An Unwise Growth Subsidy?
Citizens insures $5 billion worth of construction projects in places many believe are unwise to build. Should Florida homeowners be on the hook for a $74-million condo project?
Citizens also provides other types of insurance, however -- including a type of insurance to developers that critics say stimulates building in high-risk areas and will leave residential policyholders all over the state on the hook for the bill if a storm strikes the projects.
That "builders risk" insurance provides coverage to developers while their buildings are under construction. And the exposure Citizens has under those builders risk policies is growing rapidly -- up by some $800 million this year alone. At the end of May, Citizens was covering 5,723 construction projects -- condos, single-family homes, commercial buildings -- with a total exposure of $5.1 billion.
Without Citizens' writing builders risk coverage, the state could see some of that $5.1 billion in development, and its jobs and economic opportunity, curtailed.
But critics say that by writing coverage in areas that private insurers find too risky, Citizens encourages development where it shouldn't occur. And it all but guarantees that when the projects are done, the owners will wind up having to get their homeowners insurance from Citizens. That thwarts, rather than advances, the state's goal of shrinking what has become Florida's largest insurer.
In addition, because Citizens can assess non-Citizens policyholders everywhere in Florida to cover its losses, inland homeowners could pay more than what they already do to cover losses of coastal developers building projects the private market won't cover.
As with Citizens windstorm homeowners policies, the builders risk coverage involves properties in high-risk coastal areas. One builders risk policy covers a $74-million condo under construction on the beach. (Citizens is prohibited by law from identifying its customers.) Earlier this year, 1,000 of Citizens' policies were for more than $1 million each, and the 10 biggest projects Citizens insures total $447 million in exposure.
Geographically, Citizens' heaviest risk is in southeast Florida, where it has $2.1 billion in vulnerabilities, and northwest Florida, where it has $1.3 billion in exposure.
Typically required by lenders, builders risk has a sliding scale of vulnerability for an insurer -- almost nothing when a project is just coming out of the ground but a large risk in the final days of construction.
Like traditional homeowners insurance ["Breaking Point," June, FloridaTrend.com], builders risk has gotten expensive and scarce after eight Florida hurricanes in two years. "It's not so much that they won't write, but the pricing is ... there's sticker shock," says Matt Wester, agent relations administrator for the Florida Surplus Lines Service Office, a state-mandated non-profit association of agents who sell the specialty insurance products that fall under the surplus lines designation. High-priced projects, for which insurers turn to the reinsurance markets for support, are particularly tough to insure, he says.
Pat Chouinard, a vice president and insurance broker with Amwins Brokerage of Florida in Tampa, says private carrrier coverage that cost 30 to 40 cents per $100 of value a year ago now costs as much as $1.50 per $100. A few carriers have stopped writing new builders risk coverage that includes windstorm insurance in Southeastern coastal states. Noting the condo buildings proposed for Tampa, Chouinard says, "You just wonder, who's going to write the coverage on those?"
Builders risk coverage that used to cost 30 to 40 cents per $100 of value a year ago, now costs up to $1.50 per $100, says insurance broker Pat Chouinard.
Unlike Citizens, with its $74-million exposure on a single property, private sector insurers usually layer coverage on large projects, with different carriers taking different pieces of the risk -- one taking, say, the first $5 million in losses, another the next $5 million.
The Florida Insurance Council, an insurance industry group, has urged the state to get Citizens out of the builders risk business in high-hazard areas. "If Citizens is the only source for this coverage, it will be the only insurer available for the homes or businesses when they are completed," according to a Florida Insurance Council report in February. "These are structures that are essentially uninsurable and should not be built."
The state's insurance consumer advocate, Steve Burgess, says Citizens might want to consider the advisability of continuing builders risk insurance. "I would like to see the policymakers take a look at it and let every stakeholder bring forward their arguments. When you talk about $5 billion of exposure, I think it's worth a look."
There is precedent for Citizens to leave a market in which the surplus lines industry offers coverage. The Legislature this year required Citizens, beginning in 2008, to stop insuring homes that are valued at more than $1 million. The state was trying to lower Citizens' exposure to expensive properties ["Too Many Mansions?" February 2005, FloridaTrend.com].
Citizens' board supported eliminating coverage for the $1 million-and-up market and in a meeting in late June was scheduled to consider getting out of the builders risk business in high-risk areas. Citizens spokesman Justin Glover acknowledges that "eliminating coverage would be a way to reduce exposure."