Come January, tens of thousands of Floridians who have Citizens property insurance will no longer have the power to decide whether to stay with the state-backed insurer.
The plan is years in the making, as the state has steadily pushed to steer consumers away from Citizens to smaller private companies intended to help carry the burden should a hurricane strike.
It’s a daunting dilemma for homeowners, who know little about these private companies. The Sun Sentinel examined the regulatory records of these companies to shed light on this emerging insurance market. Consider:
• Most of the companies that have taken over Citizens policies in the past 10 years have never weathered a major hurricane.
• Six of the 29 companies at one point endorsed by the state have gone belly up – even without a costly storm – forcing the state to cover $400 million in unpaid claims that eventually trickled down to Florida policyholders.
• Almost all of the 29 companies authorized by the state to take over the Citizens policies – and which don’t face the same rate caps imposed on Citizens – can seek to raise consumers’ rates as much as they choose at renewal. Only two have promised to hold annual increases within the 10 percent cap that is placed on Citizens.
The state does not disclose the process for how it vets the companies that take over the policies.
“There is no one watchdog or independent evaluator of a takeout deal who is both fully informed and fully independent. That’s a problem,” said former Citizens board member John Rollins, who became the company’s chief risk officer in September. “It’s the Achilles’ heel of the system.”
Insurance Commissioner Kevin M. McCarty’s office would not provide any internal documentation, written standards or benchmark information on how the Office of Insurance Regulation evaluates companies applying to take over Citizens’ policies. Instead, the office points to an outline of requirements on the agency’s website and a state law requiring the companies to have $15 million in capital, up from $5 million in 2011.
“There’s a comprehensive, qualitative and quantitative analysis that we go through,” McCarty said. “A company has to demonstrate it has the financial wherewithal, the management team and the business plan to put forward that makes sense.”
In the years after Hurricane Andrew (a Category 5 storm that hit South Florida in August 1992), established national insurers pulled out of Florida or stopped writing new policies. Citizens was then created by the Legislature as a government-owned company that would safeguard property as a last resort if private insurers would not. It subsequently grew into the largest home-insurer in the state, with a high of 1.6 million policies in 2012.
Such a large state-run agency comes with certain risk: If an Andrew-sized storm hit Florida now, Citizens would fall $10 billion short in covering the claims, lawmakers argue.
If Citizens can’t pay claims, its customers then face extra fees up to 45 percent of their typical bills. If that still isn’t enough to cover claims, Citizens can collect the rest from all Florida taxpayers.
Shedding Citizens policies through these so-called takeout companies has been the state’s primary tool for shrinking Florida’s insurance liability. The companies are coined takeouts because they pick up policies turned over by Citizens.
The program so far has been optional: Policyholders could choose to remain with the state-backed insurer.
That will change in January, when many of Citizens’ current customers will have no choice but to insure their properties with a private carrier.
Next year, all renewing policyholders and new customers seeking coverage with Citizens will be first sent through the newly created Consumer Choice Clearinghouse electronic bidding system. If a private company submits a quote within 15 percent of Citizens’ quote for a policy, “the agent and the insured gets a letter [saying] that they are no longer eligible for Citizens,” said Citizens CEO Barry Gilway.
Like the takeout program, the clearinghouse is meant to place Floridians with private insurers.
Many consumers, who are required by mortgage lenders to carry property insurance, have opted to stay with Citizens because they have doubts about the new companies they know little about.
Untested companies
The bottom line for a Florida homeowner is simple: If a storm hits the area and damages my property, will my insurance company have enough cash to pay my claims?
McCarty, the insurance commissioner, said his office does its best to vet companies and weed out those that appear to have a shaky future. But none of these firms have faced a major storm or been rated by the national agencies that examine more established companies.
Elements Property Insurance Co. is one recent example. On Sept. 27, the Tallahassee-based company received a state license to do business in Florida. On the same day, it received state insurance regulators’ approval to take on 45,000 Citizens policies. The swift consent came even before Elements received approval to sell the catastrophic coverage required by Fannie Mae and Freddie Mac, the nation’s federally backed mortgage lenders.
It’s hard to know exactly what carried the day for Elements – or any other takeout company, for that matter – because the process for vetting the companies is done confidentially. Though regulators consider a company’s projections for how it would withstand storms of differing severity, nothing tests an insurer like an actual hurricane.
“The best gauge of how much damage (an insurer can handle) is after a storm hits. Not before. After,” said State Rep. Frank Artiles, R-Miami.
Companies collapse
Even without the pressure of a major storm, six companies endorsed by the state to replace Citizens subsequently went out of business.
Atlantic Preferred Insurance Co. went insolvent in 2006, American Keystone Insurance Co. in 2009, followed by Magnolia Insurance Co. and Northern Capital Insurance Co. in 2010. In 2011, Homewise Preferred Insurance Co. and Homewise Insurance Co. also failed.
The cost of those failures – $400 million in outstanding claims – was recovered through assessments on the remaining solvent companies selling property insurance, many of whom passed the expense on to consumers.
The state is trying to recoup some of that money by suing Allianz, the $6 billion parent company of Magnolia. According to documents filed in the Second Judicial Circuit Court in Leon County, the state accused Allianz of draining Magnolia’s assets, putting the company’s customers and ultimately the state of Florida at risk. Allianz lost its bid to have the case dismissed, and the company declined to comment on ongoing litigation.
The Florida Insurance Guaranty Association handles the settlement of outstanding claims when an insurance company fails. If the company can’t pay, the state agency assesses all property insurance companies with a fee, which is then often passed on to policyholders insured by other companies in the form of a higher bill.
In response to the failure of the six insurance companies even without a hurricane, McCarty said his agency has done its part, but insurance companies are “in the business of assuming risk” and some simply won’t succeed.
Where’s the watchdog?
The state’s Office of Insurance Regulation regulates insurance companies, approves licenses for carriers to sell insurance in the state and approves their participation in Citizens’ takeouts. These takeout companies were vetted by the agency and approved by the Citizens board of directors.
Florida’s authority over insurers doesn’t stop once regulators have licensed a company to do business here. The state is empowered to take a close look at insurance company performance at any time – but regulators have yet to disclose doing so with more than two-thirds of the companies they approved to take on Citizens customers in the past decade.
The state Office of Insurance Regulation said it does not reveal when or if it is conducting a review. The only information that is released is a final report.
These “market conduct examinations” are regulators’ most thorough way of investigating if a company is abiding by the law and treating Florida homeowners properly. State law used to require periodic exams but now allows insurance regulators to do the reviews whenever they want.
Artiles, the legislator from Miami, said he has been asking the state for the past year to conduct such a review of Tower Hill, a prominent insurer in the state that has taken out policies in the past and won regulators’ approval to take out 82,948 Citizens policies in November.
“I have not received one iota of information. Not one response,” Artiles said.
Eight of the 29 companies that have taken over Citizens’ business in the past 10 years have faced that type of investigation. The state accused two of them – Florida Peninsula Insurance Co. and United Property and Casualty Insurance Co. – of violating state insurance regulations. They were cited, but not fined.
In Florida Peninsula’s case, the state found 36 violations of state insurance code, including failing to give a reason for canceling a policy, enacting bad underwriting practices and failing to respond to complaints.
Regulators found 26 violations of state statute at United Property and Casualty, which included not following procedures to return unearned premiums, failing to maintain records and not properly handling complaints.
Despite the troubles, the two companies won state regulators’ approval to take a total of more than 174,000 former Citizens policies so far in 2013.
Florida law permits companies to make a certain number of errors.
“It is a rarity when violations are not found in a market conduct examination,” Florida Office of Insurance Regulation spokeswoman Amy Bogner said. “… The issue raised in the examinations [of Florida Peninsula and United Property and Casualty] did not rise to a level of concern that would stop a takeout of policies from Citizens.”
Rising rates
During the past few years, the state has shuttled more than 473,000 homes from Citizens to private insurers. This month, up to 200,000 Citizens customers will get letters from insurance companies asking for their business.
The state’s pitch to consumers highlights the fact that exiting Citizens means leaving behind the threat of a 45 percent “hurricane tax” if Citizens can’t pay its claims.
Jay Pellis was rattled when he got his takeout letter in March. “The way it was marketed, you’d think a used-car salesman was selling something,” he said.
The Coral Springs homeowner was among the 60,000 Citizens policyholders earmarked to go to Heritage Property & Casualty Insurance Co., a St. Petersburg firm that’s only a year old. In the end, he decided to give Heritage a try.
The state hasn’t required most companies receiving Citizens’ policies to commit to the 10 percent rate cap, so they will be free to request rate increases of their choosing at renewal time. The Office of Insurance Regulation reviews and decides if rate increases are justified. It rarely denies the increases but sometimes approves less than the companies request.
Only Heritage Property and Weston Insurance Company have written in their takeout agreements with the state that they will hold renewals within the 10 percent state-mandated rate cap.
Bruce Lucas, Heritage’s chairman, said his company is run by experienced managers who are confident enough to tell policyholders upfront what premium increases they’ll face upon renewal after leaving Citizens.
“We are the first company in Florida ever to voluntarily calculate what your rate would be with Citizens and with Heritage,” he said. Consumers don’t want surprises, he added, so “if the answer is ‘No, I can’t tell you the price,’ they’re going to say, ‘No, I’m going to stay with Citizens.’”
But beginning Jan. 1, all of Citizens’ new and renewal business will be run through the clearinghouse without exception. Consumers no longer will have the option of staying in Citizens if a private insurer offers a rate within 15 percent of the state insurer’s rate.
The program is also expected to curtail one of the biggest problems the state has faced in shrinking Citizens – the thousands of policies funneled into Citizens weekly by agents who work exclusively for such big-name firms as State Farm, USAA and other national carriers no longer writing new homeowner policies in Florida.
“Every single time they try to put a policy into Citizens, they’re going to be stopped,” CEO Gilway said.
The irony in Florida’s beleaguered insurance market is that the company many consumers love to hate – Citizens – is the company many prefer to trust with paying a claim.
The last thing Denise “Dee Dee” Owens, of Pembroke Pines, wants to worry about is whether she can get a check to rebuild after a storm. Owens fought a nine-month battle to recover discounts that Citizens revoked after reinspecting her property. And though she eventually was reimbursed, Owens said she had to do a loan modification to afford the most recent rate increases in her Citizens policy.
Yet, despite “all of the bull I went through,” Owens has rejected offers to shift her policy to Universal Property and Casualty.
Citizens, for all its problems, is at least a familiar entity. “Nobody pays like Citizens does. I will say that in their favor,” Owens said. “Nobody pays like Citizens pays.”
Copyright © 2013 the Sun Sentinel (Fort Lauderdale, Fla.), Kathleen Haughney and Maria Mallory White. Distributed by MCT Information Services.