Products & Rates Products & Rates Product and Rate Development Board Workshop December 8, 2002 1
Policy Language Policy Language Citizens uses Insurance Service Office (ISO) policy forms and modified ISO policy forms to adjust for the unique coverage that is needed for a residual market such as a wind only policy. The completed forms are filed with the Office of Insurance Regulation for final approval. Insurance Service Office (ISO) = ISO is the property and casualty insurance industry's leading supplier of statistical, actuarial, underwriting, and claims data. ISO is also the acknowledged leader in writing policy language to cover property and liability risks. Florida’s Office of Insurance Regulation has accepted the ISO policy language for all policy forms. ISO’s standardized policies help regulators confirm that the policy meets basic coverage expectations and the standardized language helps confirm the ease of policy reading and understanding by policyholders. Board Workshop December 8, 2002 2
Policy Policy Property Insurance Policy The insurance policy is a contract of adhesion and as such it is important to write the contract in a way to eliminate any ambiguity to avoid payment of claims that were not intended to be covered based on the rates charged. The following are the sections of a property and liability policy: 1. Declarations – Summary of information declared by the insured and the coverage provided by the insurer. 2. Definitions – Defines words in the contract. 3. Insuring Agreements – Defines how the insurer will make payment or provide a service, such as, “We will pay for loss to Covered Property from any of the Covered Causes of Loss.” 4. Exclusions – States what the policy insurer does not intend to cover. 5. Conditions – Outlines the conditions that must be met by the policyholder for the insurer to provide coverage, such as timely notification of a loss. 6. Miscellaneous Provisions – Utilized when an item does not fall into one of the above categories, such as to explain voting rights of the insured in a mutual insurance company. Board Workshop December 8, 2002 3
Policy Coverages Policy Coverages INDUSTRY - COVERAGE Section I - First Party Coverage Section II- Third Party Coverage Building Liability Contents Medical Payments Detached Structures Loss of Use CITIZENS - COVERAGE Personal Lines Account: Section I and II coverages, with the exception of Dwelling Fire Policies (Section I coverage only) and policies where the insured is a corporation only (Section I coverage only) High-Risk Account: Section I coverage only Commercial Lines Account: Section I coverage only Board Workshop December 8, 2002 4
Causes of Loss Forms Causes of Loss Forms Basic Form – Causes of loss consist of the following perils specifically named in the policy: fire, lightening, windstorm, hail, explosion, riot or civil commotion, aircraft, vehicles, smoke, vandalism or malicious mischief, theft and volcanic eruption. Broad Form – Causes of loss consist of the Basic causes of loss plus six others. Special Form – Causes of loss include any “risk of loss” that is not specifically excluded. Peril = a specific cause of loss, such as fire, windstorm, or theft. Board Workshop December 8, 2002 5
Perils Insured Against Perils Insured Against Personal Lines Account: Broad and Special forms. High-Risk Account: Modified Broad and Special forms. Covers only the named perils on the policy. The named perils are: Hurricane, Hail, and other Windstorm. Commercial Lines Account: The named perils are: Fire, Lightning, Explosion, Windstorm, Hail, Smoke, Aircraft, Vehicles , Riot, Civil Commotion, Sinkhole Collapse, and Volcanic Action. Board Workshop December 8, 2002 6
Policy Forms Policy Forms INDUSTRY FORMS - RESIDENTIAL PROPERTY Homeowners 1 - Basic Form Homeowners 2 - Broad Form Homeowners 3 - Special Form Homeowners 4 – Contents Broad Form Homeowners 6 – Unit-Owners Form Homeowners 8 – Modified Coverage Form INDUSTRY FORMS - COMMERCIAL PROPERTY CP – Building and Personal Property CP – Buildings Under Construction CP - Condominium Associations CP - Commercial Condominium Unit Owner Board Workshop December 8, 2002 7
Policy Forms Policy Forms CITIZENS - RESIDENTIAL FORMS Homeowners 3 - Special Form Homeowners 4 – Contents Broad Form Homeowners 6 – Unit-Owners Form CITIZENS - COMMERCIAL FORMS CP – Building and Personal Property CP – Buildings Under Construction CP - Condominium Associations CP - Commercial Condominium Unit Owner Board Workshop December 8, 2002 8
Products Products Citizens offers three basic types of property & casualty insurance products: – Residential (PLA and HRA) Homeowner Condominium Unit Owner Tenant Contents Mobile Homeowners Dwelling Fire – Commercial Residential (CLA and HRA) Condominium Association Apartment Complex Homeowners Association – Commercial Non-Residential (HRA) Office Restaurant Mercantile Building Motel Church Other Board Workshop December 8, 2002 9
Territory Territory Personal & Commercial Accounts: Policies are written for eligible consumers, regardless of the location in Florida. High-Risk Account: Policies are written for eligible consumers, only in the eligible areas (see map). These areas represent 29 of the 35 coastal counties in Florida. Board Workshop December 8, 2002 10
Rate Development Rate Development Industry - Rate Development Actuaries develop premiums to pay losses according to expected frequency and severity to ensure the insurance company will not become insolvent. The premiums are not to allow for excessive insurer profit and must not be unfairly discriminatory. Class Rating: Theoretically, each insured needs to be charged a premium specific to that risk; however, this is impractical and therefore the classification method of grouping like exposures is utilized (law of large numbers). Board Workshop December 8, 2002 11
Rate Development Rate Development Industry - Rate Development Simple view of rating steps: 1. Determine pure cost of protection 2. Determine expense loads such as agent commissions, premium taxes, administrative expense contingency reserves, acquisitions costs and profit margin 3. Combine 1 & 2 above for a gross premium that is charged to the policyholder Board Workshop December 8, 2002 12
Rate Development Rate Development Citizens – Rate Development PLA – Top 20 approach HRA Residential – Modified top 20 approach CLA – ISO loss cost combined with modified top 20 approach HRA Commercial - ISO loss cost combined with modified top 20 approach Board Workshop December 8, 2002 13
Rate Development Rate Development PLA - Multi Peril Residential Rate Methodology In 1995 Legislature passed a law requiring Citizens (formerly Florida Residential Property and Casualty Joint Underwriting Associate) to base its rates on those charged by the Top 10 personal residential companies in the state. This concept was designed to have Citizens’ rates not competitive with the authorized market place. A year later in 1996, an amendment was past changing the methodology to a top 20 approach. This process has evolved over the years and the following is a summary of how the process currently works. Board Workshop December 8, 2002 14
Rate Development - - PLA PLA Rate Development Selecting the Top 20 Companies: The Office of Insurance Regulation 1. (OIR) provides Citizens a list of the top 30 authorized insurers in the state of Florida based on written premiums. Three separate lists are provided that represent homeowners, dwelling fire and mobile home type policies. Citizens staff then culls through the list of companies and eliminates companies that do not write standard coverage, such as high value dwellings, low value dwellings, force-placed coverage, etc. Citizens staff prepares the list of the top 20 companies for the rate analysis and submits the lists to OIR for approval. Board Workshop December 8, 2002 15
Rate Development - - PLA PLA Rate Development 2. Calculation of Premium: A premium is calculated for each company selected based on the following characteristics: – HO3 (standard homeowners policy) characteristics: - Building insured for replacement cost at $125,000 - Contents insured at $62,500 at replacement cost - Masonry construction - ISO protection class 4. 2% hurricane deductible, $1000 all other peril deductible - - Other structures insured for 10% of the building coverage amount - Loss of use coverage at 10% of the building coverage amount - Liability coverage with a limit of $100,000 - Medical expense coverage with a limit of $2,000 - Any applicable loss mitigation credits are not applied Board Workshop December 8, 2002 16
Rate Development - - PLA PLA Rate Development – HO4 (standard homeowners policy) characteristics: Same as HO 3 with the following exceptions: - No building Coverage. - Contents insured at $25,000 at replacement cost – HO6 (standard homeowners policy) characteristics: Same as HO 3 with the following exceptions: - No building Coverage. - Contents insured at $25,000 at replacement cost - Loss of use coverage at 20% of the building coverage amount – MH (standard homeowners policy) characteristics: Same as HO 3 with the following exceptions: - Building insured for replacement cost at $25,000 - Contents insured at $12,500 at replacement cost Board Workshop December 8, 2002 17
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