1. Why are insurance rates rising so quickly?

2. What is Citizens?

3. Why am I being assessed for Citizens Insurance if they are not my insurer?

4. What is an assessment and why is it needed?

5. How much will the average consumer pay for the 2006 assessment?

6. Why are all Floridians surcharged to assist those who elect to build on the coast?

7. Why did my insurance company drop my policy even if I haven't had a claim in years?

8. Why don't we make insurance companies write all insurance instead of choosing what they insure?

9. What have Florida’s leaders done to address the insurance crisis?

10. What can I do to make myself more insurable?

Questions and Answers compiled by the Governor's Office of Policy and Budget.

1.  Why are insurance rates rising so quickly?

There are many reasons why the cost of property insurance has risen dramatically in the recent months. Some of the reasons include:

• It costs more to insure a home these days, partially because property values have increased so dramatically. The same property value increases that have given people more equity in their homes also leads to higher insurance costs; therefore, even if the rates for insurance were not on the rise, the cost would be greater to insure a person’s home.

• The costs of building materials and labor have risen dramatically. The cost to rebuild a home has doubled in the past couple of years, primarily due to demand for labor and materials. As a result, it costs more to replace or repair homes damaged by hurricanes.

• Insurers are required by law to have cash reserved to cover a portion of estimated claims. In the past two years we’ve been hit by eight hurricanes, and insurance companies have lost their surplus funds because of the number and amount of claims paid to property owners. Insurance companies need to ensure that sufficient premium is collected to pay claims.

• The cost of reinsurance that insurance companies purchase to ensure to help pay the cost of claims has risen dramatically. Reinsurance is essentially insurance for insurance companies. It is probably the single most important factor contributing to the rise in insurance costs for property owners.

• Many homes in Florida do not meet the new building codes and therefore are more prone to damage form hurricane winds. This increases the risk that insurance companies have to insure against.

• Political pressures in the past may have forced rates to be capped or not allowed to be actuarially sound. As a result, insurance in Florida has not really been priced properly and, while this has been easier on Florida’s property owners, it has caused a greater jump in rates to account for the artificially low prices that Floridians are used to.

2.  What is Citizens?

Citizens Property Insurance Corporation is the state’s entity to address the insurance availability deficit that exists in Florida. Citizens provides insurance to homeowners in high-risk areas and others who cannot find coverage in the open, private insurance market. It was designed to be the state’s insurer of last resort, therefore, Citizens insures the properties most at risk to be damaged in the state, especially for properties along coastal regions and those subject to sinkholes.

By law, Citizens writes policies only for homeowners and businesses that cannot find insurance in the private market and the rates that Citizens charges are required to be actuarially sound and higher than the private market rates in that geographic region in order to be noncompetitive.

Citizens is working exactly as the current law provides. The Legislature created the framework for the current Citizens in 1972, although it operated under different names. This system was based on a model in which the private insurance market was to play the greatest role in insuring Florida property holders and Citizens was to act as the insurer of last resort. The model has been updated and refined over time, but the basic structure remained.

Citizens was statutorily granted the authority to assess other property insurance policies in case of a deficit. For many years, it was difficult for anyone to imagine a scenario where the statutorily set assessment mechanism would take effect and require policyholders to subsidize the insurance for those policyholders in Citizens. While it was agreed by both parties that this model was the right policy direction for the state, the tremendous, catastrophic damage caused by recent storms that have battered Florida revealed the need for both long-term reforms and immediate solutions.

3.  Why am I being assessed for Citizens Insurance if they are not my insurer?

By law, Citizens is to write policies only for homeowners and businesses that cannot find insurance in the private market. That means that Citizens insures the most vulnerable properties in Florida and those properties are more likely to be damaged. As a result, Citizens pays for a lot of claims and many of the properties are high value since they are located in risky, coastal areas. Even though Citizens must charge actuarially sound rates, the premium collected may not be enough to pay policyholders’ claims, especially during hurricane seasons as severe as Florida has experienced over the past two years.

Citizens receives no direct state government funding; its claims and operational costs are paid from premiums collected. If Citizens runs a deficit within a fiscal year, it has the authority to assess all property insurance companies to cover the amount of the deficit. These assessments are passed on directly to the policyholder when an insurer files a rate increase which is approved by the Florida Office of Insurance Regulation.

4.  What is an assessment and why is it needed?

As a result of 2005 storms, Citizens incurred more than $2.6 billion in losses, stemming from 168,377 claims. Because of these losses and insufficient premiums to pay those claims, Citizens had a shortfall of $1.7 billion. Under Florida law, this amount is to be recouped by an assessment on property insurance companies statewide to ensure Citizens is able to pay claims in the event of future storms.

5.  How much will the average consumer pay for the 2006 assessment?

During the 2006 Legislative session, $715 million was appropriated to offset a portion of this Citizens deficit. This appropriation will reduce an estimated $920 million regular assessment against property insurers to about $205 million, and thereby reduce an estimated average 11 percent premium surcharge to about 2.5 percent for property insurance policyholders in the state (including Citizens policyholders). The bill also requires that the remaining estimated $800 million of the deficit, which would require about an 8 percent emergency assessment on policyholders if billed in one year, must be amortized and collected from policyholders over a 10-year period.

This will reduce the impact on policyholders significantly. Prior to the relief, policyholders would have had to pay approximately $203 per $1,000 of insurance premium. With the relief provided by the Legislature, that amount will be reduced to less than $33 per $1,000 of premium. That action by Florida’s leaders will save policyholders $170.50 per $1,000 of insurance premiums paid.

6.  Why are all Floridians surcharged to assist those who elect to build on the coast?

Citizens insures more than 904,000 Floridians as of June 30, 2006, including thousands in inland areas. Without Citizens, these policyholders would have nowhere to turn for property insurance coverage. State lawmakers provided the assessment mechanism in 1972 to ensure that Citizens can continue to serve as the insurance safety net for all Floridians.

As time passed and development intensified in the coastal areas of the state, private insurers saw these properties as too risky to insure. As a result, many of these properties are in Citizens and are subsidized by all other property owners in the state, to the extent that the rates on those properties are not sufficient to prevent a deficit.

7.  Why did my insurance company drop my policy even if I haven't had a claim in years?

Because of the heavy losses that insurance companies have had over the past two years, many companies no longer have the assets needed to cover new losses. They have to reduce their exposure somehow. In many cases, reducing the number of policies a company has in a particularly vulnerable area is their only option. Unfortunately, property owners who have never had a claim may lose their policy in the process.

Insurance is a year to year contract with a company, not an investment. The policyholder buys insurance for one year in exchange for one year of protection. If there is no storm and no damage, the insured was simply protected for one year. Some feel that insurance over the years is some sort of investment; that not filing a claim for many years means they should receive continued coverage. People buy life insurance for financial protection, but don’t fret if they are not required to file a claim on it.

To stay in business, insurance companies have to limit or reduce exposure. But there is hope. The Legislature during the past Legislative Session, provided $250 million for a new Insurance Capital Build-up Incentive Program to provide matching funds for insurance companies bringing new capital to the market. This program will enable private insurance companies to write more policies and should also lessen the need for companies to reduce the number of policies that they write.

8.  Why don't we make insurance companies write all insurance instead of choosing what they insure?

While forcing companies to write all insurance sounds like a good idea, it is probably is not within the constitutional authority of the Legislature. Also, some companies (GEICO and Progressive, for example) only write auto insurance. Requiring companies to write all lines of insurance would likely run these and other such companies out of the state and could lead to higher auto insurance rates.

9.  What have Florida’s leaders done to address the insurance crisis?

Some blame the government and its leaders for letting us get to this point. While pointing blame is certainly understandable, government did not make many of the decisions that are causing the problem in insurance: increased property values, rampant coastal development, the fact that Florida is extremely susceptible to tropical storms and hurricanes. While government arguably should have made coastal development impossible or, at least, extremely difficult, the influx of people wanting to live in Florida – in and around coastal areas – has put pressure on Florida’s resources, policies, and infrastructure that has led to the development of areas that should never have been developed for habitation. If the private market would not insure homes in risky locations, development would not occur. The state made the policy decision to provide insurance to homes that the private market deemed too risky. For that, government is at fault, although it was due to public demand that this decision was made.

Government has tried to be all things to all people and that just does not work.

Florida’s current insurance situation and the state’s insurer of last resort – now called Citizens Property Insurance Corporation (Citizens) – was created in 1972. This system was based on a model in which the private insurance market was to play the greatest role in insuring Florida property holders and Citizens was to act as the insurer of last resort. Florida’s leaders have made incremental revisions to the state’s insurance laws over the past several years and the model has been updated and refined over time, but the basic structure remained. The system in its current form worked reasonably well in helping us recover from Hurricane Andrew and continued working until the 2004 and 2005 storm seasons revealed the need for further refinement and reform.

The Legislature passed bills that increased public protections, reduced insurance fraud, and provided incentives for property owners to harden their homes to make them more storm resistant. The Legislature expanded the Florida Hurricane Catastrophe Fund (CAT Fund) to increase the state’s reinsurance capacity. This helps the insurance companies buy cheaper reinsurance, which in turn, helps keep insurance rates down. Policy documents are more user-friendly, allowing the policyholder to clearly understand what deductibles are required and what coverages are provided. The Legislature provided relief to property owners who were hit by more than one storm during the 2004 season. The Legislature appropriated $150 million for the Multiple Deductible Program to reimburse residential property insurance policyholders whose property was damaged by two or more hurricanes and whose insurer applied more than one hurricane deductible, up to specified limits. For residential policies issued on or after May 1, 2005, the hurricane deductible is applied on an annual basis, rather than a per-event basis, to all hurricanes that occur during the calendar year.

Most recently, the Legislature provided $715 million to offset the 2005 deficit in Citizens, which was estimated to be about $1.73 billion. This appropriation will reduce an estimated $920 million regular assessment against property insurers to about $205 million, and thereby reduce an estimated average 11 percent premium surcharge to about 2.5 percent for property insurance policyholders in the state (including Citizens policyholders). The bill also requires that the remaining estimated $800 million of the deficit, which would require about an 8 percent emergency assessment on policyholders if billed in one year, must be amortized and collected from policyholders over a 10-year period.

To help residents make their homes more resistant to storms, the state is providing $250 million through the Florida Comprehensive Hurricane Damage Mitigation Program to perform free inspections and provide grants up to $5000 to qualified homeowners who harden their homes to reduce the risk of wind damage. Individual homes will be eligible for matching grants of up to $5,000 each to make specific home improvements as recommended in the inspection report. A “matching grant” means that for every dollar of the homeowner’s own money spent on a wind resistance upgrade recommended in the official inspection report, the program will provide an additional dollar to help pay for the upgrade, up to a maximum grant of $5,000.

Access to the Florida Hurricane Catastrophe Fund (CAT Fund) was increased in an effort to attract more insurers to write policies in the state. The Insurance Capital Build-Up Incentive Program was established to provide for up to $500 million of greater insurance capacity in the state. The operations of Citizens was revised to make it more efficient and user-friendly and a process was set up for the evaluation and resolve sinkhole claims.

10. What can I do to make myself more insurable?

Higher rates and the inability to get private insurance have created a significant hardship for many homeowners and small businesses. The key to solving the problem is fortifying Florida properties against the potential damage of future storms. Reducing damage reduces the cost of a disaster, and ultimately the cost to insure against the potential damage.

Protecting your home against damage can also reduce the cost of your insurance premium. Florida requires insurance companies to give a discount on insurance premiums – as much as 44 percent on your hurricane policy – for certain improvements that guard against wind damage. Choosing a higher insurance deductible, either 2 percent or 5 percent, can also reduce your premium.

To help homeowners make these improvements, the state is providing $250 million through the Florida Comprehensive Hurricane Damage Mitigation Program to perform free inspections and provide grants up to $5000 to qualified homeowners who harden their homes to reduce the risk of wind damage. Individual homes will be eligible for matching grants of up to $5,000 each to make specific home improvements as recommended in the inspection report. A “matching grant” means that for every dollar of the homeowner’s own money spent on a wind resistance upgrade recommended in the official inspection report, the program will provide an additional dollar to help pay for the upgrade, up to a maximum grant of $5,000.

For example:

• If the recommended improvements you have done cost $3,000, the state would pay $1,500 and you would pay $1,500.

• If the recommended improvements you have done cost $20,000, the state would pay $5,000 and you would pay the other $15,000.

Low-income homeowners will be eligible for $5,000 grants with no match required. Matching grants will also be available to local governments and non-profit entities for projects that will reduce hurricane damage to single-family homes.

The Florida Comprehensive Hurricane Damage Mitigation Program is managed by the Department of Financial Services. For information about how to apply for the grant, please visit http://www.mysafefloridahome.com or call 1-800-342-2762 in Florida, or out-of-state call
(850) 413-3089

Invenice editor's note: If you get into any financial dealings with the state please read every inch of the form. I have seen a few people write in to local sites about how they were taken by the legal mumbo jumbo and lost their houses and lost everything in the process including the all important credit rating.