I read with a great deal of interest comments that were made by the big chiefs at a hearing held by the Office of Insurance Regulation in Tallahassee concerning the rate request Citizens Insurance Company was asking for in the South Florida market. In my view the back-and-forth discussion that took place on August 25 is newsworthy as are some of the back-story items not covered or published. Here is a link from the Insurance Journal that reported on the August 25^th hearing.

As you can read, overall things appear to be looking up for the depopulation of Citizens Insurance Company’s property policies. In fact, Commissioner McCarty started the hearing by applauding Citizens policy count reduction by almost one million policies over the last several years, calling it a “Herculean effort.” Supposedly, this effort was necessary because it removed the possibility of billions of dollars of assessments that could be levied on all policyholders should the big one finally hit our shores. McCarty went on to say, “I commend you and your team for the work you have done and the leadership and strides you have made to make that depopulation effort a success.”  So there you have it. The good news for all Floridians is that newly formed private market insurance companies have stepped into the breach and will save us all from assessments that otherwise would be levied on Florida property owners given the lack of actuarial acumen on the part of Citizens.

But what about these new private companies assuming the policies--how financially sound are they? Most are untested in regards to their service response or claim paying ability after a big cat event. From my reading, many are new to the property insurance industry and headed by finance people as opposed to tested claim professionals. So what happens should they go belly up following a major hurricane? Well, let’s hope they are admitted insurance companies as opposed to surplus lines carriers so the Florida Insurance Guarantee Association (FIGA) can pay the outstanding claims. And remember FIGA has the same ability to levy assessments, (yes even billions of dollars of assessments) for all the dollars they pay out above capital reserves for admitted companies that took over Citizens policies.

Citizens and FIGA both have the ability to pay claims if they come up short and claim payments exceed capital reserves. As for reinsurance, according to Florida Insurance Consultant, Scott Johnson, “While there may be some nuances, Citizens buys reinsurance for the stated purpose of reducing the likelihood it will assess after a storm.  So, reinsurance will pay before any assessments are made.  Reinsurance treaties stipulate the level of payment and when/if the payment kicks in based on retention levels and other factors.  Assessments by Citizens only occur after a deficit, which can only occur after reinsurance has been fully paid.  The first tier assessment goes exclusively to the Citizens policyholder.

No other companies can assess, except theoretically mutual carriers or assessable reciprocals.  So, they must be insolvent before FIGA will pay claims on their behalf.  Insolvency is basically when your liabilities exceed your assets.  Reinsurance is an asset and would be paid before FIGA could apply.  FIGA can assess all policyholders 2% if there aren't enough funds in reserve. This assessment is, of course, after the carrier is insolvent and its assets have been converted to pay claims, including completely exhausting its reinsurance. Citizens policyholders are not exempt from paying FIGA assessments and Citizens assessments.” Thank you for enlightening me and our readers Scott.

Now the bad news or maybe we should be a little more optimistic and call it the not so good news!  Despite the praise and congratulatory comments, not much has changed. Florida is still exposed, growing again in population while our geographical location continues to show up on this country’s most dangerous location lists in terms of windstorm and flooding perils in the U.S.

So what is really going on here? Are we just reshuffling the deck chairs by depopulating Citizens with all these newbie insurance companies?  Are we just circling the drain albeit at a slower pace given the lack of major cat events? Yes, I think so, but it may be worse than that.

Take a look at the first 5 pages of this property insurance policy I was just provided that has a special section titled SPECIAL PROVISIONS FOR FLORIDA. Nothing in these forms gives more coverage but in fact takes away coverage and limits this company’s responsibility to pay for losses. It seems this company domiciled in the far upper Midwest wants a presence in our state and the high premium dollars that go with it.

Now more bad news. It seems there is some type of fraud going on (or at least in the big chiefs’ minds, it is fraud) as they are reporting a high frequency of water losses and uncontrollable costs for these types of claims.  Not surprising that these losses are in three South Florida counties of Broward, Dade and Palm Beach. So we know fraud is costing everyone, right?  Fraud costs seemingly are just built into the system where the cost of fraud is passed on to you and me in the form of higher property premiums.

So despite all the rhetoric about fraud, it looks like it is just that, rhetoric. Nothing seems to be happening at least on the most recent alleged water loss frauds from a law enforcement perspective. So my question of the day--how do you catch a water loss fraudster? If you read this link Assignment of Benefits Insurance Reform Fact Sheet from the Personal Insurance Federation of Florida, you will get some sense of how big the problem really is. Note the last paragraph, which talks about other property insurance crises. As we all know, the fix in some of those matters were to remove the peril from coverage. Since water losses are the most frequent cause of claims and can be extremity damaging, it would be a very bad thing to see this peril shifted to property owners.  My guess is that if you took the one-way attorney fees out of the mix for Assignment of Benefits (AOB) or limited them the water, AOB would go away. As you can read in the court case below this judge reversed the attorney fees. 

Here, a court in Florida with shall we say an engaged judge, may have found a way, albeit costly. Please take the time to read this recently published court decision dealing with Assignment of Benefits .

It seems to me the AOB, which in my view is nothing short of a huge moral hazard, is playing a big role in the water loss controversy. I was told by one industry insider that most of the new carriers would not fight all these small lawsuits and they would just pay the demand and raise the rates to their customers to compensate. This person said this case likely would not have gone to trial but for the financial standing of the defendant. The new smaller companies would have just paid and adjusted their rates to their customers.

Finally, last week I had a phone conversation with a national insurance carrier representative who was headquartered out of state. In the course of the discussion about a shockingly large “emergency service” bill that had been submitted on a commercial fire we were attempting to settle, this gentleman started telling me about all the lawsuits they were getting from Florida based on the standing that contractors have with AOB’s written into their contracts. He said some of the suits had no merit since there was no coverage in the insurance contract. It seems this company is trying to come to grips with this and have set up a special unit to deal with AOB lawsuits.

So on one hand we have the good news of Citizens depopulation that must be tempered with the bad news of even higher homeowner and commercial rates coupled with insurance policy restrictions on Floridians to recover for losses that otherwise may be covered in other states. Add the invasion of untested newbie insurance carriers with the lack of will, knowledge or maybe resources to crack down on the alleged fraud in order to preclude rate hikes in the effected Florida counties and that sums up our present situation.

In closing, if the Florida legislature does not deal with the AOB issue, I have been advised that some carriers will undoubtedly change their contracts as I am told some E&S carriers are now looking at doing. 

This is an important issue. Let us know what you think!