Shared benefits of a smaller Citizens Insurance
Long-time broadcaster Paul Harvey used to do a popular radio segment called “The Rest of the Story” in which he filled in the blanks on prevailing news or anecdotes of the day. A similar approach is in order for those interested in the rest of the story involving plans to depopulate Citizens Property Insurance, the state-run insurance company.
Depopulation is a fancy word for shrink. The state-run insurer wants fewer policyholders. It is considering a plan to use some of its surplus as incentive for private insurance companies to take over these policies. Surplus is money that serves as a financial cushion in case an unexpectedly high number of claims occur, such as when a major hurricane hits. Every insurance company needs to have this money set aside to pay for disasters. The more policies an insurance company has, the more money it needs for this cushion. It is a regulatory requirement for private insurers to have a certain amount of surplus for every premium dollar they collect.
It is somewhat less important for Citizens, for the simple reason that if they run short of money, everyone with a homeowners, auto, business or boat insurance policy pays an assessment (a tax) on that policy to make up for the shortfall – even those who get no insurance coverage from Citizens. About 77% of all property insurance customers in the state get insurance from a company other than Citizens.
The Citizens board is considering using some of that surplus money to encourage private companies to take over up to 300,000 policies. A few things you should know about this:
- It is not a done deal yet. The board of Citizens agreed to the CONCEPT to use surplus to encourage private insurers to take over some of its policies. The board is continuing to study the issue as the Citizens staff works up a final plan.
- The reason Citizens is willing to loan private insurers money to take over its policies is because the policies are currently priced too low. The loan bridges the difference between what the policies cost now and what the proper rate should be. It makes no sense for an insurer to take on underpriced policies. Sure, they get the premium dollars, but they also are on the hook to pay the entire amount of a total loss. The loan from Citizens evens the playing field.
- When a private insurance company takes over a policy, they also take over the risk. That is the entire point of removing policies from Citizens and putting them in the private sector. Reducing the total exposure of Citizens reduces the responsibility taxpayers have to fund its losses.
- This is a loan that will be paid back to Citizens. By contrast, when Citizens buys reinsurance (which is backup protection against hurricane losses to protect surplus), the reinsurance expense is money gone. However, if a catastrophic event occurs in the first five years after the loan is made, Citizens may be able to credit the principal for that year. Why would they do this? Because the private insurance company, not the state insurer, still has the responsibility to pay for the loss, saving taxpayers money.
- Citizens’ policyholders can decide to stay with the state-run company. If they opt out, they will have the same rate with the private carrier as they would have had with Citizens for the first three years. After that? Well, Citizens’ rates may be closer to where they need to be and the private carrier may be a better deal.
To learn more, you can review the Depopulation Program Analysis.