Citizens Insurance for everyone? Here are the pros and cons

Why not simply increase state-run Citizens Property Insurance Corp. to cowl all householders in Florida?

It’s a well timed query for the fast-growing state-owned insurer of final resort after a run of expensive hurricanes and heavy litigation have resulted in 5 straight years of collective insurance coverage trade losses, failure of 15 insurance coverage corporations since 2020, and large price hikes for householders.

Created in 2002, Citizens is supposed to offer insurance coverage protection solely to householders who can’t in any other case receive it at an inexpensive worth.

But fast-rising personal market charges have made Citizens coverage comparatively cheaper for many Florida householders. The firm’s coverage depend has elevated from about 420,000 in 2019 to 1.16 million at the finish of 2022, and Citizens estimates it is going to enhance in 2023 to almost 1.7 million.

Lawmakers are attempting to strengthen personal market corporations whereas making Citizens much less interesting. In December, the state Legislature handed a sequence of reforms supposed to scale back litigation prices for personal insurers. It additionally handed a legislation barring householders from getting Citizens if private-market protection is out there priced 20% or much less increased than Citizens.

[ RELATED: Should you drop your home insurer and go to state-owned Citizens? ]

Yet Citizens protection is out there in lots of areas of Florida for about half the worth of competing personal insurers.

Security First Insurance CEO Locke Burt says he’s dropping 2,500 insurance policies a month to clients who are opting for cheaper Citizens insurance policies.

Whether insurers are publicly or privately owned, Florida policyholders find yourself paying for their losses a technique or one other with increased premiums, particular assessments, surcharges, or transfers from state coffers.

Private market insurers get well their losses from surpluses and reinsurance. Costs of each are recovered by elevating premiums. They are additionally backstopped by the $17 billion Florida Hurricane Catastrophe (CAT) Fund, bankrolled by surcharges on house owner insurance policies, and a taxpayer-funded $2 billion reinsurance fund created final yr. Claims filed towards corporations that go bankrupt are coated by the Florida Insurance Guaranty Association (FIGA), which recovers its prices from personal market insurers that go them alongside to policyholders.

Publicly-owned Citizens can get well losses higher than its surplus and reinsurance by imposing particular assessments on their clients, and if that’s not sufficient, on practically all insurance coverage clients in the state.

So if Florida’s insurance coverage clients are in the end on the hook for the prices of insurance coverage, can a case be made for sidestepping the personal insurance coverage market and letting everybody purchase protection from a supersized Citizens?

[ RELATED: Citizens CEO Gilway to retire as insurance industry struggles ]

The South Florida Sun Sentinel posed that query to quite a few insurance coverage trade consultants. None thought the concept fascinating or politically attainable. Some acknowledged that it could possibly be possible, however would require adjustments to Citizens’ organizational construction, protection ranges and eligibility.

Below is what the consultants stated, edited for size and readability:

Rollins supplied the pros and cons of every argument, summarized under.

The case for “Citizens for All:”

1. The state’s promise is safer than any personal insurer’s, as it’s backed by the whole Florida economic system slightly than a small pool of personal capital.

2. We know what we are shopping for, an ordinary coverage contract at predictable charges with tightly-governed customer support, slightly than a proliferation of poorly understood personal choices with annual price shocks.

3. The state has outsize negotiating energy with international reinsurers, getting the better of each worlds – personal capital backing our danger, however at truthful equilibrium prices – as an alternative of dozens of small insurers who are out of enterprise with out it approaching a spot market every year with little leverage.

4. If additional public capital is required, the state can work with the federal authorities to backstop our danger, whereas personal insurers would discover it tough or unattainable.

The case towards “Citizens for All:”

1. Private insurer guarantees are simply as safe as Citizens. The worst case is your declare is paid by FIGA after insolvency, and you by no means get a Citizens surcharge.

2. Private insurers continuously innovate to customise insurance policies to mirror danger profiles of shoppers. You might not want id theft or service line protection, however your neighbor does, and the contract continues to be tightly regulated by the state.

3. Private insurers compete (viciously, in mushy markets) to focus on the danger they need at the lowest charges, so you’ll be able to store round in case your profile is a poor match for a specific insurer. A state-made ranking plan may by no means sustain. It’s the identical with customer support — insurers compete and innovate, notably in expertise, with out the cumbersome state-agency procurement means of Citizens, so that you store for the greatest “user experience.”

4. Private insurers have longstanding reinsurance relationships that buffer their prices in exhausting markets and after a string of unfortunate climate, whereas Citizens will get a by-the-book “technical price” as a result of reinsurers know they don’t have to return again yr after yr. Private insurers use brokers and a syndication method to “auction” their danger to international reinsurers at the greatest worth for the buyer paying the premium.

[ RELATED: After latest insurance reforms, what rights do policyholders have left? ]

Consumers pose this query as a result of Citizens charges are decrease, suppressed and supported by assessments on different shoppers. If Citizens charged an actuarially sound price (a price that displays the precise value of overlaying losses and dealing with claims), shoppers would by no means have voiced this opinion.

It may make sense for Citizens and/or the CAT Fund to offer wind-only protection [where] the personal market can’t present it, however the authorities shouldn’t compete by forcing folks to purchase a product made cheaper by way of assessments on personal people for inexpensive coverages that the personal market is keen to offer.

The downside with government-supported insurance coverage entities is there’s an amazing political incentive for them to cost lower than they need to cost. The National Flood Insurance Program was $40 billion in the gap till the federal authorities wrote off $20 billion of the debt.

What [the question] proposes actually is: “Should we tax people for the purpose of paying for insurance?” That’s not an unreasonable proposal. But then you definitely nonetheless need to say: “What’s the reasonable price?” The historical past of presidency insurance coverage would let you know that politicians are going to make them cost lower than actuarily sound charges.

Also, what occurs when a giant storm hits and you’ve gotten only one insurance coverage firm? After Ian, the large corporations introduced in folks from throughout the United States [to process claims]. It’s very tough to adequately service that many claims.

If you’ve gotten one large insurance coverage firm, large numbers of individuals will lose their jobs. It could be massively disruptive. There are 165 property insurance coverage corporations doing enterprise in Florida. All have CEOs, brokers, adjusters, and many others.

I don’t understand how I’d really feel if I have been to lose my job, lose my home, and break up — say “thanks for the $100 discount?”

Besides, the state won’t ever do it. What the state must do is repair the reinsurance [affordability and availability] downside and get fast capital into the arms of the insurance coverage corporations. It wouldn’t be a bailout, however it will be paid again after the reforms enacted final December permits them to grow to be financially wholesome once more in 24 to 36 months.

You could be making a facility for over seven million households with over $4 trillion in publicity. I feel that when you have been to scale back choices and proceed to construct expertise the means now we have been then it’s attainable and may work.

Many have introduced up the idea that wind insurance coverage ought to be centralized as a result of the charges there are decided by modeling corporations and the [National Hurricane Center] catalogue of storms vs. precise loss historical past. It in fact would take a very totally different infrastructure and method to the product itself however could possibly be accomplished.

[ RELATED: As home values soar, calls grow to increase Citizens Insurance eligibility cap to $1 million statewide ]

I’d actually have to consider the reinsurance concerns as this may be key to doing one thing like that. It would throw out conventional reinsurance and demand use of recent merchandise like [loss warranties] and parametric [coverage with predefined payouts tied to specific events] approaches. It may additionally us a reciprocal method [defined as an exchange of insurance contracts between policyholders who pool together resources when one experiences a loss] so policyholders grow to be “owners” and the revenue motive is faraway from the insurance coverage aspect.

It could possibly be accomplished, however what an enterprise and [would be] politically volatile by altering construction, product and distribution.

However, the main motive I don’t help the idea is that I firmly imagine that competitors in the end gives the best charges for the house owner and gives many extra choices and alternate options to handle the exposures they’ve. When the market was wholesome and worthwhile in 2013 to 2016, charges dropped like a rock. Even Citizens lowered charges in 2015.

I admit that right this moment the insurance coverage trade in Florida is going through some unprecedented pressures, however I don’t imagine the reply is consolidation. I’m optimistic that once we get by means of this disaster — and it’s a disaster — the reforms which were handed lastly will scale back litigation prices and we are able to get again to a non-public market that provides higher pricing and extra choices to shoppers.

Ron Hurtibise covers enterprise and client points for the South Florida Sun Sentinel. He may be reached by cellphone at 954-356-4071, on Twitter @ronhurtibise or by e mail at [email protected].