Q&A of the Day – What Happens if Citizens Property Insurance Can’t Afford to Pay Claims?
Each day I feature a listener question sent by one of these methods.
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Today’s Entry: Hi Brian, I read that in addition to Citizens asking for a big rate increase for new policies that we all could have what they’re calling a “hurricane tax” whether we have a policy with Citizens or not. Do you know what they’re talking about?
Bottom Line: Yes, and what a mess Florida’s property insurance market continues to be. 40+ year high inflation for the better part of two years has already taken its toll on Floridians and property insurance renewals are quickly becoming one of the biggest stressors in the lives of many Floridians who were already stretched thin. I’m still regularly hearing from listeners commonly experiencing sticker shock from escrow increases being sought by mortgage companies as a result of rapidly rising property and flood insurance costs. Unfortunately, that’s set to continue into next year, as last year’s two special sessions addressing the property insurance crisis – will take years for the impact to fully be felt in our property insurance market as only new policies written this year will begin to be impacted. It took many years for the crisis to be created and unfortunately, it's going to take years for it to be alleviated as well. That’s where Wednesday’s news from Citizen’s, the state’s property insurer of last resort, but also the state’s largest property insurance company, comes into play.
Before talking about the potential for a “hurricane tax”, here’s what the board of Citizens voted on Wednesday:
- A 12% increase for new policies and policy renewals effective November 1st for primary residences with multi-peril policies
- A 13% increase for similar new polices and policy renewals as of January 1st
- An average increase of 14.2%, the maximum allowable under state law, for all other policies
In Palm Beach County specifically, the requested rate increase would be 12.9% if approved by the state. Wednesday’s vote was for what they’ve now officially petitioned the Florida Office of Insurance Regulation to approve. And that’s a key part of this conversation as well. Last year Citizens requested a double-digit rate increase to attempt to stabilize its balance sheet, however the state only approved about half of what was requested. That’s now being factored into why Citizens is asking for maximum increases this year and the discussion surrounding the potential for a “hurricane tax” in the future. So, about the concept of a hurricane tax...
Citizens Property Insurance took a loss of nearly $2 billion last year. Clearly, they were right about the need for a bigger policy price increase. As a result, Citizen’s reserves dropped from approximately $7 billion a year ago to $4.9 billion currently. Citizens now holds greater than 1.2 million policies, a policy count that’s about a third higher than was the case entering hurricane season last year. In other words, if we were to experience a hurricane season similar to last year’s with huge payouts from Ian and Nicole damage, it would have the potential to erode most of Citizens’ reserves which are necessary to be able to afford to payout claims during mass claims events. That’s where all of us can come into play whether we have Citizens policies or not.
Citizens is a state-run insurance entity. That means the ultimate backstop for Citizens in fiscal emergencies are Florida’s taxpayers. There are many reasons why it’s not in the long-term interests of Floridians for Citizens to be the state’s largest property insurer, however this is right at the top of the list. This is where it can get really ugly. If Citizens is no longer solvent, there is a three-step assessment process which could be financially painful.
Step 1:
- Citizens policyholders can be assessed up to 45% of their current annual premium
If that doesn’t fix the solvency issue...
Step 2:
- Citizens can assess all property insurance holders with other carriers up to 2% of their annual premium cost
And if that still doesn’t do the trick...
Step 3:
- Citizens can assess every insurance policy in the state, including renters and auto insurance, up to 30% per year for as long as is needed
And that’s why all Floridians have a vested interest in Citizens remaining solvent. Given the strain on the insurance market and Citizens’ dwindling reserves we desperately need a quiet hurricane season. That along with premium increases and the reforms on newly issued insurance policies has the potential to lead to a stable market going forward. This year is an especially pivotal one for Citizens and Florida’s property insurance market in general.