The problem is, there are too many citizens in Citizens.
Citizens Property Insurance Corporation, the state’s “insurer of last resort,” has grown to be the third largest writer of property insurance in the country.
The situation has grown so dire, the risk of a hurricane wiping out the company’s finances and sticking all Floridians with the tab so great, that the company’s CEO is suggesting it might be time to shoo hundreds of thousands of Citizens customers back to the private sector.
Doing so will almost certainly mean an increase in rates for those customers, since artificially low rates are part of what drew them to Citizens in the first place.
Jim Malone, appointed to head Citizens by then Chief Financial Officer Alex Sink in 2008, realizes the idea won’t be popular in many quarters.
“There will be a lot of people who have a lot of reasons who don’t think this is a good idea,” he said.
Thanks to five straight years of no major hurricanes, Citizens has $16 billion in reserves. But with potential exposure statewide at $500 billion, something has to be done, Malone said. “There’s no painless way to solve this,” he said.
Citizens was founded in 2002 as private insurers pulled out of the state because of the high risk associated with insuring homes in Florida.
Talk of privatizing what was born from a lack of interest in the private sector seems counterintuitive, but Malone and State Sen. Garrett Richter of Naples, who sponsored an insurance reform bill in the last session of the Legislature, say now may be the time.
Citizens has grown to 1.4 million customers. Of those, Malone estimates as many as 600,000 might be able to find insurance through a private carrier.
Richter says Florida erred in 2007 when the Legislature, at the urging of then Gov. Charlie Crist, made it more difficult for property insurance companies to raise rates. “In my opinion, that was all politics. It was bad policy,” Richter said.
The state recently gave the go-ahead for private insurers in the state to raise prices. That may give companies an incentive to reconsider writing policies in Florida, taking some of the load off Citizens, albeit at rates higher than what Citizens policyholders have been used to paying.
Insurance is about assessing risk and setting costs accordingly. Citizens has been undercharging, given the hurricane risk in Florida and the fact that all of its customers are within the state, meaning risk can’t be spread to areas not prone to hurricanes.
“Our rates have been artificially and, I’m not afraid to say, irresponsibly held below market,” Malone said. “I’m scared to death we’re going to have a big event or a series of medium events that become a real nightmare,” Malone said of the impending risk.
If Citizens exhausts all of its reserves paying claims after a hurricane, its customers would be hit with a 15 percent surcharge. If that isn’t enough to cover the damages, all property insurance holders in the state would be assessed a surcharge of up to 16 percent that could continue for years after the storm.
Citizens insures residential properties up to $2 million.
But Malone said the image of a millionaire living on the beach getting an artificially low rate for insurance isn’t necessarily an accurate depiction of a Citizens customer. More often, properties uninsurable by the private sector are mobile homes and older homes that aren’t sturdily built.
Because there are so many of those homes in the state, Malone believes Citizens will stay in business, even after privatization.
“When Alex Sink asked me (to serve as CEO of Citizens) my bias going in was, ‘Why in the world does the state need to be involved in this at all?”’ Malone said. “I’ve changed. In Florida in particular, there needs to be an insurer of last resort.”
He and the Citizens staff will spend the next few weeks developing strategies to reduce Citizens’ role in the state’s insurance market, he said.
Richter credits Malone for bringing the idea to the table but said it may not get the full attention of the Legislature for more than a year. When the Legislature meets in January in a session moved up two months from its usual March start, most of the focus will be on the topic of drawing new legislative and Congressional district boundaries. “The number of major policy issues may be limited,” he said.
Then it becomes late 2012 before reforming Citizens comes to the forefront. “Rare is the politician who will do something that will make as much noise as this in an election year,” Malone observed.
But every hurricane season is another roll of the dice for the insurer of last resort.
“If a Category 3 (hurricane) hits Apalachicola, no problem,” Malone said. “If a Category 3 hits South Beach, big problem.”
Connect with Brent Batten at naplesnews.com/staff/brent_batten