Too Many Mansions?
Florida's state-run insurer continues to offer unlimited coverage for the waterfront homes of the wealthy — at prices that some claim are too competitive with private insurers.
Florida's Department of Financial Services, a state agency, oversees Citizens Property Insurance Corp., which was created to be an insurer
of last resort for property owners who cannot find coverage on the private market. Citizens operates as a free-standing company but is overseen by a seven-member board of governors appointed by Chief Financial Officer Tom Gallagher.Citizens, citing state and federal law, won't disclose where the home is or who owns it. But it's not the only expensive home the state insures, not by a longshot. In providing insurance to homeowners who say they can't otherwise get it, Citizens has taken on plenty of mansions as potential state liabilities. In fact, the value of just the top 10 homes Citizens insures against hurricanes totals $107.8 million. The most expensive home Citizens insures is valued at $15 million, not counting the land.
All told, Citizens' wind-only coverage pool insures 4,674 single-family homes in Florida, each insured for more than $1 million. The average value of the million-dollar-plus homes is $2.5 million.
Citizens' total exposure from homes worth $1 million is more than $11.8 billion. In Palm Beach County alone, Citizens' potential losses from mansions is $1.5 billion more than all the losses it incurred statewide from the summer's four hurricanes.
In addition, there's evidence that many owners of high-value homes don't need to rely on the state for coverage. Private insurers claim Citizens is undercutting competitors who already write insurance for expensive homes -- raising questions about Citizens' mandate to be the insurer of "last resort" and to operate in a way that encourages private firms to compete in the market.
Citizens, created in 2002, combined the Florida Windstorm Underwriting Association, a wind-only insurer from the 1970s, and the Florida Residential Property and Casualty Joint Underwriting Association, which was created by the state after 1992's Hurricane Andrew to provide coverage for those who couldn't get it.
In principal, Citizens is supposed to operate like every other insurance company. It takes in premium payments from policyholders and pays claims using the premiums and the money it makes investing those premiums. Citizens' premiums are supposed to be high enough to encourage private insurers to enter the Florida market, but low enough to keep coverage available for those who can't find it. It has a separate high-risk account, the windpool, to insure homes in coastal areas that can get standard coverage for fire and theft but not hurricane insurance.
But there's a difference between Citizens and private insurers: If a catastrophe creates more claims than Citizens can pay, Citizens can assess the homeowner policyholders of all insurance companies operating in the state. In effect, the property owners who can get private market insurance serve as the backstop for the state-insured property owners who can't get private insurance.
Citizens limits its exposure from some policies. For example, it won't insure a property owner for more than $1 million in a "multi-peril" policy that covers a broad range of dangers -- fire, theft, hurricane and other mishaps. Thirty-five properties insured by Citizens bump up against that $1-million cap.
But Citizens doesn't limit the coverage it will write for homes in its windstorm-only pool, its high-risk account.
That uncapped coverage creates several issues. One is a scenario in which Citizens might have to pay claims from its wealthy coastal policyholders by charging an assessment to the owners of modest, privately insured homes all across the state -- homeowners who are less able to pay that assessment than the wealthy homeowners are to absorb a loss.
In contrast to Citizens' unlimited windstorm policies, federal flood insurance is capped at $250,000 per dwelling with another $100,000 for personal property. In Texas, the state windstorm insurance association caps dwelling coverage at $406,000, though individual homeowners can purchase reinsurance for larger amounts.
Louisiana Citizens Property Insurance Corp., launched in 2004, caps its per home exposure at $250,000, though it will raise the cap in April to $500,000. "There are very few companies writing high-value homes," says Louisiana Citizens Executive Director Terry Lisotta, who adds that "We don't want to be a dumping ground for high-value homes."
Another issue is Citizens' role as a "last-resort" insurer to provide coverage for those with no private market option.
Insuring expensive waterfront homes is pricey, but there are private market options. Wealthy homeowners can get coverage, say private insurers, and better service. Specialty companies called surplus lines carriers offer it throughout Florida. Boston-based Lexington Insurance Co., an AIG unit, began offering coverage, including hurricane coverage, to higher-end homes after Hurricane Andrew in 1992 and has since spread its program to cover earthquakes in California and other risks nationally. "We've been very successful," says John Moran, vice president of personal lines.
Lexington covers some Florida homes for as much as $40 million, and Moran says that except for the Keys, there is no region of the state it considers off-limits for its coverage, including the windpool area. "We're looking at how we can expand in the state," Moran says.
Another AIG entity, AIG Private Client Group, provides insurance for the "ultra-high net worth client" who wants a sole-source for auto, home, hurricane, kidnapping ransom, surplus flood, liability and other risk management services. While every risk is underwritten individually, a minimum Florida policy might cost $50,000 a year to cover a $3.5-million to $4-million home, jewelry, art, four or five vehicles and $10 million in excess liability, says David Spencer, central zone marketing manager.
Larry Stowe of Elliott McKiever & Stowe in Coral Gables and past president of the surplus lines association in Florida, cites a house in Weston, the town farthest from the coast in Broward, that his firm got covered for $2.3 million: With a 5% deductible and 10% wind-only deductible, the annual premium, including tax, is $29,072.
Homeowners on the ocean face 10% surcharges, higher deductibles and higher rates for older homes, says Efren Serrate, a wholesale insurance broker with U.S. Insurance Brokers in Miami and a managing general agent and authorized correspondent for a Lloyd's of London syndicate.
The difficulty in the marketplace, Serrate says, is competing with Citizens. "Citizens was supposed to be the market of last resort, but it's not. It's the preferred market. Believe it or not, they're still cheapest out there." Citizens undercuts private firms' rates by 20% to 30% and also has a low 2% deductible, he says.
Serrate says the private insurers stay in the market by offering more flexibility than Citizens. Citizens, for instance, has limits on living expense reimbursement that some high-value homeowners might find restrictive.
And unlike Citizens, Serrate can offer additional coverage for jewelry, furs and art collections and cover homes held by a partnership or limited liability corporation. "Where Citizens is pretty much etched in stone, we're not," Serrate says, and that's how he picks up business.
Overall, is it "enough to compete with Citizens? No," he says.
Susanne Murphy, Citizens corporate counsel, says Citizens, in setting its rates, doesn't consider what surplus line carriers charge. Florida law requires Citizens to charge more -- be "non-competitive" -- than the approved rates charged by authorized insurers, "admitted" carriers such as AllState and State Farm, whose rates are approved by the state.
Surplus lines insurance carriers are "non-admitted" and their rates aren't approved. "So when we perform our competitive rate analysis, we are comparing our rates to those of authorized insurers in Florida, not surplus lines writers," Murphy says.
The difficulty is that many authorized insurers don't write high-value home coverage. AllState Floridian, for instance, doesn't write over $600,000, preferring middle-market homes.
Asked whether surplus lines carriers could provide coverage for some Citizens customers, she responds that "I would presume that some of the risks currently being covered by Citizens could find coverage with a surplus lines insurer." Murphy says some customers choose Citizens rather than a surplus lines writer because Citizens' rates are lower, because the customer wants a company whose forms and rates are state-approved, because Citizens has a state law-mandated lower deductible or because customers don't like the terms offered by the surplus lines writer.
While Citizens recently announced plans to raise premiums an average of 12% for wind-only policyholders, capping coverage, Murphy says, is up to the Legislature. The statute that governed the old Florida Windstorm Underwriting Association, Citizens' predecessor, allowed it to insure properties of more than $1 million if the owner could show that coverage for the full value of the property wasn't available on the private market. "It is to some extent a public policy decision," Murphy says. "It may be appropriate to explore moving these policies out into the market or some kind of layering of coverage where Citizens would participate in some portion of the coverage."
The last attempt to cap coverage came in 2000 by then-state Rep. Stan Bainter, R-Eustis, while he chaired the House Insurance Committee. Bainter says his committee learned a "great many" of the state-insured mansions were second homes owned by non-residents, yet "here we were with unlimited coverage on these secondary residences. We were shocked when we found that out."