Citizens’ New Exposure Reduction Program Creates Opportunities for Private Insurers

by Holland & Knight LLP

On September 7, Citizens Property Insurance Corporation's Board of Governors approved — subject to formal approval by the Florida Office of Insurance Regulation — a Surplus Note Depopulation Program designed to encourage the removal and extended retention of a substantial number of policies from Citizens — a not-for-profit, tax-exempt government corporation — by private-market insurers, as well as to reduce the size of Citizens.

300,000 Policies Could Be Removed 

The goal of the program, which may begin as soon as December, is to reduce both Citizens’ claims liability and the potential for assessments on all types of insurance policies to cover losses arising from a storm or a series of storms affecting Florida homeowners.

The terms of the new depopulation program have similar characteristics to the Insurance Capital Build-Up Incentive Program approved by the Florida Legislature in 2006. Under the new program, by taking capital from its $6.2 billion in reserves, Citizens will lend money, in the form of 20-year loans called "surplus notes," to those insurers who qualify by, among other things, agreeing to “take over” policies (i.e., assume large blocks of Citizens’ personal residential policies and hold the policies for 10 years.) In its press release, Citizens estimates that as many as 300,000 policies could be removed under the new program.  

Citizens solicited depopulation ideas from private insurance companies that do business in Florida in an effort to significantly reduce the number of policies Citizens has issued, which currently stands at approximately 1.5 million.

Program Details

Key provisions of the new depopulation program, as per the Citizens press release, are as follows:

  • Citizens will dedicate a maximum of $350 million to support the program. The maximum amount an assuming insurer can receive is $50 million.
  • Companies must complete a detailed application to Citizens addressing financial eligibility, including reinsurance and business plan information, and must receive written approval of its proposal from the Florida Office of Insurance Regulation.
  • Participating insurers may not use the surplus note funds in calculating shareholder dividends; purchasing non-permitted investments or physical assets; paying advances or distributing funds to parent, subsidiaries or affiliates; or making any payment, including bonuses, to their Managing General Agent (MGA) in excess of the contracted MGA fee.
  • An assumption company that fails to make its surplus note payments on time or fails to meet other program requirements may incur an interest rate increase, acceleration of the payment schedule for the note principal or interest, a reduction in the term of the note and/or a demand for immediate full repayment of the surplus note.

The program also includes important safeguards and assurances for Citizens policyholders whose policies are assumed under the program:

Policyholders will continue to be allowed to opt-out of the assumption and remain with Citizens, as is the case with the current depopulation program.

In addition, the assuming insurer must agree to:

  • renew the assumed policies for at least 10 years after the expiration of the current policy term
  • limit rate increases for renewal offers from January 1, 2013, through January 1, 2016, to no more than 10 percent per policy per year
  • provide substantially the same coverage for the first three years as that provided by Citizens

Prior to implementation of the program, the Office of Insurance Regulation, by law, must review and approve the plan. 

Holland & Knight will be glad to answer any questions you have regarding this new depopulation program.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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