Brief History Of Florida Citizens Property Insurance Corporation
Citizens Property Insurance Corporation came into existence in 2002 in Florida. It is a not-for-profit insurance provider and one of the largest in the state.
Several insurers also use the word “citizens” in their official business names such as Citizens Insurance Company of America (a subsidiary of The Hanover Insurance Group) and Louisiana Citizens Property Insurance Corporations. Every company above does not have the affiliation of any sort with each other. The former is a for-profit insurer in Midwest, while the latter is the equivalent entity in Louisiana. The main idea behind the foundation of the corporation is to provide general property insurance and windstorm coverage for homeowners who cannot get the same policies from private companies in the market.
Why It is Necessary
As of 1992, Hurricane Andrew was the most destructive storm to hit United States costing more than $45.5 billion in damage. There were about 30 insurance companies in Florida that took the critical financial loss for claims. Eleven of them went bankrupt, while others stopped underwriting or renewing new insurance policies in the state. The remaining companies were still in business, but they raised the premium rate and deductibles to compensate for expenses. Prices of property insurance were not very reasonable for consumers. About a million homeowners in Florida were unable to find any company willing to insure their properties.
After Hurricane Andrew
Between 1992 and 2003, damages from hurricanes were quite manageable. In fact, Florida did not see any major windstorm during that period except in 1998 (Hurricane Earl and Hurricane Georges). Accommodate the needs for insurance, state’s government, merged FRPCJUA (Florida Residential Property and Casualty Joint Underwriting Association) with FWUA (Florida Windstorm Underwriting Association) to form Citizens Property Insurance Corporation in 2002. The state also created the Florida Hurricane Catastrophe Fund as a resource for insurers and consumers.
In 2004, Florida saw two major storms with a total damage of more than $57 billion. Five major storms made landfall again in the following year including Katrina, the most expensive and destructive Atlantic hurricane of all time. Just like in 1992, several companies were out of business due to expensive claims. For many residents, Citizens Insurance became not just the last resort, but the only resort available at that time. As of 2005, Florida owed about $5 billion; the recovery came from insurance policy assessments.
Private Companies Resurgence
Major insurance companies such as State Farm and Allstate pulled back in 2005. Since that time, smaller in-state companies have been taking a larger share of policies. Those startups do not implement the conventional business model by accumulating cash reserves for payout necessities. Instead, they use reinsurance model in which they pay a percentage of total policy values to offshore companies. There is a distribution of risks, preventing them from paying more than they can handle to cover high expense claims.
Thanks to reinsurance models, small companies are making good profits. They determine the premium rate for profitability to keep the business going, rather than for the purpose of building a cash reserve. Florida Office of Insurance Regulation (OIR) suggests that insurance companies do both cash reserve and reinsurance to prepare for the once-in-a-century major storm. In case claims exceed reserve and reinsurance, the government takes over the policies and pay off the remaining amount to policyholders.
Another important turning point of Florida property insurance market is that Citizens charges its customers the highest rate possible in accordance to OIR. The purpose is to avoid competition with other for-profit private companies. Such regulation keeps the market in good shape, and residents always have reliable insurers if needs be. Through 2006, Citizens could not allow insurance agents to underwrite policies through not-for-profit insurers when there was a private company that offered more affordable rate or one willingly to write the risk. A private corporation or a group of companies could take over policies from Citizens as well. As long as they met the requirements by the government, Citizens would transfer the risk and cancel its coverage.
In June 2007, Governor Crist signed a legislation which permitted insurance agents to underwrite policies though Citizens, but with more strict conditions:
1. When a private carrier has 15% more expensive rate for the same (or at least comparable) policy, insurance agents are eligible to underwrite it through Citizens.
Major Companies Made Returns
In 2010, major companies began to enter Florida property insurance market. With big names in the market, reinsurance cost became more competitive that it fell by about 10% in the year. However, the cost of insurance remained the same for customers.
The 2007 legislation concerning property insurance focuses on risk transfer or depopulation. There are three important points to understand about depopulation as follows:
1. Florida requires Citizens Property Insurance to create programs that lead policyholders to return to the private insurance market. The purpose is to reduce the risk of assessments for all residents. Any program carrying out this objective is subject to approval by Office of Insurance Regulation.
2. Participating private insurers must undergo an approval process by OIR as well. Qualifications include financial conditions of the companies. If a company meets the requirement, Citizens insurance allows the insurer to take over policies at any time, as long as the policy is in the active period.
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Before the legislation, policyholders had no choice to decline the take-over program. Depopulation allows policyholders to opt-out by returning the form within 30 days.