Thursday, June 6, 2013

Occupy Citizens

One of the great laments by many people in Florida is that Citizens Property Insurance Corporation acts as a grand subsidy for rich people with million dollar homes on the coast.  As such, in the past couple of years and most recently with SB1770, the "rich" (apparently defined by the replacement value of your home) are being kicked out of the state run Citizens.

And while great anger and frustration are focused on these wealthy homeowners, the graph above from Citizens' 2010 Annual Report shows that the majority of policies in the company are worth far less than a million dollars.  In fact, the category with the most policies is the $200-400k range, which in many parts of Florida, cannot be considered lavish.

So who are these million dollar babies?  In early 2012, Lynn McChristian who writes a blog covering Florida insurance for the Insurance Information Institute, reported that 7,500 Citizens policies had a coverage range of $1-2 million.  According to the numbers in the graph, then, this is the 1%.

At the time, Citizens reduced eligability to those with no more than a million dollars of coverage.  As McChristian points out, that some would question the wisdom of taking these policies out of Citizen.  Though they have the most in exposure per policy, they are also paying the most in premium.  Kicking them out is a loss in premium with an insignificant reduction in exposure.

Further, if these policies are picked up by undercapitalized take out companies, then the public is still on the hook for the exposure without the benefit of the premium.  

Perhaps, little had been solved.  

Right now, the new legislation set forth by SB1770 will continue kicking the upper crust out of Citizens until it reaches those with coverages for $700,000.  According to the graph above, it's hard to imagine that this will really be all that many policies.

Instead, this is a political win more than anything that has to do with running a sound insurance regime- the success of which goes well beyond the confines of Florida's Citizens.  The legislation is a product of a renegotiation of the rules guiding who ought to have access to a public defined hurricane risk.  Removing the top echelon of the Citizens' "public" enables politicians to appear tough on the rich that take avantage of public resources.  (Whether or not these people are in fact "rich" or just the victims/beneficiaries of increasing replacement costs).   At the same time, the private market is happy because they get to have access to a larger part of the market, especially those that, in theory, can afford top dollar risk.    

It will be interesting to see how long this goes on and I suspect it will have little to do with controlling or reducing Florida's hurricane risk and much to do with the state's economy.  While $1 million has a nice ring to it, the real value dwindles over time.  Dr. Evil learned this the hard way back in 1997.  This is especially true in a volatile housing market like Florida's with homeowners making far less than the value of their home (market, replacement, or otherwise).  It is hard to imagine much of a rally around ousting the 40% scumbags living in $300,000 homes.

1 comment:

  1. Very perceptive analysis. Under this plan, it seems that the State cuts off the largest money making aspect of managing the risk. Particularly since the $1M properties are scattered throughout the State and unlikely to all be lost at the same time. Viewing the risk on a Statewide basis, the $1M policies are the lowest risk and pay the highest premiums (high premium to loss ratio). As you point out, the State then makes up the losses for the other insurance companies which cannot pay the loses on their policies. Thus, the State makes the payments without having received the premiums.

    I think you're exactly correct when you factor in politics as a variable. Remember, we're talking about Florida. Too often, the answer lies in focusing on the interests of much smaller groups or simply recognizing ineptitude for what it is. To know this, all one need do in Florida is try to vote, or get health care, or go to a good school, or get hurricane insurance, or ...


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