International Association of Black Actuaries Presentation to 2016 Annual Meeting: Residual Markets: “Last Resort” Coverage Arthur R. Randolph, II, FCAS, MAAA, CPCU, ARM, ARe Principal & Consulting Actuary July 30, 2016

Agenda Property Residual Market Plans Citizens Property Insurance Corporation (Florida) Florida: It’s Always Something!! Citizens “Re-Population”

Property Residual Market Plans

Property Residual Market Plans One key difference between auto and property residual market mechanisms is that property mechanisms are all individual “insurance companies” that are generally created by state mandate to service property residual risks. The equivalent on the auto side is MAIF. Each plan has their own Plan of Operation, Governing Board, etc. These plans determine their own policy offerings (Fire only, or HO too? Condo? Renters? Commercial?) based on state needs. Let’s look at a property map. First thing to notice is that 16 states have no property residual market mechanism. Generally, there is a healthy voluntary market and any residual risks may be picked up by the non-admitted market. FAIR Plans – Generally healthy property markets (with exceptions). The industry *may* share in profits/loss from operations, but each state may differ. FAIR Plans + Wind – Operate like a FAIR plan for residual risks EXCEPT Wind; Wind Pool exists for residual market due to wind exposure. Wind – Residual market exists only for wind risk. The way that the plans are funded varies, and industry assessment potential can be significant. Re quires careful management and risk evaluation to handle efficiently. FAIR 28 Wind 2 FAIR+Wind5 None 16 Sources: PIPSO, June 2014 Report, AON Benfield

Fair Access to Insurance Requirements (FAIR) Created in 1960s Provide HO coverage to areas with significant exposure to uncontrollable risks: Vandalism Fire Windstorm Currently offer comprehensive coverage - limited coverage options previously To qualify must make home improvements to limit risk of fire, theft, or water damage

Coastal/Wind Pools First pool created in 1969 after Hurricane Camille Similar to FAIR Plans But, specific to only hurricanes and windstorms Some have broader coverage such as fire or hail Usually coverage restricted to coastal exposures Allow private-market insurers to write policies excluding windstorm/hurricane losses

Assessments Residual market mechanisms often are not self-sufficient Permitted to charge assessments to insurers Can charge residual market insurers and private market insurers to recoup deficits Some states authorize assessments to be reflected via rate level increases Others require insurers to absorb the loss Hypocrisy: “rates must not be inadequate”

Florida: Citizens Property Insurance Corporation

Background Created August 2002 by Florida legislature Combined Florida’s FAIR plan and wind pool Tax-exempt, not-for-profit, government entity Tries not to compete with private market Higher rates Less comprehensive coverage Policyholders subject to assessments

Eligibility Requirements Coverage is not available from Florida-authorized insurance companies OR Premiums for coverage from Florida-authorized insurance companies > 15% of comparable Citizens premium

Depopulation: Process Clearinghouse Citizens required by law to submit renewal policies to Property Insurance Clearinghouse If comparable coverage available and premium < or = Citizens, non-renew Depopulation Program Matches “interested” private-market insurers with current Citizens policies If policyholder/agent is agreeable, private-market insurer is able to “takeout” policy at mid-term Genesis for many new market entrants – capitalization incentive

Depopulation: Process

Depopulation: Policy Counts

Depopulation: Total Insured Value

Depopulation: Market Share

Florida: It’s Always Something Florida: It’s Always Something!! (Regulatory Restrictions / Market Dysfunction)

Catastrophes

Sinkholes

Sinkholes

Sinkholes

Sinkholes

Assignment of Benefits – Water Mitigation

Assignment of Benefits – Water Mitigation

Assignment of Benefits – Water Mitigation

Assignment of Benefits – Water Mitigation

Assignment of Benefits – Water Mitigation

Assignment of Benefits – Roofers

Assignment of Benefits – Roofers

Assignment of Benefits – Roofers

Assignment of Benefits – Roofers

Assignment of Benefits – Roofers

Florida: Citizens Property Insurance Corporation “Re-Population”

What Can Go Wrong? Expect higher rates “Rate” keeper effect Worst of the worst remain Higher fixed expense ratios “Rate” keeper effect Unbound loss trends and inadequate private-market rates Public-perceived correlation between catastrophes and rate levels Next scam? When will the wind blow again?

Questions / Comments Arthur R. Randolph, II, FCAS, MAAA, CPCU, ARM, ARe Principal & Consulting Actuary Direct Dial: 678.894.7258 arandolph@pinnacleactuaries.com