Unsustainable growth makes Florida Citizens the “insurer of first resort”

Florida’s Citizens Property Insurance Corporation has increased its policy count by 28% in just the last 18 months and the insurer expects its growth to continue at an unsustainable rate, which now makes it “the insurer of first resort,” according to its Chairman.

Florida Citizens was always supposed to be the insurer of last resort for the states property insurance needs, but the significant downsizing achieved through its take-out program has now completely reversed, with the dysfunctional Florida market now driving policyholders back to Citizens over the last couple of years.

Citizens Board this week cited a “flood of new policies” coming to the carrier, which alongside a “growing disparity between Citizens’ rates and the higher rates generally charged by private companies” has led to concerns over the financial strength of Citizens over the longer-term, should these trends continue unabated.

“Over the past 18 months, Citizens has become the insurer of first resort,” Florida Citizens Board Chairman Carlos Beruff explained. “This is not its statutory mission and we must take steps immediately to reverse this trend and protect Floridians who are ultimately on the hook if Citizens is unable to pay claims.”

Since May 2019, Citizens’ policy count has increased from 420,000 to 537,000, a 28% increase.

Originally, a 2020 budget forecasted that Florida Citizens would end 2020 insuring some 431,000 policies.

That forecast was raised by 17% to 517,000, but now it seems more likely that the anticipated figure of 540,000 policies for year-end 2020 will prove accurate.

Citizens policy count is expected to continue skyrocketing, with another 100,000 or more policies expected to return to Citizens in 2021 as well.

As we explained in a September article:

It means Florida Citizens is likely to need to buy an increasing amount of reinsurance protection, also raising the prospects of further catastrophe bonds over the next year.

But it also suggests potential opportunities, for those providers of insurance capacity or reinsurance capital that are able to raise the money and have an appetite for portfolios of Florida focused property catastrophe exposed risks.

The Board of Florida Citizens heard at its meeting this week that continued growth of policies could “put Citizens’ solid financial position at risk.”

Which suggests the need for more risk transfer and reinsurance in 2021, to cover the expanded portfolio of risk that Citizens will go into the hurricane season with.

That makes catastrophe bonds a possibility, as Florida Citizens reinsurance program could need to grow quite substantially and in the past the carrier has always sought to diversify its sources of risk capital using cat bonds and the capital markets.

It also means that take-out assumption offerings may see more uptake in 2021 as well, given the availability of risk to assume from Citizens has increased and there could be some more attractive opportunities now available there as well.

Policy numbers removed from Citizens through take-outs have declined considerably from their highs around 2014.

Back then, the quality of policies and risk level of assumptions were more conducive, even leading to some take-outs backed by insurance-linked securities (ILS) managers, including Nephila Capital.

That activity dwindled as Citizens policy count reduced, leaving less desirable insurance policies remaining.

But as policyholders return to Citizens, we could see a resumption in take-out activity as one way for Citizens to reduce its risk and the potential for assessments on Florida’s taxpayers in the event of a major hurricane.

Perhaps more likely though and almost assured, Citizens will need more reinsurance protection to cover its growing portfolio of risks, which should mean it looks to the capital markets again if pricing is more conducive for catastrophe bonds.

This year, Citizens withdrew one layer of its latest issuance from the catastrophe bond market at the mid-year renewal, citing “irrational” pricing and saying that it wasn’t willing to lock in pricing over a multi-year basis at those rates.

As property catastrophe reinsurance rates have continued to rise and may rise again, perhaps substantially, for Florida programs at the 2021 mid-year renewals, it is possible that catastrophe bond pricing may once again look a better deal for Citizens next year.

Citizens needs to transition back to being the insurer of last resort, with the private market the main provider of policies, backed by reinsurance and ILS capital and therefore a reduced risk for Florida’s taxpaying community.