The recent Palm Beach Post article critical of Citizens Property Insurance Corporation’s alleged lavish travel junkets to buy reinsurance was unbalanced, unfair, and frankly over-the-top.
My defense of Citizens may seem unlikely to some. During my tenure with FAIR, our members have filed not one, but two, class action lawsuits against Citizen’s practices which we believed were unfair to policyholders.
But FAIR is FAIR (pun intended). Over the last two years, we have witnessed a positive cultural change in Citizens, a change that, if it continues, will bring lasting benefits to the people and policyholders of the state of Florida. The folks at Citizens still have a long way to go. But when you criticize someone and they start to fix the problem, don’t you owe them a good word?
The Post article covered four areas: denied coverage because of a roof condition, handling of water claims, reinsurance purchases, and so-called lavish travel. The article unfairly attempts to weave these issues together in such a way to suggest that Citizens would prefer to go on junkets to exotic travel spots and waste millions on unneeded reinsurance than to provide coverage to senior citizens and pay legitimate claims.
Indeed, the roof policies and claims handling need work. Citizens must operate like any private insurance company. But they must also serve as the insurer of last resort for those Florida homeowners who simply cannot obtain affordable coverage from the private market. This is a difficult balance. Two years ago Citizens would have likely resisted change. But today, the “new Citizens” has a much better understanding of the need for balance, and a senior management team willing to roll up their sleeves, sit down with stakeholders, and work to improve their policies.
That gets us to reinsurance. Reinsurance is simply insurance for insurance companies. Much like those of us with a mortgage are required to buy homeowner’s insurance, private insurance companies are required by regulators and rating agencies to buy reinsurance. It’s expensive. Roughly half of total collected premium goes to pay for it. On the other hand, much like homeowners who do not have a mortgage, Citizens is not required to buy reinsurance. With the power to assess, or tax, Florida’s insurance consumers if they run out of money to pay claims, Citizens has a deep well from which to draw. The policyholders hardest hit are at Citizens, but every other property insurance consumer in Florida, including auto insurance consumers, are also on the hook. Citizens has to determine each year whether buying reinsurance coverage and minimizing the possible tax they would need to levy is worth the cost of that reinsurance.
In our view, Citizens management made a smart and reasoned choice. They spent $300 million on reinsurance which secured $3.39 billion of coverage and contributed to a reduction in assessment risk from $11.6 billion to $2.3 billion. The transaction had negligible impact on the terms private insurance carriers received and paved the way for potentially more favorable terms from the investment community in the future when we really need it. Even slightly better terms in such a scenario could mean billions of dollars in savings for Florida insurance consumers.
That gets us to travel. Travel is unavoidable when buying reinsurance. Almost two thirds of reinsurance companies are located in Bermuda with a bunch more in London. Investors who make multi-billion dollar deals want to see principals face to face, ask tough questions, and take the full measure of who they are dealing with. Citizens has a new CFO, a new Chief Risk Officer, and a new Board Chair. Along with other key executives, all three needed to be physically present and play an active visible role during the negotiations. Hotels in these locations are expensive.
A quick search on one of those budget travel sites showed the cheapest room in all of Bermuda at $352 per night, with several choices at twice that rate. Citizens had a travel expense problem in the past that was fixed. Their employees now have the same travel standards as any other state or federal agency. Chris Gardner, as Board Chair, serves as an unpaid volunteer, not an employee. Still, he reimbursed Citizens for the $104 ($52 per night for two nights) over the travel guidelines. Was this really newsworthy? The Brits have a name for frivolous news stories in the heat of summer when there is little else to print. It’s called “Silly Season”.
As the legendary Sam Rayburn, the longest serving speaker of the US House of Representatives once said: “Any jackass can burn down a barn, but it takes a carpenter to build one.” We at FAIR prefer to work with the new Citizens to find better ways for them to operate a smart business that covers Floridians who have nowhere else to go and treats them fairly when they have a claim.
Jay Neal is President and CEO of FAIR, the Florida Association for Insurance Reform