Citizens Property Insurance Corporation's response to Chairman Whitehouse

April 12, 2024

The Honorable Sheldon Whitehouse, Chairman
Senate Committee on the Budget
530 Hart Senate Office Building
Washington, DC 20510-6100

Dear Chairman Whitehouse,

I am in receipt of your March 18, 2024, correspondence regarding our ongoing communications concerning the Florida property insurance market and Citizens Property Insurance Corporation’s ability to protect its policyholders in its role as Florida’s insurer of last resort. While we believed our initial letter of December 15, 2023, addressed the issues you had raised previously, this correspondence provides more data in support of our position and provides documents which do the same. I am confident that after reviewing this information you should agree that Citizens is structured and has the mechanisms and resources in place to always be able to pay the claims of its insureds without the need for federal assistance.

Citizens Depopulation Efforts and Market Recovery

You expressed concern in your latest correspondence that “Citizens has begun offloading hundreds of thousands of policies” to the private insurance market. However, that is exactly what should happen as Florida’s property insurance market continues to recover. As demonstrated in the historical information below, Citizens’ policy count grows when the private property insurance market is under stress, and as the market improves, Citizens’ policy count shrinks.

Since January 1, 2023, nearly 400,000 (389,883 through March) Citizens policyholders have found coverage in the private market through Citizens’ Depopulation Program. By design, this return of policyholders to companies approved by the Florida Office of Insurance Regulation (FLOIR) assists Citizens in its ongoing effort to return to its role as a true insurer of last resort, providing property insurance to those who simply cannot find coverage in the private market due to age of home, geographic location, or other factors. A smaller Citizens reduces Citizens’ exposure and the risk of assessments on the people of Florida (the vast majority of whom are not Citizens customers).

Recent legislative reforms and the success of Citizens’ Depopulation Program have provided Citizens with even more tools and flexibility to protect its policyholders and the people of Florida following a disaster. Going into the 2024 hurricane season, which begins June 1, we expect Citizens to be in the strongest financial position it has been in over the past several years.

Citizens Ability to Pay Claims / No Need for Federal Assistance

With respect to your concern that Florida may seek a federal bailout, we previously wrote that “(a)t no time in Citizens’ history has it, nor the State of Florida, sought a federal bailout to pay its hurricane loss claims – including after the catastrophic 2004 and 2005 hurricane seasons.” You responded that “(i)n 2008, a few years after the devastating 2004-2005 hurricane season in Florida, state senators introduced legislation encouraging the U.S. Congress to assume responsibility, at least in part, for increasing insurance risk in disaster-prone areas.”

The legislation referenced was filed sixteen (16) years ago – and it died, never passing the Florida Legislature. In fact, it was never even heard by the Florida House of Representatives. Therefore, we stand by our statement that Florida has never asked for a federal bailout to pay hurricane loss claims, even after the 2004-2005 hurricane season. Nor was the proposed legislation a bailout: it was a proposal for a national catastrophe plan modeled after Florida.

Hurricane Modeling / Worst-Case Scenarios

As described below, Citizens uses robust modeling which meets or exceeds, in every measurable way, industry or regulatory standards, not only in Florida but across the country, and does take into account the most recent climate trends. Even under these models the probable upper range of Citizens’ potential losses does not exceed Citizens’ claim paying abilities through use of surplus and reinsurance, as well as its surcharge and assessment authority. Moreover, the information provided below explains why the method applying the Cambridge Centre for Risk Studies report overestimates potential losses to Citizens.

Citizens is continuously monitoring its exposure to various worst-case hurricane scenarios using catastrophe modeling software for various reasons such as risk transfer and enterprise-wide strategy planning. The modeling software that is used has been approved by the Florida Commission on Hurricane Loss Projection Methodology (FCHLPM), which is a board of experts created by Florida statute in 1995 to “provide the most actuarially sophisticated guidelines and standards for projection of hurricane losses possible.” Because Florida is the only state that has such an evaluation process in place, the work of the FCHLPM is used by insurers and regulators not only in Florida, but in many other coastal states, as well. Citizens considers estimates from models developed by Verisk, Moody’s RMS, Karen Clark & Company, and Corelogic. A recent report to the National Association of Insurance Commissioners by Donna Sirmons, Manager of Modeling Program, for the FCHLPM can be found here.

Hurricane models also allow Citizens to consider its probable losses under different real, historical storms. For example, this presentation by Citizens to the Florida Office of Insurance Regulation (FLOIR) on June 8, 2023, considers Citizens’ financial condition after first growing to insure 1.5 million policies, and then being hit with two destructive Category 4 hurricanes. You will note the first of these storms would be similar to Hurricane Irma but follows a path that is much more destructive to Citizens’ policies than Irma’s actual, historical path. The second would be the Great Miami Hurricane of 1926. These two storms, in sequence, would have caused $23.9 billion in assessments had we reached 1.5 million policies in 2023.

The scenario can be compared to another hypothetical hurricane scenario referenced in your December letter. That scenario is part of a study conducted by the Cambridge Centre for Risk Studies. The simulated storm loss, called EventID 2870790, is modeled by Moody’s RMS (then called simply RMS) and is a 1-in-1200-year event that estimates $1.35 trillion in damage. EventID 2870790 makes landfall in Florida Bay of Monroe County as a Category 4, doing damage in both Monroe and Miami-Dade counties. It then moves through the Gulf of Mexico, doing damage along Florida’s west coast before making landfall again near Pensacola as a Category 3. Some of the losses to each home would be below the deductible covering the home and be absorbed by the homeowner. Insurers would pay the remaining loss, though much of that would probably be reimbursed by their reinsurance policies, which are heavily used by Florida insurance carriers.

Allocating a portion of the $1.35 trillion in losses from EventID 2870790 to Citizens does not work for two reasons. First, those losses appear to include damage to non-residential properties and offshore structures. Citizens is not able to report its market share as a fraction of both residential and non-residential properties because the non-residential data does not exist. Second, these losses include damage caused by flood, and Florida statute prevents Citizens from insuring against or paying for damages resulting from flood. Accordingly, the application of the Cambridge Centre for Risk Studies report greatly overestimates potential losses to Citizens.

Moody’s RMS must report potential industry losses to the FCHLPM in order for its model to be approved for use in Florida property insurance ratemaking and are reflected here: Moody’s RMS FHCLPM submission, see page 323, part C, Table 50. These losses are only for residential buildings (excluding non-residential buildings) and include only wind losses (excluding flood losses). The most severe storm contemplated by RMS’s latest model does only $778 billion in wind losses to residential properties, well below the $1.35 trillion in total losses due to EventID 2870790, which presumably includes both flood damage and damage to non-residential property. This confirms that trying to allocate EventID 2870790’s $1.35 trillion in losses to Citizens using
Citizens’ share of the residential market greatly overestimates Citizens’ losses.

Citizens continuously monitors the number of policies it insures, which is also called the “in-force policy count.” This quantity is roughly proportional to market share, and this portion of the response will focus on the insured policy count. Every month, Citizens’ forecasting team updates a monthly forecasting model of the insured policy count. These forecasts are used to determine Citizens’ probable future exposure to storms, as shown elsewhere in this letter.

Citizens’ historical policy count and market share are shown in this 9/30/2023 Florida Personal and Commercial Residential Property Market Share report. You will note that Citizens’ market share peaked in 2011 at 22% before the policy count began to decline. In October 2023 Citizens was 17% of the Florida market, but after a successful 2023 depopulation, our market share is now at 15%.

Historically, the forecasted insured policy count’s average error 16 months into the future is about 10%, and 12 months into the future is 6%. Estimated errors significantly increase for forecasts beyond 16 months due to historical volatility in the trends affecting Citizens’ insured policy count. For this reason, Citizens usually does not heavily rely on its policy count forecasts more than 16 months into the future and does not produce a 10-year forecast of its market share.

As noted in my last correspondence, policies leaving Citizens for the private market is a positive, for two reasons. First, it signals that the private property insurance market is returning to health, which gives consumers more choice. Second, it reduces the magnitude of Citizens’ losses after a catastrophic hurricane, and therefore reduces the risk of assessment on non-Citizens policyholders.

It is not surprising that Florida’s insurance market is steadily improving. Out-of-control litigation, a major source of unnecessary increased costs, has been addressed through legislative reform, specifically House Bill 7065, effective in 2019, and Senate Bill 2A, effective in 2023. As a result, capital is returning to the Florida Market. For example, the Florida Office of Insurance Regulation released a press statement explaining that over the past year, there have been eight property and casualty insurers approved to enter the market following legislative reforms. News outlets have reported that capital and competition is returning to the Florida market.

Again, a healthier private market will reduce Citizens’ policy count and hurricane risk. It is true that as Citizens shrinks it may be left with somewhat riskier policies that are less desirable to the private market – but that is the role of an insurer of last resort. As long as Citizens insures fewer policies when a large storm hits, its total cost will be less (although the average loss per policy may be higher). This will better protect Citizens’ surplus and reduce the likelihood that it must assess.

In any case, it is important to note that private insurance companies do not necessarily make offers to only the healthiest, least risky policies. This is true for two reasons. First, all else equal, more geographically concentrated policy portfolios cost more to reinsure. An insurer might make an offer to an otherwise riskier policy if writing that policy makes its portfolio more geographically distributed. Second, premium compared to cost can vary widely between Citizens’ individual policies. A private company may make an offer to a riskier policy if there is more than enough premium to compensate for that risk.

For example, the “Windstorm mitigation credit” can be used to measure the vulnerability to wind losses of policies that have left Citizens through the Depopulation Program since 1/1/2023 compared to those still insured by Citizens as of 3/31/2024. All else being equal, a policy will get a reduction, or credit, to its premium if the insured risk has features like storm shutters. In other words, a higher wind mitigation credit means the policy is less vulnerable to wind losses. Policies depopulating from Citizens’ two largest counties, Miami-Dade and Broward, have lower average windstorm mitigation credits than those still insured by Citizens. This shows that the relationship between risk and those policies leaving for private companies is complicated.

Analysis of Claims Paying Ability

As described above, if a storm or series of storms were to deplete Citizens’ surplus and exhaust its reinsurance, Citizens would be able to satisfy its claims paying obligations through its surcharge and assessment authority – even under the latest hurricane models.

Citizens’ enabling statute, section 627.351(6), Florida Statutes, provide Citizens with the authority to levy both policyholder surcharges on Citizens’ policyholders and assessments on almost all property and casualty insurance policyholders (excluding workers’ compensation, medical malpractice, federal flood, and federal crop lines of insurance). The Citizens assessment base for the upcoming 2024 storm season is approximately $85 billion in premium. This would provide the necessary claims-paying resources were surplus and reinsurance resources to be exhausted after an event or series of events. This would be true even after extremely devastating events. For example, after eight storms crisscrossed the state of Florida in 2004 and 2005, Citizens was able to cure its deficit and pay all claims. It first levied assessments directly on private insurers: $515 million in 2004 and $163 million in 2005. It then levied a $1.384 billion assessment on the larger base of property and casualty insurance policyholders. This corresponded to roughly 1.4% of the base from 2007 through 2011 and then 1% from 2011 through 2015.

In preparation for storm season, Citizens analyzes its ability to pay claims for up to a 1-in-100-year event with the goal of reducing exposure and, by extension, reducing or eliminating the amount and likelihood of its assessment burden on Florida taxpayers. Since 2011, Citizens has consistently transferred risk through the use of catastrophe reinsurance. This approach offers an effective means to reduce or eliminate the amount and likelihood of assessments after such an event or multiple events and preserve surplus.

Per Section 624.316, Florida Statutes, the FLOIR conducts a Catastrophe Stress Test to evaluate the sufficiency of the reinsurance and capital available to pay claims for property insurance carriers. Each insurance company submits a series of reports of its modeled losses and anticipated recoveries specific to a set of scenarios defined by the FLOIR.

In each of the 2023 Catastrophe Stress Test scenarios, Citizens was able to cover the storm losses using surplus, recoveries from the Florida Hurricane Catastrophe Fund (FHCF), and recoveries from private reinsurance without excess losses that would require assessments.

Citizens Assets and Budgeted Reinsurance Coverage

As of December 31, 2023, Citizens’ net admitted assets were approximately $10.3 billion. View Citizens’ 2023 Annual Statement. For the 2023 storm season, Citizens had approximately $5.38 billion of private risk transfer placed along with about $5.61 billion of coverage provided by the FHCF. Under this program, a 1-in-85-year storm would have exhausted Citizens’ internal resources and required it to levy a surcharge on its own policyholders and possibly levy an assessment on the Florida insurance property market. This is based on the actual policies insured by Citizens as of 9/30/2023 but restated as if its financial resources were combined into a single account, which happened at the beginning of 2024. For comparison, 1992’s Hurricane Andrew is modeled as a 1-in-43-year storm relative to Citizens’ 9/30/2023 exposure, meaning it would not exhaust Citizens’ resources were it to hypothetically hit Florida today.

The proposed 2024 risk transfer program, which was presented at the April 10 Citizens Board of Governors meeting is promising and reinforces Citizens’ ability to obtain adequate coverage. This document was made publicly available on Citizens’ website prior to that meeting. As noted, the 2024 reinsurance program is expected to include $5.0 billion of new private risk transfer and $500 million of existing private risk transfer remaining from 2023. Also included is about $5.67 billion in coverage provided by the FHCF. The expected placement would cover up to a 1-in-96-year storm before requiring a surcharge on Citizens’ policyholders and would cover a 1-in-102 year storm before requiring an assessment, based on projected policies insured on 9/30/2024.

Citizens Forecasts of Probable Maximum Loss

Per section 627.35191, Florida Statutes (enacted in 2013), Citizens is required to provide the Florida Legislature and the Florida Financial Services Commission, comprised of the state’s statewide elected executive branch officials, a report identifying the aggregate net probable maximum loss, financing options, and potential assessments by February 1 each year. The most recent version of this report was delivered February 1, 2024. A link to the 2024 Probable Maximum Loss Report is available through Citizens’ website here.

Additionally, Citizens routinely shares information with its appointing offices in advance of each of its publicly noticed board meetings, which include Citizens’ quarterly financials and reinsurance layer charts and claims-paying resources. The layer chart document discussed above is an example of Citizens’ future solvency. Layer charts associated with the 2023 storm season and an early projection for the 2024 storm season can be found here.

Conclusion

Chairman Whitehouse, you specifically asked if Citizens has ever contemplated asking for a federal bailout if it were unable to cover losses, and if it has discussed the possibility of a federal bailout with Governor DeSantis, Insurance Commissioner Yaworsky, their staffs, or any other state officials. The answer is an unequivocal “no” to both questions. As explained above, Citizens’ current statutory structure provides for the necessary mechanism to cover its liabilities without federal intervention. In fact, neither Citizens nor its predecessor entities have ever sought federal intervention to pay claims following a storm or series of storms. A historical list of assessments in Florida can be found here.

The state of Florida, under the leadership of Governor DeSantis, has passed significant bipartisan reforms – and as demonstrated above, these reforms have begun to improve the state’s property insurance market. After reviewing our response we hope, as we expressed in our last correspondence, the Budget Committee will recognize Florida as a model of sound financial stewardship and meaningful property insurance reform.

Sincerely,
Timothy M. Cerio
President/CEO and Executive Director