1. 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

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

3. Property Residual Market Plans

4. 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

5. 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

6. 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

7. 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”

8. Florida: Citizens Property Insurance Corporation

9. 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

10. 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

11. 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

12. Depopulation: Process

13. Depopulation: Policy Counts

14. Depopulation: Total Insured Value

15. Depopulation: Market Share

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

17. Catastrophes

18. Sinkholes

19. Sinkholes

20. Sinkholes

21. Sinkholes

22. Assignment of Benefits – Water Mitigation

23. Assignment of Benefits – Water Mitigation

24. Assignment of Benefits – Water Mitigation

25. Assignment of Benefits – Water Mitigation

26. Assignment of Benefits – Water Mitigation

27. Assignment of Benefits – Roofers

28. Assignment of Benefits – Roofers

29. Assignment of Benefits – Roofers

30. Assignment of Benefits – Roofers

31. Assignment of Benefits – Roofers

32. Florida: Citizens Property Insurance Corporation “Re-Population”

33. 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?

34. Questions / Comments
Arthur R. Randolph, II, FCAS, MAAA, CPCU, ARM, ARe
Principal & Consulting Actuary Direct Dial: