Even if you aren’t a customer of Citizens Property Insurance Corporation, if you live in Florida,  you’re still a 'citizen' of the state-owned insurance company. To repay the enormous  outlays for damage claims from past hurricanes, Citizens taps your pocketbook  through assessments on most types of insurance you purchase, regardless of the  source—but today’s assessments are small change compared to what’s possible if a catastrophic storm strikes Florida’s heavily-developed coastal cities and resort communities dead-on.  

 A Short History of Citizens

 Florida entered the insurance business in 1970 by establishing the 'wind pool'  (more formally known as the Florida Windstorm Underwriting Association) to  write wind-only coverage in the Florida Keys. Over time, the wind pool grew to  encompass parts of 29 coastal counties where private insurers feared to tread.  Eventually, the company began to compete statewide for both wind and  'multi-peril' homeowners insurance on individual residences, as well as condo  and homeowners associations.  

 Then came Hurricane Andrew, which struck the Homestead-Florida City area south  of Miami in 1992. A Category 5 storm, Andrew was the second costliest hurricane  in U.S. history, causing more than $26.5 billion in damages—equivalent to $43.9 billion in today’s dollars. In its wake, many private insurers abandoned the Florida market,  making homeowners coverage difficult to obtain.  

 In response, the state legislature created the Florida Residential Property and  Casualty Joint Underwriting Association (JUA) to write homeowners insurance. In  1995, the JUA absorbed a separate commercial joint underwriting association  that insured condominiums and rental apartment buildings. In 2002, the  legislature merged the wind pool and JUA, creating Citizens and transferring to  it the JUA’s ability to assess if necessary to pay claims.  

 Eight named storms struck Florida in 2004 and 2005, causing significant damage.  Citizens sustained a $1.766 billion deficit in 2005, and levied a one-time  assessment in 2006 that yielded $163 million. The 2006 legislature allocated  $715 million in general funds to reduce the deficit. In 2007, Citizens levied a  1.4 percent emergency assessment amortized over 10 years to recoup the  remaining $878 million.  

 The Problem

 Upon cursory examination, Citizens appears to offer many customers a bargain on  rates. Florida state law says a customer may reject a private company’s offer of coverage if its premium is more than 15 percent higher than Citizens’ premium—but most people don’t realize this ostensible bargain comes with a potential downside. In the wake  of a massive storm, Citizens’ policyholders will be subject to significantly higher assessments than those  with private insurance.  

 “Some people don’t have other options,” says Christine Ashburn, Citizens’ director of legislative and external affairs, “But those who do should consider taking them, even if it costs 20 percent to 25  percent more, because it reduces the amount of potential assessments. In a  worst-case scenario, we could assess Citizens’ policyholders 75 percent of premium in one year. If you’re a non-Citizens’ policyholder, the worst case would be 35 percent.”  

 Political Winds—an Awkward Paradox

 As a creature of the state, Citizens is buffeted by the shifting winds of  politics. Gov. Charles Crist, who served from 2007 to 2011, “believed Citizens should compete with the private market and rates should be  capped and rolled back,” says Sam Miller, executive vice president of the Florida Insurance Council, a  statewide trade association.  

 The 2007 legislature obliged with a 10 percent annual cap on residential premium  rate increases, and Crist vetoed a rate deregulation bill that the 2009  legislature passed. This consumer-friendly climate enabled Citizens to capture 61 percent of Florida’s residential-property insurance market.  

 Thus, Citizens today has more coastal exposure than any other company writing  property insurance in Florida, and Ashburn notes that “Florida has more coastal exposure than all other coastal states combined.” As of Friday, April 13, 2012, Citizens had 1,448,695 policies in force with a  total insured value of $505,440,873,211.  

 The rate cap created an awkward paradox. “Citizens is supposed to move toward actuarially-sound rates, but because of the  10 percent cap, they will never get there,” Miller says.  

 Crist’s successor, Gov. Rick Scott, appointed new members to the Citizens board of  directors and gave them new marching orders to shrink Citizens’ size and exposure. The 2011 legislature considered but did not pass such  measures, including an adjustment to the cap that would have increased Citizens’ rates, and a phase-out of the 15 percent offer-of-coverage rejection limit. In  2013, Miller says, Citizens’ legislation will be “a major issue.”  

 “Legislative leaders oppose some of the changes because they say it will increase  the cost of insurance for individuals, but if the rate isn’t correct now, the gap and the debts to be paid after a hurricane will just be  that much higher,” says Lynne McChristian, Florida representative for the Insurance Information  Institute (III), a nationwide trade group.  

 Self-Help Measures

 Compounding the threat is the breadth and depth of Citizens’ reach. To reduce this threat, Citizens has been shrinking itself in ways that  don’t need legislative approval by making itself less attractive: increasing  deductibles, raising rates for condominium coverage, eliminating coverage for  awnings, carports, and screened enclosures, and reducing its maximum coverage  limit from $2 million to $1 million to force higher-priced properties into the  private market. Citizens also is phasing out builders’ risk insurance that provides coverage during construction, thus removing the  state-run insurer from the business of encouraging development in areas  vulnerable to hurricanes.  

 Another of Citizens’ self-help measures involves use of a controversial software program to  establish a dwelling’s replacement cost. The Florida Association for Insurance Reform (FAIR), a  consumer group, claims the software inaccurately inflates a home’s value. “People were complaining that their premiums were skyrocketing,” says Jay Neal, FAIR’s executive director. The group has filed a class-action lawsuit challenging the  practice.  

 Citizens’ 2012 goal is to transfer at least $1 billion of risk to private companies, a  process it calls “depopulation.” Currently, Citizens encourages private companies to take policies out of its  inventory. Neal says the private companies “cherry-pick” Citizens’ best risks. He urges Citizens to create and offer for sale more balanced  underwriting “tranches,” or packages of policies.  

 In 2012, the House passed but the Senate rejected a bill that would have allowed  surplus-lines companies to participate in Citizens’ takeouts. “I and other people on the consumer side thought this was a horrendous bill,” says Sean Shaw, founder of the consumer group Policyholders of Florida. He  served as the state’s insurance consumer advocate from 2008 through 2010. “Surplus-lines companies are not regulated by the state for rates and forms. They  can charge what they want and write any kind of policy language they want.”  

 Condo & HOA Concerns

 In a condominium or homeowners association, individual owners buy personal-lines  policies covering their own premises and possessions, while the association  buys insurance covering the common areas.  

 “Premiums are going to go up,” Ashburn promises. The increases are limited by law to 10 percent a year, but a  condominium association with an insured value of $10 million or more is not  subject to the rate cap. For these, she says, a multi-peril policy will  increase 20 percent in 2012.  

 “Premium increases hit condos and HOAs the hardest,” Shaw says. “Many of their residents are on fixed incomes. With insurance costs creeping up  and eating into that fixed income, they can’t afford property insurance.”  

 As premiums rise, some association boards may be tempted to skimp on insurance  coverage and rely on their reserve funds to repair damage from a storm or other  catastrophe. That’s a bad idea, say the pros.  

 “A claim should not have a direct impact on the reserves, assuming the insurance  covers the full cost minus the deductible that is set by law,” Ashburn says. “We have seen instances where, in an attempt to reduce their insurance coverage,  some condominium associations have provided us with appraisals that are  undervalued. After the 2004 and 2005 storms, we saw one instance where one  association was grossly underinsured. It’s hugely important that condominium associations have a windstorm hazard review  every year and make sure they know what their actual structural value is so  they can be adequately insured—with Citizens or any other insurance carrier.”  

 McChristian concurs. “It’s up to an individual and the community to make sure the insurance doesn’t fall short,” she says. “It should be reviewed every single year, so the board of a condominium  association or an individual with his own policy can make sure the coverage is  appropriate. If you disagree with the insurance company’s valuation, and you have documentation that shows why, then the insurance  company takes a look at that. If an adjustment and review is necessary, it will  be done.”  

 The review also should include flood insurance, Ashburn notes. “After Hurricane Ivan in 2004, there was a huge class-action lawsuit. It  clarified that a storm surge or anything rising up from the ground is flood,  while a hole in the roof is wind. This was important because wind coverage is  for the whole house, and flood coverage from the federal government has a  $250,000 limit. For a $5 million condominium building, you need excess flood  coverage.”  

 Short-Term Rentals

 Associations with large numbers of short-term renters face an additional  headache. “If more than 25 percent of the units are rented on a short-term basis, the  building has to be written on a commercial non-residential form—as a business, not a residential structure,” Ashburn says.  

 Citizens defines short-term rental as “rented to guests more than three times in a calendar year for periods of less  than 30 days or one calendar month, whichever is less, or held out to the  public as a place regularly rented out to guests for periods of less than 30  days.”  

 That won’t affect associations limiting rentals to a minimum of three or six months, but  where the “transient occupancy exposure” is short-term by Citizens’ definition and more than 25 percent of the units fall into that category, the  cost of property insurance could double or even quadruple.  

 “Does a hurricane say, ‘Oh, there’s a renter here, I’m going to blow on it harder?” asks Neal of FAIR. Illogical as this rule may seem, it’s one more way for Citizens to pursue depopulation.  

 Solving Citizens’ Problems

 Citizens does whatever the politicians currently in power tell it to do, so  solving its many problems will be up to the politicians. “The pendulum has swung to the insurance industry,” Neal says. “FAIR’s objective is to have some permanent policies that promote a strong private  market and protect consumers.”  

 Shaw also advocates expanding the private market. “We have to balance the rights of the consumer with the ability of the private  market to charge what it needs to make a profit and continue to write  insurance,” he urges.  

 “We’ve got to manage the risk strategically,” says McChristian. “You can make money in the Florida insurance business when the wind doesn’t blow. By making changes that return Citizens to its original mission of  insurer of last resort in highly vulnerable areas, let the private market work  so more investors are willing to bring their money here.”  

 The legislature asked the Florida Catastrophic Storm Risk Management Center,  housed within the College of Business at Florida State University, to analyze  and recommend ways to correct and stabilize Florida's property-insurance  market. Center staff members Patrick F. Maroney, Lorilee A. Medders and Charles  M. Nyce wrote in the Naples Daily News on January 8, 2012:  

 “Consumers want transparency in property risk financing and to know what  subsidies will cost them when state-run funds fall short. To achieve  transparency, we recommend first addressing the appropriate mix of pre-loss  insurance premiums and post-loss assessments. Strategies to attract financial  capital to Florida's property insurance market … are also imperative for ensuring sufficient capital. Speeding the glide path  for Citizens' rates [increasing the 10 percent annual cap] is another  recommendation to protect all policyholders from assessments. Absent a faster  path to risk-based rates, it will take Citizens five more years to reach  actuarially fair rates, and we can't count on more storm-free years.”  

 One thing is certain, as the winds of change blow through the government and the  legislature, so lies the fate of Citizens Property Insurance Company and its  individual ratepayers.    

 George Leposky is a freelance writer and editor living in Miami, Florida, and is  a frequent contributor to The South Florida Cooperator.