end of June. Surplus is accumulating at the rate of about $200 million a month. It's collecting about $320 million in premiums a month.

Citizens also has taken steps to bolster its liquidity.

By the time hurricane season starts, Citizens expects to have $8.8 billion in the bank to pay claims if a major storm were to hit Florida this year, with $1.2 billion specifically to pay windstorm claims. This money includes surplus as well as proceeds from bonds Citizens has sold and lines of credit. It's all invested in securities earning interest that equals or slightly exceeds the debt service on the bonds, says Douglas.

''All three of our accounts are in good shape from a claims-paying resource standpoint,'' says Douglas.

But these additional resources don't guarantee that Citizens won't have an assessment after a massive storm.

This year's mandate from Tallahassee to provide rate relief for policyholders means Citizens will have less money coming in.

Citizens' Jan. 1 rate increase was eliminated by the new insurance bill, meaning $269 million will flow out of its coffers.

Citizens can file new rates for 2008, and officials say these must be actuarially sound, so policyholders are likely to see an increase next year.


The state's requirement that all insurers effectively double the credits they offer homeowners who harden their homes against future storms will cost Citizens about $160.6 million.

Plus, the rate reduction Citizens is passing onto policyholders because of its expected savings from buying extra back-up insurance from the Florida Hurricane Catastrophe Fund means another $175.8 million less for the insurer this year.

The grand total: $605.3 million, give or take a storm shutter or two.

The lack of a padded surplus fund keeps some lawmakers and business leaders up at night. If Citizens faces a budget shortfall, the pain of filling the gap will fall on all insurance policyholders throughout the state -- because of another change on the recently passed insurance bill.

Associated Industries of Florida, a powerful business lobbying group, practically sees red when the discussion turns to Citizens' expansion.

Says Barney Bishop, the group's president and chief executive: "When Mother Nature's wrath strikes Florida again, Citizens may not have enough revenue to cover losses, and our property owners will take an enormous hit in their pocketbooks through additional taxes on their insurance policies.''