The Dogs of Wind

Sunday's Pensacola News Journal finally addresses the scandalous "depopulation" of Citizens Property wind insurance customers to unproven start-ups. We wrote about this as it was happening more than three months ago.

In a prominent article aptly titled "Citizens Shifting Risk, But To Whom?" Leslie Conn more or less fingers the real culprit behind this scandal-in-waiting: the state legislators we have been sending to Tallahassee:

Citizens Insurance's transfer of 25 percent of its policies to private firms is raising concerns that Florida homeowners could be exposed to financially shaky insurers.

The concerns arise chiefly from a Citizens program called "depopulation."

Approved by the Legislature in 1996, the program allows the state-run insurance company of last resort to offer financial incentives to private companies that agree to handle or "take out" some of Citizens' riskiest homeowners policies for at least three years.

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Six of the 10 companies taking over Citizens policies this year were licensed in Florida less than a year ago. Only one of the 10 companies, Service Insurance, has earned a secure rating from A.M. Best., which is widely considered an industry leader among financial ratings firms.

As Conn reports, since the first of the year Citizens Property "has moved 242,000 of its approximately 1 million policies into the hands of smaller, Florida-based private companies." Higher-risk barrier island homeowner wind insurance policies were among the first to be transferred.

Most of the private companies to which Citizens Property has handed off its own policies are start-ups with no meaningful track record. Many, as local insurance agents like David Ratcliffe have been warning Pensacola Beach customers for some time, exist only 'on paper.' They aren't fully staffed or reliably rated, and most have no experience handling storm claims. Yet, "the state is encouraging us to do business with them," says Ratcliffe.

Pensacola Beach resident Monica Kellner is among the "depopulated" customers. She told Conn that after Hurricane Dennis -- a relatively small, abbreviated, but intense storm -- ripped off her roof, collapsed interior ceilings, and damaged house contents, dealing with her new insurance company "turned out to be a nightmare."

"I've turned Florida Peninsula in to the Department of Financial Services, and they just blow off the state," she said.

Even today the new company's self-promoting description of its claims practices speaks, tellingly, in the future tense:

"... adjusters will be extremely familiar with our policy and will be outfitted with the latest automated tools for increased efficiency and accuracy."

Yet, it seems, Florida Peninsula may not be among the worst. Conn reports that two of the new companies already have been rated by A.M. Best as financially "vulnerable," five more (including Florida Peninsula) haven't been rated at all, and two have refused altogether to meet with the insurance rating service so it could review finances, accounting practices, and risk management policies.

How on earth can the state legislature countenace, much less mandate as it does, Citizens paying multi-million dollar rewards, for such behavior?

There are other scandalous aspects to the depopulation mess. One that got a lot of ink a month ago was the conflict of interest exposed when some Citizens' staff and then-board chairman Ed London were caught planning a new start-up company of their own to nuzzle up to the Citizens feeding dish.

That was nipped in the bud, but as Conn notes in her article others have left Citizens' employ to start up new insurance companies. If they survive three years, they collect tens of millions in state subsidies. If not, they can always take the company into bankruptcy or shut down Florida operations, as 44 companies did after Hurricane Andrew in 1992.

This is known in some quarters as gambling with the house's money. On the street it's called "heads they win, tails you lose."

Conflicts of interest at Citizens are getting the Florida legislature's attention. But the bigger problem is the systemic one created by legislators themselves: state law mandates that Citizens Property Insurance "depopulate" policies even to untested, unrated, inexperienced private insurance companies. Citizens is required to pay them tens of millions of dollars in bonus incentives after only three years. Then the law lets new companies surrender their policies -- as many have done -- back to Citizens. And the cycle repeats -- another go 'round of depopulation, another round of incentive payments, etc. etc.

If well-established, financially solvent companies in the private market "have no capacity left to write policies," as Citizens' press secretary Justin Glover says, then it's time for the Florida legislature to recognize that throwing tens of millions of dollars away every year to subsidize shaky new companies is no answer. We need to make a full-fledged commitment to building a competent, sound, reliable, and efficient state-owned insurance company.

In hurricane-prone Florida, that's as much a public infrastructure need as publicly-financed highways, police, and fire protection.