Article Courtesy of The Palm Beach Post

By Randy Diamond
Published  January 23, 2007

The insurance industry in Florida has reason for concern. Lawmakers overwhelmingly passed a bill that will allow state-sponsored Citizens Property Insurance Corp. to compete with private-market insurers for business for the first time, ending its primary role as the insurer of last resort.

Further, the new law lifts restrictions on Citizens put in place specifically so that it could not compete. Those limitations helped ensure profits in years when there were no storms and limited liability in years when there were.

The plan to expand Citizens was strongly pushed by Crist. Allowing Citizens to compete with private insurers will create more consumer choice, he said Monday night.

"It's competition," Crist said. "And they (the insurance industry) seem to not like it, and that's probably good."

The insurance industry's position is that the competition is dangerous. Officials argue that Citizens' rates are inadequate to cover all the claims that would result, even from a small hurricane.

"We saw over the last two years that Citizens was not taking in enough money to pay its bills,'' said William Stander, regional vice president of the Property Casualty Insurers Association of America. "Now the state is putting itself in a situation where the number of policies will continue to grow and the amount of money it is taking in will continue to not be enough."

Stander said that puts consumers in an "increasingly difficult position.''

As it stands now, every homeowner insurance policyholder in Florida is being assessed surcharges for the next decade to make up for the $2 billion deficit suffered by Citizens during the 2004 and 2005 hurricane seasons.

Under the new law, surcharges — which were 6.8 percent last year, and just under 3 percent this year — would be expanded to auto insurance and other property and casualty policyholders, if Citizens were to run in the red again.

"It's not a question of if they will go broke again, it's just a question of when,'' said Chris Neal, a spokesman for State Farm Florida Insurance Co. Neal also said that if policyholders start leaving State Farm for Citizens, it could erode the insurer's financial base.

The uncertainty of what will happen with Citizens and other provisions of the legislature's plan have created major worries for the insurance industry, according to insurance regulatory attorney Tim Meehan.

"It's gloom and fear of the unknown,'' said Meehan, who represents insurance companies.

Citizens became Florida's largest insurer last year, surpassing State Farm. It has grown to more than 1.3 million policyholders as other insurers including State Farm have scaled back, exited the Florida market or become insolvent. Meanwhile, Citizens was permitted to provide coverage only in high-risk areas undesirable to the private companies.

In its relief package, the legislature scrapped Citizens' two scheduled 2007 increases. The first, which was almost 30 percent in Palm Beach County coastal areas, was designed to make Citizens rates actuarially sound, meaning it could pay all claims in a year without major catastrophe. That could include a minor to moderate hurricane, or one predicted in a five-year period, but nothing bigger than that.

Citizens officials insist the plan allows it to compete with private insurers because providing broader coverage — not just the undesirable risks — will help it gain better financial footing.

Citizens will compete for more policyholders in several ways. The first is by assuming more policies in the wind pool, which is east of Interstate 95 in Palm Beach, Broward and St. Lucie counties.

About 250,000 policyholders in those areas have two policies, one for windstorm risk and the other for fire and theft. For the most part, insurers such as State Farm, Nationwide, Allstate and USAA carry the lower-risk and thus more-lucrative fire and theft policies, but cede the risky wind policies to Citizens.

Citizens now will be allowed to cover the fire and theft risks. Citizens officials estimate the plan will allow it to add about $400 million in premiums in the high-risk wind area.

In exchange, policyholders will get at least a 10 percent discount and possibly up to 20 percent off their current rates, according to officials with Citizens.

Christina Turner, Citizens director of legislative affairs, said the additional premium from the fire policies will allow Citizens to offset its hurricane risk.

Policyholders outside of the wind pool areas also will be permitted to switch to Citizens if they find their current insurer is charging them more than 125 percent of what their premium would be with Citizens, something they were prohibited from doing.

The legislature also repealed provisions in its property insurance package that had required Citizens to be among the most expensive insurers in the state.

But the reality is that even before the legislature acted Monday, the premium rates of many private insurers over the past year had overtaken Citizens by double or more.

Moreover, under the legislature's new plan, existing Citizens policyholders can elect to stay in the event a take-out company —- private insurers paid a cash bonus to assume Citizens policies — agreed to assume the policy.

Take-out companies have assumed more than 500,000 Citizens policies in the last few years. However, those companies often raise rates after an initial transition period, in many cases to more than twice what Citizens was charging. Under the old rules, once a policy had been moved, the policyholders were ineligible to go back to Citizens.

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