A Capital Crisis: The 2006 Florida Property Insurance Market John W. Rollins, FCAS, MAAA Citizens Property Insurance Corporation Presented at Casualty Actuaries of the Southeast Boca Raton, FLApril 11, 2006

April 11, 2006John W. Rollins, FCAS, MAAA2 Overview  Citizens 101  Recap and Market Effects  2006 Legislation  How to Fix the Market

April 11, 2006John W. Rollins, FCAS, MAAA3 Citizens 101: Who are We?  Citizens is the only property insurer of last resort chartered by the state of Florida FRPCJUA – statewide all-peril insurer created after Andrew 1992 FWUA – coastal wind-only insurer created in early 1970’s by insurance industry 2002 statute merged the two into Citizens  Citizens is a “real” insurance company but operates under special statutes and supervision Board of Governors (8) appointed by Florida CFO (2), Governor (2), House Speaker (2) and Senate President (2) Several Citizens-specific laws since 2002 govern operations Board proposes and Office of Insurance Regulation (OIR) approves a Plan of Operation, Board makes most major decisions Citizens is subject to all other insurance laws and regulations

April 11, 2006John W. Rollins, FCAS, MAAA4 What do We Insure?  Three “accounts” maintained almost like separate companies: Personal Lines Account (PLA)  Personal residential policies from FRPCJUA  Homeowners, Renters, condo Unit-Owners forms  All-perils, statewide eligibility Commercial Lines Account (CLA)  “Commercial-residential” policies from JUA  Apartment building and condo Associations  All-perils, statewide eligibility High-Risk Account (HRA)  Wind-only policies in defined eligible (coastal) areas from FWUA  Personal lines, commercial-residential and some “true commercial” risks

April 11, 2006John W. Rollins, FCAS, MAAA5 What do We Insure? Personal Commercial- Residential True Commercial InlandPLACLAn/a Coastal PLA (all perils) HRA (wind only) CLA (all perils) HRA (wind only) HRA

April 11, 2006John W. Rollins, FCAS, MAAA6 HRA Eligible Areas

April 11, 2006John W. Rollins, FCAS, MAAA7 How are we Structured? – Points of View  Actuarial/Products Rates and Rules – PLA, CLA, HRA-PL, HRA-CR, HRA- TC all separate lines (to us and OIR) PLA, CLA, HRA-CR subject to standard rate regulation  Financing Assessments and Debt – PLA, CLA, HRA Florida Hurricane Cat Fund (FHCF) – PLA+CLA, HRA Reinsurance – PLA, CLA+HRA  Operations Systems – PLA, CLA, HRA separate Policy Admin – PLA, CLA separate from HRA Claims – “Daily” (non-cat) and “Cat” separate  Public/Media Alphabet soup – all the rates are too high!

April 11, 2006John W. Rollins, FCAS, MAAA8 Actuarial - Rates and Rules  All rates by statutes must be “Actuarially sound” “Noncompetitive” with private market  Easier said than done When 80% or more of your fair premium is for infrequent, severe cat events, what is the “right” rate (including cost of capital)? With the diverse rate structures, underwriting and coverage in the private market, define “noncompetitive”?  Personal lines easier than commercial – standardized products, lots of competitors, good rate information Statutes also more specific about how to test rates

April 11, 2006John W. Rollins, FCAS, MAAA9 How are we Financed? - Needs  By statute and Plan, Citizens must finance 100-year event PML, which varies with Exposure – market share and risk attributes  Which depends on private market health and private reinsurance prices/availability Modeled hurricane losses FHCF coverage – set by statutes

April 11, 2006John W. Rollins, FCAS, MAAA10 Financing – Current Structure (1)  Current financing comprises Surplus (cash on hand) – zero right now Assessments  “Regular” – up to 10% of property written premium from private insurers (due 30 days)  “Emergency” – sell bonds for an additional amount, serviced by annual assessment to all property insureds (including Citizens’) for up to 30 years

April 11, 2006John W. Rollins, FCAS, MAAA11 Financing – Current Structure (2) FHCF  Coverage (and premium, at actuarially sound rate) proportional to exposure, one season aggregate amount, fairly high retention  Much cheaper than private reinsurance because FHCF’s capital also provided by its (separate) assessment authority on all P&C policies (except Work Comp and Med Mal) Private reinsurance – “wraparound” FHCF cover the only current treaty Debt (Pre-Event Notes)  Fairly standard bonds with slight variations  Outstanding notes due in 2007 for PLA, for HRA

April 11, 2006John W. Rollins, FCAS, MAAA Recap and Market Effects  2004 – Four hurricanes affected every area of Florida Millions of claims and logistical nightmare Costs borne by primary insurers and consumers  Multiple deductibles and retentions  No one storm was a mega-event Reinsurers and FHCF relatively unscathed  2005 – Four hurricanes affected Florida and Katrina blasted global reinsurers Wilma by far the most costly to Florida, driven by demand surge in area Wilma struck “Citizens alley” in PB/Broward/Dade  2006 Results Massive Citizens (and smaller FHCF) deficits Modelers woke up and adjusted short-term outlook Global market saying “no mas” to Florida

April 11, 2006John W. Rollins, FCAS, MAAA – Where does Citizens stand?  $12 Billion projected PML during 2006 season Financing only up to roughly $9.5B in place now  $1.7 Billion deficit from 2005 “Deficit year” 2005 includes adverse runoff from 2004 Most of 2005 deficit in HRA (Wilma)  FHCF also broke (but less broke - $1.5 Billion)  Rapidly growing exposure in all accounts Reinsurance capital disappearing for Florida-only “takeout” companies totally dependent on rental $$$ The few commercial-residential specialists also exiting due to lack of reinsurance

April 11, 2006John W. Rollins, FCAS, MAAA Legislation  “Reform” of property insurance inevitable House and Senate both moving 100+ page bills (see next)  Much discussion about using general revenue to pay off Citizens and possibly FHCF deficits New revenue estimates arrive April 20 showing size of state budget surplus  Resumption of 2005 discussion about lowering FHCF retention and providing more coverage in working layers

April 11, 2006John W. Rollins, FCAS, MAAA15 House Insurance Package Highlights  Creates a new Citizens account for non-homestead property with higher capital adequacy standards in rates Homestead rate standard reduced to 50-year PML Nonhomestead rate standard increased to 250-year Deficits in nonhomestead assessed to only nonhomestead insureds – homestead still paid by everyone  Limits home values eligible for Citizens to < $1 million  Allows “flex rating” (small rate adjustments bypass OIR approval)  Removes “Panhandle exemption” from statewide Florida Building Code  Requires private insurers to adjust claims for Citizens wind-only policies  Requires Citizens Board and employees to adhere to State Code of Ethics

April 11, 2006John W. Rollins, FCAS, MAAA16 Senate Insurance Package Highlights  Allows cost of (internal) capital to be included in rates Only actual reinsurance costs allowed before  Imposes 25% premium surcharge on vacation homes owned by nonresidents of Florida  Tougher standards for depopulation by takeouts Must retain policy for 5 years (up from 3)  Limits home values eligible for Citizens Started at $1M – now backing off  Moves certain OIR oversight of Citizens to Florida Cabinet  Makes Citizens more political and “ethical” Director to be confirmed by Senate Many other strict audit/conflict provisions  Toughens standards for valid sinkhole claims

April 11, 2006John W. Rollins, FCAS, MAAA17 How to Fix the (Citizens) Market  Make getting into Citizens a hassle Require declinations from both admitted and surplus lines insurers Quit automatically renewing HRA policies – reunderwrite annually Require extensive and quality risk data on applications  Make getting into Citizens expensive Achieve actuarially sound rates in all accounts Monitor market concentration in all accounts and allow “presumed” rate changes in uncompetitive places based on market share A-rate large risks based on market prices

April 11, 2006John W. Rollins, FCAS, MAAA18 This is Just Too Easy If you were an agent, and Citizens was not only cheaper, but required only a one-page document to allow entry, what would you do?

April 11, 2006John W. Rollins, FCAS, MAAA19 Market Concentration Analysis Many of the tools needed for better public policy are already available, such as this quarterly analysis from OIR.

April 11, 2006John W. Rollins, FCAS, MAAA20 How to Fix the (Voluntary) Market Stop letting Citizens compete for business (above) Streamline rate/rule regulation  Flex rating is a good start, with appropriate transition plans (phase-ins)  Restrict OIR use of “unwritten rules” to delay or disapprove Allow cost of internal capital to be included in rates Allow any cat model approved by Florida Commission on Hurricane Loss Projection Methodology to be used freely Streamline post-disaster regulatory environment  Standardize emergency orders/requirements  Reduce “exit barriers” to nonrenewals Supersize FHCF  It has superpowers nobody else has (all-lines assessment authority) Long-term: turnover housing stock and mitigate what’s left, and educate the public

Speaker Contact Information John W. Rollins, FCAS, MAAA Actuary Citizens Property Insurance Corporation 101 North Monroe Street, Suite 1000 Tallahassee, FL (850)