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Date of Issue: November 23, 2006

Insurance: What's behind Citizens rate hike proposals?

The news these days is full of scary headlines saying that rates for wind insurance with Citizens Property Insurance Corp. may jump 104 to 1,200 percent for Manatee and Sarasota property owners. But it’s too early to panic.

The story behind those headlines is still developing and final results may not be known for weeks or even months.

Most of those projected increases are based on recommendations that have not yet been approved by the Citizens board of governors or the state Office of Insurance Regulation.

There is considerable political maneuvering and postering going on here. The players include the state legislature, the governor and a lot of other important people at Citizens and in the insurance industry.

The timing for this announcement is also worth noting. It has come just as the pressure is building for Gov. Jeb Bush to call a special session of the Florida Legislature to address the insurance crisis and to seek some relief for policyholders.

State Rep. Bill Galvano, who represents western Manatee County, expects plans to be announced any day now for a special session to convene as early as the week of December 4.

"I am very confident about it," Galvano told the Islander. "These things have to be addressed. I think a special session will be announced, perhaps this Wednesday, Nov. 22."

Galvano said the rate hikes proposed by Citizens have raised the stakes for the Legislature to take action. "This has gotten to a point that it is eclipsing everything else we do."

What does all this talk about rate hikes and politics mean for property owners on Anna Maria Island? Here are some of the questions and some answers, based on interviews with insurance experts and elected officials as well as public records.

Q: How much of an increase is scheduled for Citizens policyholders at this time?

A: State regulators at this point have approved an increase of 25.9 percent for Citizens effective Jan. 1. That is an average increase for the entire state and will vary from one area to another, and it may be different for residential and non-residential property owners. Anna Maria Island property owners are in a high-risk area and probably will have a higher than average increase.

Q: When does this increase take effect?

A: It is effective January 1, and that is when Citizens will begin notifying policyholders to expect a rate increase, according to Citizens spokesman Rocky Scott. He said policyholders would have to pay the higher rates beginning March 1 as they renew their policies or obtain new policies.

Q: How much money is involved?

A: A property owner who has been paying $1,000 for Citizens insurance can expect to pay an average of $1,259 for the same coverage on a policy that is new or renewed after March 1. The actual amount will probably be more than $1,259 for island property owners, because this is considered a high-risk area.

Q: What about the predictions for increases ranging up to 1,263 percent for Manatee and Sarasota property owners who have Citizens coverage?

A: Those proposals are based on recommendations announced last week, on Thursday, November 16, by Citizens. The recommendations were proposed by the Citizens actuarial and underwriting committee, and they are subject to review and approval by the Citizens board of governors. If the Citizens board does approve the recommendations its members meet December 7, the proposed rates would still have to be analyzed and approved by the state Office of Insurance Regulation.

Q: What led the Citizens committee to recommend such huge increases at a time when property owners are already hurting from the state insurance crisis?

A: There are two basic forces driving the recommendations and those forces are converging right now, along with the already-approved 25.8 percent rate increase, to create a perfect insurance premium storm.

Q: What are the two basic forces behind the big rate proposals?

A: According to Citizens, one of the forces is its analysis of the rates for the state-established Property and Casualty Joint Underwriting Association (PCJUA), which began in September to offer wind insurance to small businesses and other non-residential property owners who were not eligible for Citizens and who could not find coverage from standard insurers.

The PCJUA rates are substantially higher than the Citizens rates.

The Citizens actuaries have analyzed the difference and they are now recommending that wind-only coverage for non-residential policyholders jump an average of 610 percent statewide. That would be more in line with the PCJUA rates, according to Citizens.

The other major force behind the Citizens rate hike proposal is the legislation known as Senate Bill 1980, which was approved earlier this year by the Florida Legislature and signed into law May 18 by Gov. Bush.

Scott, the Citizens spokesman, said that Senate Bill 1980 forced Citizens to change the way it figures its rates for high-risk policies as well as for standard personal and commercial coverage.

"There are two components to the change," he said. "First, in our high-risk policies, we have to figure in the losses we would sustain in a one-in-70 year storm. For the personal and the commercial, we have to use losses from a one-in-100 year storm.

"Second, we have to figure what we would pay on the open market for reinsurance."

As a result of those changes in rate-setting procedures, Scott said, the actuaries at Citizens now recommend a 55.8 percent increase in premium for wind-only policies and a 10 percent increase for those who have full homeowners policies.

Both of these forces - the effort to get Citizens rates up to the PCJUA level and the legislative mandate to cover reinsurance and potential storm damage - are efforts to prevent future deficits with Citizens, which has had huge losses from 2004-2005 hurricane damage.

Q: When would the proposed rate increases take effect if Citizens and the state regulators approved them?

A: Scott said that the recommendations are scheduled to take effect March 1 and would begin on May 1 for new and renewal policies.

Q: How many policyholders are affected by what Citizens is doing?

A: Citizens is the state’s largest insurer with nearly 1.3 million policyholders. According to Scott, Citizens covers 2,757 high-risk policyholders in Manatee County for wind-only, 163 Manatee commercial customers, and 15,606 Manatee property owners who have full homeowners coverage.

Q: What can be done to stop or reduce these proposed rate increases?

A: The Citizens board could adjust what its actuarial and underwriting committee is recommending.

The state Office of Insurance Regulation could deny or reduce the increases.

The Florida Legislature could take some action that could bring relief for policyholders, if lawmakers move quickly.

Q: What kind of record does the Office of Insurance Regulation have when it comes to approving insurer requests for rate increases?

A: In the days and weeks prior to the November 7 election, the Office of Insurance Regulation took tough stands against insurance company requests for rate increases and often denied or reduced the requests. The office put out press releases several times a week announcing the denial of a rate increase.

But that pattern of denials appears to be a departure from tradition.

A report submitted to the governor’s Insurance Reform Committee said that 69 percent of all requests submitted since 2004 for rate increases were approved as requested. The report, which was dated August 12, also said that the Insurance Commissioner "ordered or issued a letter to have rates increased on eight separate occasions to ensure that rates were adequate."

Q: Does the Office of Insurance Regulation have anyone representing the consumer in these rate cases?

A: Apparently not.

According to that same August 12 report, "Florida laws do not provide for, nor does the Commissioner of Insurance Regulation have statutory authority for determining whether insurance policies are affordable."

Q: What role does the state Legislature play in this situation?

A: Lawmakers and other elected state officials have a critical role in what happens next in the insurance crisis. How quickly they act will impact the rates that policyholders pay for coverage next year.

"A special session won’t take that long - only two or three days," says Rep. Galvano. He believes that is enough time for lawmakers to take the steps that are necessary to make insurance more available and more affordable.

Otherwise, if there is no special session and if there is no legislative action, "we are stuck for another year," Galvano said.

He believes that one key action the Legislature needs to take is the restructuring of the Florida Hurricane Catastrophe Fund, known as the Cat Fund, to make reinsurance less expensive.

Galvano, who has been a leader in the effort to find relief for policyholders and who voted against Senate Bill 1980, is now working on a letter to the Speaker of the House urging that "we keep focusing on reinsurance and also address the special needs of coastal communities, including the eligibility issue."

Insurance specialists say that legislative action in December to lower the cost of reinsurance would be in time to impact the rates that the insurance industry sets for 2007. But the longer the Legislature waits to act, the longer it is going to be before any of those actions translate into more affordable, more available insurance coverage.

"If it were up to me," Galvano said, "we would have been in session three months ago."