The temporary reinsurance arrangement for downgrade-challenged carriers announced last week by Florida’s Office of Insurance Regulation (OIR) will not put the risk transfer arrangements of Citizens Property Insurance Corporation on the hook for any claims or losses through the scheme.
Last week the Florida Office of Insurance Regulation (OIR) announced a plan to launch a temporary reinsurance arrangement to support any downgraded carriers through Citizens Property Insurance Corporation.
The announcement was made with little in the way of details, and this has led to market discussion and questions over exactly how the temporary arrangement would work.
Artemis has learned more about the arrangement, which it turns out is not really a reinsurance agreement. Rather it is a type of guarantee that will see Florida Citizens supporting the ability of any downgraded, but importantly still viable, carriers to pay claims above and beyond the caps enforced by the Florida Insurance Guaranty Association (FIGA).
The Florida Insurance Guaranty Association (FIGA), a non-profit corporation created by the Florida Legislature in 1970, steps in and handles the claims of any insolvent property and casualty insurance companies in the state.
When an insurance company has been declared insolvent, covered claims will be paid by FIGA up to specific caps for different lines of business, which we understand to be $500,000 for residential property damage policy claims, $300,000 for condos, $300,000 for non-residential commercial policies and $200,000 per unit for condo association policies.
The temporary reinsurance, or guarantee, arrangement announced by the OIR will see Citizens covering the excess above FIGA’s caps only.
So, if a carrier is downgraded, as a number are still seen as likely to be, the fact Citizens will step in and support claims above FIGA is expected to be seen as sufficient to serve as an exception for Fannie Mae and Freddie Mac, we are told, meaning policyholders claims will still be covered.
If a downgrade occurs, the OIR will assess the Florida property insurer in question and if they meet the requirements to continue writing business (are deemed viable), then it would enter into the agreement with Citizens.
The idea of this is to enable carriers to keep operating, as with this agreement with Citizens in place they could continue servicing policyholders, plus writing new or renewal business, even while their rating is below the levels typically accepted by the mortgage providers.
So, policyholders can be made whole, while the downgraded carrier can work to recover its rating at the necessary higher level, thanks to any claims being guaranteed by Florida Citizens, above the FIGA caps.
We’re told these claims, that might be paid by Citizens, will not qualify as losses under the residual market insurers’ reinsurance or risk transfer program, including its catastrophe bonds.
So, these reinsurance arrangements are not facing any additional risk should a major storm occur and there have been a number of downgraded carriers that could tap into this Citizens facilitated additional guarantee.
If a carrier was in a particularly poor financial shape, then the OIR would likely not deem their business viable after a downgrade and they would be expected to go into liquidation in the normal way.
The OIR’s temporary arrangement is really designed to help out insurance companies seen as viable businesses, but who have lost the necessary level of rating for the mortgage business in Florida.
Thereby sustaining Florida’s property insurance market environment, helping to make policyholders whole in the event of a claim and avoiding the policies actually moving into Citizens own portfolio of risk.
FIGA will pay its share of claims up to the caps, while Citizens would pay above that level, which reduces the number and amount of claims likely to flow to Citizens.
It’s also important to note that FIGA does not pay plaintiff fees, so this arrangement means litigation related costs are less likely to flow to Citizens as well.
Claims are paid off the original policy, so there’s no need for the holders to move across to Citizens policy terms either.
We’re told by market sources that in the event of a major hurricane striking Florida and causing a rush of claims through any downgraded carriers, there is a remote risk of Citizens surplus being hit through this arrangement, so it does accentuate the risk of assessments being levied, but all sources we spoke with stressed this is relatively remote.
The temporary arrangement is only supposed to be in place until June 2023, in the hope that any downgraded carriers can recover their ratings and that further property insurance reforms are enacted in Florida in the meantime, so improving the situation for the state’s insurance market.
It seems a prudent way to ensure more of the viable property insurance businesses can survive a downgrade, fewer policies flood into Citizens and policyholders don’t need to look for alternatives at a time when the market is so stressed.