There is no doubt Florida is in the midst of a homeowner’s insurance crisis. After decades of disaster-level storms and hurricanes, the insurance industry is barely keeping its head above the financial waters due to the unprecedented storm seasons and the rising numbers of annual claims, not to mention excessive litigation. At the same time – and perhaps even more alarming – is the reality that a record number of home and business owners are losing coverage or denied insurance coverage altogether.

As a result, the Florida government diligently works to find solutions, but it’s a challenging task. As private insurance companies go out of business or refuse coverage throughout the state, the state’s designated backup plan – Citizens Insurance Program – can no longer sustain the financial risks associated with its consistent and rapid policy growth.

Citizens Insurance: When Growth is NOT a Good Thing

In 2002, Florida created and implemented a state-run insurance program to help bridge the gap, called Citizens Property Insurance. While the Citizens concept was launched, legislators simultaneously began crafting legislative changes to support the private insurance sector and protect its government-run Citizens program. The result of this legislation was the recently passed Florida Senate Bill 76 (SB 76). SB 76 is a prime example of how our state is trying to create a more fair and equitable insurance platform while still honoring the interests of both the general public and private insurance sectors.

While we hope the long-term value of that legislation continues to build, it’s also true that more and more private insurance companies are fleeing the state or refusing to cover Florida home and business owners. As a result of the insurance industry’s cut-and-run, the Citizens Insurance program growth has been rapid and exponential. Unfortunately, this growth poses astronomical risks to its policyholders.

Citizens Property Insurance Basics

According to the state’s website:

As a government entity fulfilling a public purpose, Citizens aspires to provide insurance products and services that meet the needs of Florida property owners who are, in good faith, entitled to obtain coverage through the private market but are unable to do so. We strive to reduce the financial burden on all Floridians by being good stewards of the premium funds entrusted to us. In all that we do, we conduct ourselves with the highest level of ethical behavior.

These insurance plans aim to:

• Cover all homeowner’s who need insurance and qualify with Citizens’ guidelines
• To keep homeowners insurance policies affordable
• Make insurance coverage an equitable solution for all Florida homeowners

One of the stipulations behind the Citizens program is that homeowners only qualify if the private insurance sector won’t cover homeowners at “a marketable rate.” The program was designed as the “last resort” insurance company to take up the moderate amount of policies resulting from clients who couldn’t afford to pay private insurance carrier premiums.

Moderation was the key element to the Citizens plan. The program relies on a reasonable number of policies, with slow growth over time, to keep its overhead down and the underwriting stable. To accomplish this, to qualify for a Citizens policy, owners had to prove that:

• A Florida-authorized insurance company would not offer them coverage.
• Premiums from Florida-authorized insurance companies were more than 15% higher than similar coverage from Citizens.

In the beginning, those stipulations worked to keep the Citizens’ policyholders at manageable numbers.

However, since 2011 the continued private insurance carrier crisis, rife with policy cancelations and policy refusals, has exposed the Citizens program to unavoidable risk. Moreover, as a result of the program’s rapid growth from 2012 to the present, the entity is teetering on the brink of collapse.

A Tale of Unprecedented Growth

In March of 2021, the Insurance Journal reported on a Florida State Office of Insurance Regulation (OIR) hearing, where the OIR heard from Citizen Insurance Program CEO, Barry Gilway.

Gilway explained how the rapid growth of Citizens puts the entire program in jeopardy. He reported:

• Citizens are growing by 5,000 new policies per week.
• By the end of 2021, they were expected to reach a policy count of 700,000.
• Florida carriers’ net underwriting losses for 2020 were expected to reach a combined $1.6 billion, Gilway said, with income losses totaling nearly $840 million.

He concluded those statistics by reiterating, “The capacity in the marketplace has shrunk to the point where unfortunately Citizens is becoming not the market of last resort but, in many cases, the market of first resort.” Unfortunately, that was never the intention for an entity that was supposed to be a “residual market mechanism.”

As a 2020 article in the Tampa Bay Times reports that while the staggering number of storm-related claims is an issue for Citizens, litigation surrounding non-stormwater-related damage claims is an even larger threat. The article states, “A rise in water damage claims unrelated to storms land in court, bringing additional legal fees on top of any claims that would be paid out…these claims make up the majority of Citizens’ closed claims every year and have risen steadily since 2013.”

Presently, the Citizens business foundation is unstable. Florida homeowners find themselves pressed into a situation where they either forgo homeowners insurance altogether, putting their lending privileges at risk, OR they pay for insurance policies that may never be returned in payouts in the event their building is damaged.

The Florida Insurance Marketplace is Shutting Down

The failure of the Citizens Insurance Program is a final red flag in a sea of red flags – evidence the Florida insurance market is shutting down, and legitimate solutions must be brought to the table ASAP.

Gilway succinctly summed up the situation saying, “The consistency of loss across the entire marketplace is absolutely staggering.”

Some of the most salient reasons for that dismal reality are:

• Five years of excessive losses due to excessive litigation and the associated fees (800 lawsuits were filed against the insurer in February, and 78% of the claims it receives are from non-weather water losses).
• The increased rhythm of “catastrophic events” taxing insurance carrier coffers.
• Contractor schemes (a focus of SB 76’s regulations).
• An unprofitable marketplace.

Gilway warns, “The reality is the [insurance] marketplace in Florida is shutting down.” While Citizens Insurance Program is designed to offer very basic homeowner’s insurance at competitive rates, and their ability to raise rates is limited, they are in the same sinking boat as the private insurance companies.

If the monies earned in a series of years are less than the cumulative monies paid out in the event of a catastrophic event – particularly those deemed as 1-in-100 year events – there is simply not enough money to go around. As a result of the impossibility of remaining profitable in a state known for hurricane-force winds and flooding, Florida’s OIR and Citizens are scrambling to rectify the problem.

FSU Weigh In on Solutions

In the spring of 2020, Citizens hired Florida State University to provide research and evidence-based solutions. Specifically, they asked the University research team to:

• Identify ways the state-run insurer of last resort can lessen its overall exposure to risk.
• Operate more effectively.
• Encourage the private market to absorb more of its policies.

Unfortunately, the FSU study concluded Citizens would have a challenging time accomplishing those goals. According to the Tampa Bay Times article, the FSU report stated that unless the private insurance sector stabilizes and continues honoring insurance coverage at marketable rates, there might not be a solution.

That said, FSU recommended stringent stipulations that should be in place before a building is insured or before a policy is renewed. These are some of the same regulations put forth in Florida SB 76, including:

• Updating building codes to make buildings more weather resistant.
• Requiring homeowners to provide proof of professional home inspections every three to five years, vetting the building’s structural stability, weatherproofing, and well-maintained electrical and plumbing systems.
• Implementing alternative litigation processes such as early claim offers and dispute resolution options.
• Setting stricter limits on the time that can pass between an event and when a claim is filed.
• Ensuring all construction and subcontractor work is performed by a licensed/certified contractor or professional.
• Requiring new construction contractors to verify a building can be insured by the private sector in particular geographic locations before breaking ground.

The hope is that fewer claims will be filed by ensuring homes and businesses are more structurally sound and competently built, repaired, and maintained.

The team at Super Inspection Pros keeps a close eye on insurance regulations. We’re happy to provide four-point or full home inspections for Volusia County home and business owners, as well as real estate agents, to help you qualify for the most affordable private insurance policies available. Contact us to learn more.