Florida Citizens Rate Increases

Rate adequacy and the rising loss costs from water damage claims and Assignment of Benefits abuses are in conflict, as is shown by the rate analysis and rate change recommendation by the Florida Citizens Board of Governors.

Florida Citizens Property Insurance Co
Florida Citizens Property Insurance Co

The Board of Governors of Florida Citizens met on June 22, 2016 for the purpose of setting rates for 2017. As you know, the property insurance market in Florida has been in crisis mode lately, largely due to a substantial rise in water damage claims and abuses of the Assignment of Benefits (AOB) provisions in Property policies. I wrote about this problem back in May.

Florida Citizens Board Approves 6.8% Rate Increase

The Board unanimously approved the rate increase of 6.8%, for all personal lines policies. The rate increase for commercial lines policies is going to be 9.0%. This rate increase will be filed with the Office of Insurance Regulation and take effect February 1, 2017.

Scope of Rate Analysis

The Board of Florida Citizens must comply with the scope of analysis according to Florida statutes. The statutes require that all rate changes follow these criteria:

  • Comply with the requirement in Florida law that Citizens recommend actuarially sound rates
  • The recommended rates are not excessive, inadequate or unfairly discriminatory, and meet the requirements of U.S. Actuarial Standards of Practice except where Florida law supersedes such standards
  • Comply with the statutory “glide path”
  • Considers the Florida Public Hurricane Model, as required by law
  • Include an appropriate charge to pass through the Florida Hurricane Catastrophe Fund Rapid Cash build-up

What is the Florida Citizens Glide Path?

If one looks back at the history of ratemaking for Florida Citizens, you will see the process has changed over the years. Between 2004 (the last year of major hurricane activity in the State) and 2006, rates increased dramatically. In response to voters’ outcry, the Florida Legislature froze Citizens rates at 2006 levels, starting in 2006.

Florida Citizens Rate Glide Path
Florida Citizens Rate Glide Path

The “Glide Path” started in 2010. This statute mandates that rates could not increase by more than 10% per year for any one individual policyholder. This is not an average, but applies at the policy-level analysis.

This Glide Path has created a two-part rate standard for Citizens:

  1. Actuarial Soundness: Calculate the indicated rate using actuarial standards on the same basis as a private insurance company.
  2. 10% Statutory Limit: Regardless of the amount of indicated rate increase under (1), the rate increase must comply with the limitation that no individual policyholder can be required to pay a rate increase of no more than 10%.

This cap on its face may seem equitable, it has the unintended consequence of suppressing rates in high hazard locations. Over time it can create a substantial build-up of rate inadequacy during times of rapid increases in loss costs.

The Looming Problem of AOB

As I had written in my post on AOB back in May, the indicated actuarial analysis of loss costs would indicate a required rate increase of something in the range of +60%. The analysis of recommended rate increases by the Florida Citizens actuaries concluded that a rate change of 64.7% is needed for residential policies, and 46.8% for commercial policies. If nothing is done about the problem of non-storm water damage claims and Assignment of Benefits abuses, it won’t be many more years before Citizens rates are woefully inadequate.

In the 2017 Recommended Rate Filing Executive Summary, the Actuarial and Underwriting Committee reported that the pressure on rates from water damage claims is mounting. In 2013, the average annual cost of water damage per policy was $551, and in 2015 it was $1,156. Furthermore, this was just the state average. In the tri-county region the loss cost was even higher. They concluded that the water-only rate increase indication is now 300%. This is the driver behind the substantial overall indicated rate increases.

The Florida Legislature Needs to Take Action

Consequently, the pressure on rate adequacy and the “glide path” means that the Legislature is going to have to take steps to curb abuses from AOB. Otherwise, the financial soundness of Florida Citizens will be in peril.

What do you think? How long can the situation stand before either Florida Citizens is put in financial jeopardy or the Florida Legislation takes action to correct the situation?

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