Citizens Is 'Achilles' Heel,' Lawmaker Says

TALLAHASSEE - Appearing under oath before state lawmakers Friday, officials of state-run Citizens Property Insurance Corp. agreed that all Florida policyholders would be better off if regulators had allowed the company to raise its rates 44 percent.

That's what Citizens asked for in 2005. It would have generated an additional $120 million a year for Citizens, funds that could be used to pay claims resulting from a major hurricane.

The rate increase was denied and Citizens' rates were frozen by the Legislature through next year, a move designed to punish private insurers for not lowering their rates.

As a result, Citizens' rates aren't high enough to cover claims resulting from a major hurricane, company officials told lawmakers. Instead, billions of dollars in assessments, or surcharges, would be applied to all auto and homeowners policies in Florida to make up Citizens' shortfall.

'Solutions To The Wrong Problem'

That's the point House Insurance Committee Chairman Don Brown wanted to drive home with Citizens' testimony. The state has placed too much hurricane risk on the backs of Florida taxpayers and policyholders, said Brown, a Republican from DeFuniak Springs.

"We have, with the absolute best of intentions, crafted solutions to the wrong problem," he said.

Brown said the rates Citizens was charging in 2005 haven't really changed, and won't until the end of 2009 without a change in state policy. He asked Paul Ericksen, an actuary and a Citizens consultant, whether it was appropriate for the state to prevent Citizens from raising its rates.

"From an actuary's perspective, I wouldn't think that's appropriate," Ericksen said.

Ericksen helped calculate the 44 percent rate increase Citizens sought in 2005. He said the calculation was designed to help Citizens pay claims from a major storm without having to turn to assessments.

"There was a component built into that provision to help pre-fund hurricane events," Ericksen said. "Private insurance companies have to do that."

Instead, state regulators approved a 25.9 percent rate increase for Citizens, which went into effect in January 2007. A few months later, though, the increase was removed and Citizens' rates were frozen with legislation backed by Gov. Charlie Crist. As a result, Citizens had to return about $60 million to policyholders.

The state also expanded the Hurricane Catastrophe Fund from $16 billion to $28 billion, a move designed to create savings for private insurers and their customers by providing more low-cost reinsurance - backup coverage for insurance companies. But the $12 billion expansion also increased policyholders' exposure to assessments.

Crist made lower insurance rates central to his gubernatorial campaign.

"It's a shame we are creating politically adequate rates instead of actuarially adequate rates," said Rep. Alan Hays, R-Umatilla.

Most Vulnerable Policyholders

Citizens, which is required by law to take policies no other company wants, has eclipsed State Farm and Allstate to become Florida's largest property insurer, representing more than 20 percent of the state's property insurance market.

Nearly half of Citizens' policyholders live in Palm Beach, Broward, Miami-Dade and Monroe counties, areas most vulnerable to a hurricane.

Getting insurers to remove some of that exposure isn't going to be easy, because companies that take policies out of Citizens' high-risk account can't charge the homeowner a higher rate under state law.

"We have created an agency that is not benefiting consumers," said Rep. Dennis Ross, R-Lakeland. "We can't keep telling ourselves this is a good thing."

Even if Citizens' rates were adequate, however, the company still may be forced to issue sizable assessments because $12 billion of the $24 billion it will need to cover losses from a major storm comes from the Cat Fund.

The problem is the fund may not be able to raise that kind of cash because of reluctant lenders worried about the downturn in the economy.

"If the Cat Fund has difficulty, the whole thing breaks down," John Forney, Citizens' financial adviser, told lawmakers. "From a financial standpoint, it would be a problem."

Concerns about the Cat Fund's ability to borrow money and Citizens' insufficient rates means Florida's taxpayers could be forced to pay the cost of repairing the state's most vulnerable homes after a hurricane, exposure that should be shared by the private market, Brown said.

Any deficits logged by Citizens or the Cat Fund would be made up through assessments on Florida's private insurers, which pass those costs on to their customers. The tremendous growth of both state entities is the result of bad public policy, Brown said.

"Government policy that brings out the worst in us is not what we should be doing," he said. "It will be our Achilles' heel if we don't do something about it."

House and Senate lawmakers have devised a plan to reduce the state's Cat Fund by $3 billion, which would lower the state's exposure and encourage the private market to shoulder more risk. Cutting the Cat Fund, which provides low-cost reinsurance to private insurers, might lead to higher rates, however.