Citizens rate freeze comes with risks

Published January 18, 2007

TALLAHASSEE - It seems like a quick and easy way for Florida lawmakers to fulfill a promise and give immediate rate relief to 1.3-million of the state's policyholders.

The plan: Freeze Citizens Property Insurance rates at the Dec. 31, 2006, level for all of 2007.

Most Citizens policyholders would save at least 25 percent. But the sure fix could also leave Citizens dangerously underfunded if the state suffers major hurricane damage and set the stage for a far greater rate hike in 2008.

Bills from both the House and Senate include provisions that would rescind Citizens' Jan. 1 rate hike of 25.6 percent, an increase that was approved by state regulators in October. The bills also delete language from a law passed last year that would have required an additional 55.8 percent increase effective March 1.

Citizens officials say they welcome the 55.8 percent rate rollback, because it was not factored into their rate structure to begin with.

But the Jan. 1 increase is a different animal. That increase was Citizens' only rate hike within the last year and was judged by state regulators as actuarially sound, meaning Citizens will have the money necessary to cover claims and build reserves.

With the 25 percent increase, Citizens would have about $4-billion in cash at the end of 2007. Without the increase, Citizens would have $352-million less than that. Among other effects, the reduced reserves could lower Citizens' bond rating, which means it would have to pay more to buy bonds.

But the primary effect would be on policyholders because eventually Citizens would need to make up the difference.

"Whenever the freeze is lifted," said Citizens spokesman Rocky Scott, "the rate increase would be substantial because we'd have to make those rates actuarially sound."

By law, Citizens' rates must be actuarially sound, and lawmakers are unlikely to change that.

Scott wasn't alone in his assessment.

"You could roll back the rates," said Insurance Commissioner Kevin McCarty, "but the next filing could whipsaw back up to where they are."

McCarty said for the 25 percent rate reduction to remain sound, it must be tied to proposals that would allow Citizens to compete with the private market, ideas that are not popular with lawmakers.

What is clear, Scott said, is that without the rate increase, if Florida is hit with major storms this year, Citizens could run a huge deficit, as it did in 2004 and 2005. Then all Florida policyholders would make up the shortfall.

House Speaker Marco Rubio said other measures in the bill could lead to savings by Citizens policyholders.

"What we're doing now is stopping rate increases that people can't afford to pay, because the alternative is mortgage defaults and foreclosures," Rubio said.

Tom Zucco can be reached at zucco@sptimes.com or 727 893-8247.