Discourse.net: Citizens Insurance May Be Bad, But Consider the Alternatives

September 21, 2009

Citizens Insurance May Be Bad, But Consider the Alternatives

Beatrice Garcia has an article in today’s Miami Herald about Citizens Insurance company, the state-sponsored home insurer of last resort for those of us in the hurricane belt. See Is Citizens Insurance ready for the big one?

Citizens is known for its high rates, DMV-quality service, and for being under-capitalized. It is not much fun to deal with, but then neither is my bank. (Which, come to think of it, is also state-capitalized these days.)

The article does a good job of noting some of the issues with Citizens:

Citizens is the largest insurer in Florida, covering 1,057,829 homes, condos and apartment buildings. The biggest chunk of its policies — $232.1 billion worth — are written on riskier, coastal properties.

…

Insurance regulators, legislators and critics of Citizens say the company's frozen rates aren't actuarially sound. In laymen's terms, that means the insurer is not bringing in enough money through premiums to cover the bulk of the potential losses it could face after a huge storm.

To get Citizens' rates back on course, a law passed in May requires the insurer to raise rates 10 percent a year over the next five years. The smaller annual increases soften the rate shock for homeowners. But eventually, rates could end up about 60 percent higher.

…

But Citizens isn't totally in dire straits. The insurer should have nearly $3.9 billion in cash in the bank by the end of the year, says Binnun.

Add in a guarantee from the State of Florida to buy $750 million of Citizens bonds, a bank credit line and proceeds from municipal bonds it has already sold and the total of available funds comes to $6.9 billion.

…

Citizens also buys back-up insurance from the Florida Hurricane Catastrophe Fund to cover some of the losses it might face. This year, it purchased nearly $9.8 billion in coverage.

All that gives Citizens the ability to cover up to $16.8 billion in claims.

But even with all the funds it could tap, Citizens could fall short if “the big one'' — that one-in-100-years storm — hits the state. Such a storm could rack up claims totaling about $22 billion, Binnun says.

In other words, Citizens need to save up another $3.2 billion — about double what it will have in the bank by the end of the year –- in order to be actuarially sound. That’s a lot of money, but if it could save that amount since its founding in 2002, it should be able to pile it up in a few more years. Unfortunately, it's going to do that by raising our already quite substantial insurance rates some 10% per year until the money pile is big enough.

The Herald article more or less assumes that private insurance would be better, although it notes that some private policies have coverage limitations.

As it happens, I have a Citizens policy. Over the last three years I’ve had two letters from private insurance companies announcing they were taking over my policy unless I opted out (this was a state plan to encourage people to leave Citizens). One look at the capitalization of those companies and I opted out. In addition, my insurance agent has sent me proposals from three or four private companies, all but one of them started recently under the new Florida law encouraging companies to enter the market. None has a track record. None has much capital either. They are not rated by any of the major rating agencies (except one, that had a not-so-great grade of BBB-). They have their own ratings bureau, one which says they are just fine thank you, but it's not one I feel any reason to believe.

Unfortunately, in this era of light regulation private insurance is not inevitably better than public; indeed, I think some of these new tiny companies may be worse. This is, in fact, the ironic implication of a new analysis of the state home insurance market from the Competitive Enterprise Institute which shows how poorly capitalized the new private insurers really are. (CEI is not a source I’d rely on uncritically, but it confirms what I’ve worked out myself from looking up reports on the new Florida-only insurance companies. For more see Florida insurance numbers deceive and Consumers cry foul over Citizens' shift to low-rated firms.)

From the point of view of the homeowner, private insurers also have a degree of political risk that Citizens lacks: If they go belly up, the state has no moral obligation to bail them out — on the other hand, we have good reason to believe that at the end of the day the state (or the taxpayers) will stand behind Citizens.

I turned down my insurance agent’s suggestion that I go private, even though the proposed rates were a few dollars lower than what Citizens charged. My agent was all for it, claiming the service would be better (no word on the relative commissions!). The risk seemed too great.

Posted by Michael : September 21, 2009 09:45 AM | Economics & Money , Florida | TechnoLinks

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Comments

The insurance companies will scam anybody, if given a chance. If they will boldy lie to a law professor, then think of the stories they tell to homeowners with high school diplomas.

Posted by: Joe1 at September 21, 2009 11:16 AM

"From the point of view of the homeowner, private insurers also have a degree of political risk that Citizens lacks: If they go belly up, the state has no moral obligation to bail them out — on the other hand, we have good reason to believe that at the end of the day the state (or the taxpayers) will stand behind Citizens.

Explain how you calculate the risk to your property.

Posted by: King of Cats at September 22, 2009 09:24 AM

The risk to my property is unaffected by my choice of insurance company.

The risk I was weighing was the danger that the insurer might not be able to pay in the event of a state-wide catastrophe.

Both Citizens and the new insurance companies are seriously under-capitalized. Neither is geographically diversified. The differences are

1. Citizens is big; they are small. There will be greater political pressure to make good its promises. ("Too big to fail," anyone?)

2. Citizens is public; they are private. The pressure will be harder to ignore for a state-run nonprofit body than for small, private profit-making firms.

3. CItizens likely will eventually be properly capitalized; I have no such confidence for these under-the-radar firms whose regulators don't seem to require they have sufficient funds.

4. Even though Citizens is currently undercapitalized, it does have quite a lot of cash, and some reinsurance too. So it can ride out a disaster that is less than enormous. It's not obvious to me the small firms can do even that.

Posted by: michael at September 22, 2009 09:50 AM

I had some water damage on my moble home in Micco, Florida, which is in Barvard County. I have at least @15,000 in damages which was caused when Hirrican Fay dumped over 16 inch of rain in 3 days. In my policy, I have a $1,000 deductable. I had roof damage, carport damage, water leakage, which damaged wall panales etc. I received a check for only $1,040.00. I am still trying to money form the insurance Company. What will happen when a good size harrican comes in with damaging winds, and destroyes my moble home to the extent, where it needs to be rebuilt. Maybe, the insurance Company will pay me another $1,000 dollars! Who are they kidding! They do not want to pay out for losses. Where do people go to; if insurance companies refuse to pay for losses due to Hirrican losses?

Posted by: Keith Byrnes at October 17, 2009 03:20 PM

Was that Citizens? Or one of those tiny companies?

Posted by: michael at October 17, 2009 04:48 PM

I am a Licensed Agent in the state of Florida and work for the largest broker in the state. Our main business is Home Insurance. Before I became an Agent I worked for 10 years on the construction side as a subcontractor for a national insurance restoration company (Repairing Homes Due to Claims).I can tell you that they are the worst company to work with. I can go on and on about how they do business when it comes time to paying claims. I don't want you to take my word for it. All you have to do is just call any large restoration company that does residential and ask them which companies take care of there customers and which ones don’t.

There are two rating systems when it comes to insurance. AM Best and Demo Tec.
AM Best are the Big Companies like Nationwide, Liberty, Florida Family, ASI, Bankers, Pure, Chubb, Allstate, State Farm, Etc, Etc, Etc,. Demo Tec Companies are St Johns, Universal, United, Tower Hill, Sunshine State, Etc, Etc, Etc,. Here is a long but, good article about the difference. http://www.insurancejournal.com/magazines/southcentral/2003/05/19/coverstory/29677.htm

All state admitted carriers are reinsured by AM Best companies. Like Lloyds of London who has been in business for over 300 years and is one of the largest insurance companies in the world. Lloyds is a good example because they have global exposure which means that if Florida has 10 hurricanes back to back the rest of the world is still paying their bills. http://www.reinsurance.org/i4a/pages/index.cfm?pageid=3616

Ok so let’s say that you have Tower Hill as your insurance Company (who has been in business for over 30 years) and they go out of business. They have Reinsurance with Lloyds to back them up.

Let’s say that Lloyds goes out of business due to their exposure in Florida after being in business for over 300 years and being one of the largest insurance companies in the world. (LOL)

This is the Best Part; Because Tower Hill is a "State Admitted Carrier" they are backed by the Florida Insurance Guaranty Association for 300k per home. http://www.figafacts.com/faq.asp

Now it gets interesting,

What is Citizens Rating? Who are there reinsures? Are they state Admitted?

Guess what? If Citizens was a private company they would not be aloud to write insurance in the state of Florida due to their financial stability alone. 15bilion in cash, 500 billion in exposure, = big problem.

Citizens was developed to be a last resort for people that could not find insurance with any one else, and that’s it. It’s like buying a Kia and expecting it to perform like a Maserati. There is a time and a place for every thing. We write business with Citizens when needed and they are good for that market but, if there is a better option we will recommend the better option.

About the commission comment. Citizens commissions schedule is the same as every one else. Some times even more depending on the area. Another bonus to push Citizens would be; knowing that Citizens was just approved for the rate increase for all policies of 10% which would mean that I would get a 10% raise on my commission next year. So if your agent was recommending some one else that was less expensive he was taking a loss on your behalf. If you are questioning your agents ethics than get another agent. Our company has a lot of good relation ships with captive companies like State Farm that can no longer write home insurance and do not recommend Citizens as a good option. To me that’s keeping the customers best interest in mind.

Posted by: Reid Holzworth at October 29, 2009 12:53 PM