Since the beginning of 2013, Citizens Property Insurance Corporation has been making front page news regularly. The year started out with Governor Rick Scott making good on a campaign promise to push through reforms of the insurance company to once again, “return it to its rightful place as the last-resort property insurer,” and, according to Scott, “will bring much needed reforms to protect the taxpayers who support Citizens Property Insurance.”

Shedding Policies

To accomplish this, Scott signed into law Senate Bill (SB) 1770 which establishes a clearinghouse aimed at reducing the number of policies at Citizens, which for a variety of reasons, (mainly to cap rates), has increased to make Citizens the top provider of property insurance in the state with some 1.3 million policies. The creation of this clearinghouse will allow new and renewed policies to be shopped to private insurers. If no other insurance company is willing to accept the policy and provide coverage then the policy will return to Citizens for coverage. As a result of this, a comparative rate analysis will be generated. This analysis will then be used by Citizens to set its rate structure.

Additionally, the new law will prevent Citizens from insuring homes valued at more than $1 million. As more and more properties are insured by other insurance providers, this cap will be lowered gradually until it reaches $700,000 by 2017.

Another facet of these reforms relates to coverage of property in high-risk coastal areas and new construction. As of July 2014, Citizens Property Insurance will no longer provide coverage. It will also require Citizens to follow state guidelines on contracting.

According to Scott, “This common-sense step eliminates public insurance subsidies for new coastal constructions with a high risk of storm losses.”

“SB 1770 is an important piece of legislation,” says Florida Insurance Commissioner Kevin McCarty. “It will address several property insurance issues in our state, along with establishing a clearinghouse for Citizens. The clearinghouse concept will help to give consumers more choices in their search for private homeowners insurance, while providing the benefit of reducing Citizens' overall exposure and the risk of assessments for all Floridians.”

Since his election as governor, Scott has made it one of his top priorities to enact reforms, and executives at Citizens have been preparing for these. “We’re pleased that the Governor has signed this important piece of legislation,” says president & CEO Barry Gilway. “We have already done preparatory work to meet the timelines outlined in the bill.”

Scott also called on Citizens to change its policies after a controversial deal worth up to $52 million deal for Heritage Property and Casualty Company, which is looking to take over 60,000 policies from the state-run insurer. Critics have blasted the quickly-approved deal for the nine-month-old St. Petersburg company. Scott said the Citizens' board should require at least seven days’ notice before any future board meetings, in accordance with state agency guidelines. The Heritage deal was unveiled on a Friday, and voted on the following Wednesday in a 3-2 vote. Several board members complained that there was not enough time to vet the proposal, a concern echoed by House Speaker Will Weatherford and CFO Jeff Atwater.

Citizens has stood by the Heritage deal, saying that it was thoroughly vetted for several weeks and would significantly reduce the company’s liability, which is backed by the state’s consumers.

"The financials associated with this deal are significantly in our favor," said Gilway.

Inspector General

A key ingredient to the reforms is the creation of the post of Inspector General who will have oversight of the state-run insurer, something Scott has called for ever since media reports documented the company’s missteps, which include: lavish travel expenses for executives, huge salary hikes, large severance packages for disgraced employees, overpriced contracts, mishandled investigations and the abrupt dismissal of corporate investigators, who uncovered some of the misconduct.

“This new Inspector General will be accountable to the Cabinet and will not be an entity Citizens can fire, as they did with their old compliance officers,” Scott said in a statement. “A strong Inspector General is needed to provide independent oversight at Citizens and to end the fraud, waste, and abuse which has plagued Citizens for too long.”

Dan Krasner, executive director of Integrity Florida, an independent government watchdog group applauds the notion of an Inspector General, “All Florida taxpayers, whether they are Citizens’ customers or not, run the risk of having to bail out Citizens, through more hidden hurricane taxes, if the organization does not perform efficiently and effectively. We are confident that the new inspector general will be a watchdog for both Citizens’ policyholders and all Florida taxpayers.”

Rate Increases

Within a month of SB 1770 becoming law, Citizens insurance officials signed-off on its annual rate filing. The filing calls for a statewide average increase in all coverage lines of seven percent, and that includes a 6.6 percent increase in homeowners rates and an average 9.1 percent increase in commercial policies. If approved by regulators, the rate increase will apply as of January 2014 and will raise $174 million in premiums for next year.

“The rates approved by the board indicates that Citizens is moving in the right direction,” said Gilway. “The board continues to make the tough but necessary decisions while recognizing the impact on Citizens’ policyholders.”

In addition to the rate increases, Citizens is seeking to put a cap on sinkhole rate increases in three high-risk counties. By law, the insurer’s rate increases are subject to the so-called glidepath, which caps average increases at 10 percent. The only exception to the 10 percent cap is sinkhole rates. Based on a 2011 law, rates for the optional coverage must be actuarially sound. The cap for the sinkhole coverage would be set at between 20 and 50 percent.

The legislation is projected to eventually reduce sinkhole losses by 54 percent and there are signs the law is working as intended. Citizens officials said that in the first quarter of this year, new sinkhole claims were down by 52 percent compared to last year. As a result, officials said, moving to actuarially sound rates would have a negligible effect on policyholders’ premiums in 64 of the state’s 67 counties.

However, in the high-risk sinkhole areas of the state that comprise Pasco, Hernandez and Hillsborough counties, moving to actuarially sound rates would have a significant impact on policyholders’ premiums. To soften the impact of sinkhole premium increases on policyholders, Citizens has taken the approach of phasing-in the rates by limiting the annual increases.

Last year, Citizens projected it needed a 263 percent sinkhole rate increase to reach an actuarial sound rate, but opted to request an average 29.6 percent increase. Regulators eventually approved a 21.4 percent increase. This year, the insurer projects it needs a 223 percent sinkhole rate increase in homeowners rates, but is proposing to cap the change at 28.1 percent.

Oversight Board Appointees

With all these changes it will be interesting to see what will happen this month when Citizens Property Insurance Corporation's board of governors convenes. The eight-member board will have a new chairperson and possibly two to three new members. The state House Speaker, the Senate President and the Governor each get to appoint one person to the board.

In making these appointments lawmakers are hoping to calm the controversies surrounding Citizens. The appointment of an inspector general will no doubt help the company avoid any additional controversies, but Citizens also generates political friction between inland and coastal lawmakers. Politicians with landlocked constituencies and conservatives who want to see Citizens shed policies and risk to lessen the potential for assessments on non-Citizens customers are in a standoff with coastal lawmakers who have heavily criticized premium hikes and coverage reductions for their constituents in the push to reduce risk.

Liam P. Cusack is associate editor of The South Florida Cooperator.