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State Shifting Insurer's Risk

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By RUSSELL RAY

rray@tampatrib.com

Published: December 14, 2008

Updated: 12/14/2008 12:11 am

TAMPA - State regulators are making progress in moving policies out of state-run Citizens Property Insurance Corp. and into the hands of private insurers.

This year, small private insurers known as takeout companies have been authorized to assume more than 400,000 homeowner policies from Citizens. Last year, 248,000 policies were taken out of Citizens. The state's goal: reduce the exposure of the state-backed company by placing that risk in the private market.

Although some question the claims-paying ability of some of the takeout companies licensed by the state, there are advantages to going with them: The rate is typically lower and the risk of a huge assessment is greater for Citizens policyholders.

"The assessment potential is less than half if you're in the private market," said Citizens spokesman John Kuczwanski.

If Citizens runs out of money to pay claims, the loss would be offset with fees, or assessments, imposed against all Florida policyholders. But Citizens policyholders would be assessed first and at a much higher rate than policyholders covered by the private market. The assessment for Citizens policyholders could be as high as 45 percent of their annual premium versus 18 percent for all other policyholders, Kuczwanski said.

Citizens was created in 2002 as Florida's insurer of last resort, a temporary home for policies no other firm wants.

The takeout offers are "part of the process of being insured with Citizens," Kuczwanski said.

In the future, Citizens policyholders may no longer have the right to "opt out" of having their policy assumed by a takeout company.

A draft report by a state task force charged with developing a plan to return Citizens to its original role has recommended the Legislature take away that option.

Citizens has long acknowledged that its rates, which are frozen through 2009, aren't high enough to pay claims in Florida's high-risk coastal areas. That means taxpayers and policyholders far from the coastline would bear much of the cost of repairing damage to Florida's most vulnerable homes.

"We want to reduce the risk in Citizens because if they go under, all Floridians have to pay for it," said Tom Zutell, a spokesman for the state's Office of Insurance Regulation.

Claims, Questions Of Stability

West Tampa resident Charles Luthin is one of thousands of Florida homeowners who have received letters this year informing them their policies will be placed with a private company unless they choose to "opt out." In most cases, the companies are small, with little or no history.

Despite state assurances about the financial stability of these companies, Luthin became concerned after he opened the letter from Magnolia Insurance, a start-up company that won the right to assume his homeowners policy from Citizens.

"Their stationery was pretty crummy, which told me this company wasn't any good," Luthin said.

More importantly, Luthin wasn't convinced Magnolia had the financing to pay claims resulting from a big storm. Luthin, a former Walt Disney executive, questioned whether the company could survive a storm such as Hurricane Wilma, which hit South Florida in October 2005.

"If the average claim was over $4,000 in that area, Magnolia would have been out of business," he said.

Gregg Patterson, Magnolia's chief financial officer, said the company has a surplus of more than $20 million, well above the minimum required by the state, and nearly $400 million in backup coverage, enough to cover damage caused by a one-in-100-year storm.

"We're here for the long run," Patterson said. "We feel very comfortable that we can handle a big storm."

Magnolia, one of 14 takeout companies authorized to assume Citizens policies, has removed nearly 100,000 policies from Citizens this year.

Robin Westcott, the state regulatory office's director of financial oversight, said start-up companies must have at least $10 million - or 10 percent of the total liabilities - in surplus and enough reinsurance to cover claims caused by a one-in-100-year storm.

Before licensing an insurer, Westcott said, a team of experienced examiners evaluates everything from claims-handling procedures to the experience of its executives.

"I can't tell you that there will never be an insolvency," Westcott said. "But I feel comfortable saying these companies can survive events of a catastrophic nature."

If a company collapses, the claims would be paid by the Florida Insurance Guaranty Association, which covers the claims of insolvent insurers. However, the association would recover the cost from all Florida policyholders through assessments.

Westcott noted that the credit crunch may prevent new insurers from replenishing their coffers after a storm.

"It would be difficult for them to recapitalize," she said. "They would be able to write some, but I don't know that they would be able to aggressively write new business."

Lisa Miller, former deputy insurance commissioner and a consultant to a handful of takeout companies, said most of the takeout firms are financially sound.

"They're solid," Miller said. "These are acorn companies that will grow into bigger companies. The hole that they're facing is the Cat fund."

Gov. Charlie Crist and the Legislature passed a law in 2007 requiring insurers to purchase low-cost reinsurance - backup coverage for insurance companies - from the state's Hurricane Catastrophe Fund. The credit crunch, however, could prevent the fund from raising money it might need to pay claims if a major storm were to hit Florida.

Look For Takeout Notices

The financial integrity of companies isn't the only concern with the takeout process.

Some homeowners are being switched to smaller, obscure companies against their will because they are not reading the takeout notices that come in the mail.

Such flubs likely will continue until the takeout companies find a way to send policyholders a "talking takeout notice that says 'Hello, this is what's about to happen,'" Miller quipped.

Even if homeowners fail to "opt out" and their policies are assumed by takeout companies, they have 30 days to decline. Beyond that, Citizens will review requests from policyholders who want to switch back to Citizens.

Citizens policyholders should check their mail regularly for takeout notices, said regulatory office spokesman Ed Domansky.

"Part of living in Florida is having to deal with the insurance issues," Domansky said. "There has to be some level of personal responsibility."

Reporter Russell Ray can be reached at (813) 259-7870.

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