I had planned to write and try and answer the question, how can Demotech give a brand-new company (Florida newcomer, Vyrd Insurance) an A rating before they even write a single policy. As I looked into the rating process (which I don’t fully understand yet, but I plan to), I decided that Demotech used the best and most relevant information available at the time. I’ve looked into their results and from what I can tell, their rating system seems to achieve their stated goals so they get a pass from me for now.
As I dug into it, I began to see a question behind the question (thanks, John G. Miller, author of QBQ) I decided that Demotech did yeoman’s work in their rating. My trouble is not with the rating and it’s not with Vyrd. I dug a little into them and from what I’ve read so far in their OIR (Office of Insurance Regulation) filings, there’s nothing that jumps out as a system issue, except for one tiny detail.
The problem comes from a unique wrinkle in how property (homeowners’) insurance in Florida operates. In Florida, we don’t have a homeowners’ JUA or FAIR plan anymore. We have Citizens Property Insurance Corporation, our residual market for homeowners’, commercial property, and wind coverage.
Before going any further, I should probably tell you that I used to work for Citizens and loved my job there. I worked with some great insurance professionals and learning professionals. I’m not taking issue with Citizens here. I’m taking issue with a problem that the state created and saddled Citizens (and the rest of us) with.
In looking at the news and at their filings, the problem comes because their business model to gain an influx of premium is to be a Citizens take-out company, which is not nearly as good as getting take-out from that little sandwich place down the road. Because Citizens is supposed to be the market of last resort in the state, standard market companies (like Vyrd) can apply to take policies out from Citizens.
The short version of the story is that Citizens does not only write policies on those risks that would qualify for a JUA or a FAIR plan but every building in the state could potentially be insured by Citizens. When I first went to work at Citizens, they were the largest property insurer in Florida, which was never the intent, but that’s another story for another day. Those who could otherwise qualify for coverage in the standard market are eligible for the takeout program. This allows carriers to select risks based on specific criteria that they create. That’s how companies end up with thousands of new policies on their books quickly without any expense for picking up new policies.
Here’s the problem with the business model. It doesn’t work nearly as well as most carriers think it will. They plan on picking up hundreds or thousands of policies, receiving an infusion of premium dollars immediately, and instantly gaining a renewal book of business worth plenty. Remember that Florida homeowners’ insurance premiums are among the highest in the nation. If everything went the way the carriers planned, they would have a solid book of business without having to pay any customer acquisition costs or claims.
It never works out exactly that way.
What usually happens is that the carrier submits the list of risks that they want to take and so do a dozen other carriers. There are always several carriers that end up wanting the same risks so that means that someone loses out and in fact, most carriers don’t get what they want. This is just the first cut on their list.
Then the policyholders are notified that they have been selected for takeout. They get a letter that tells them that on a specific date, their policy will no longer be with Citizens, but with a new company. Several policyholders will ignore the letter for now. Others will take the letter and call their agent, which the letter tells them to do. When they call, it’s not to say thanks for finding this new policy. It’s who is this insurance company? Who said that I wanted them to write my insurance? Will they be there in a year? Will they raise premiums or reduce coverage? What often happens next is that the policyholder sends back their response to Citizens. No thanks. I’d rather not change insurance companies.
The list is smaller now.
Eventually, those customers that ignored the letters receive a bill or renewal notice or something else that alerts them to the fact that they have a new insurance company. That’s when they call their agent to ask those questions. What insurance company is this? Why did my company change? No, I didn’t see the letters letting me know about this change. Is there anything that I can do now? No, I don’t think I want that insurance company. I can’t even pronounce it.
The list is smaller now.
On renewal, some policies will renew. Others won’t. Costs will be incurred. Claims will come in. The truth of the Florida insurance market will arrive somewhere between their top line and bottom line. The claims reserves will increase. Maybe there’s a storm. Maybe there isn’t. Maybe there are four storms. It’s never as easy as it looks on paper. Maybe they can apply for another Citizens takeout.
The flaws with this business model are really in the numbers. Companies may think that they’re going to get the number of policies that they need, but the truth of it is that it never works out the way they think it will on paper. It’s the same lesson that I learned in my early Army days.
No plan survives first contact with the opposing force.
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