Section 5 Lesson 2 Florida Residual Insurance Markets and Guarantee Associations Study Guide

Overview of the Insurance Marketplace and Residual Markets

• The Voluntary Free Market: Under standard conditions, insurance carriers operate within a voluntary free market. They offer various lines of insurance at rates designed to be competitive with their peer organizations.
• Limitations of the Voluntary Market: There are specific instances where the voluntary market cannot or will not meet the insurance needs of residents in the state of Florida. In these cases, certain coverages become either unavailable or unaffordable.
• The Purpose of the Residual Market: The residual market serves as a backup system to ensure that necessary coverages are available to the public when the private, voluntary market fails to provide them.
• Compulsory Insurance Requirements: While consumers generally have the freedom to choose whether to purchase products, insurance is often mandatory due to legal or financial requirements:
  • Automobile Insurance: To own and operate a vehicle, individuals must carry Automobile Liability Insurance and Personal Injury Protection (PIP).
  • Homeowners Insurance: Financial institutions and mortgage lenders require homeowners insurance as a condition of the loan.
  • Workers' Compensation: Employers are legally required to carry workers' compensation insurance to protect employees.

Mechanics and Characteristics of the Residual Market

• Market of Last Resort: The residual market is explicitly designed to handle higher risks that the voluntary market rejects. It operates over a smaller spread of premium than standard carriers.
• Legislative Origin: The Florida Legislature created Various Market Organizations to provide coverages required by state statutes (such as automobile financial responsibility or workers' compensation) or coverages deemed crucial (homeowners, dwelling, and commercial property).
• Operational Principles: From the perspective of consumers, agents, and adjusters, residual market organizations look and function similarly to standard insurance companies. They utilize the same basic procedures, policies, and principles.
• Economic Reality of Residual Markets:
  • Higher Premiums: Because they accept high-risk policyholders, the premiums charged are higher than those in the voluntary market.
  • Greater Losses: These organizations typically experience higher loss ratios.
  • State Subsidization: It is highly unlikely for residual market organizations to generate a profit. Consequently, most eventually require subsidization by the state.
• Reasons for Voluntary Market Exit: Insurance carriers may stop writing policies in certain areas or for specific classes of business due to:
  • Excessive risk in a specific geographical area.
  • Inadequate premium volume to ensure profitability.
  • Onerous or expensive administrative and regulatory requirements.

Citizens Property Insurance Corporation

• Historical Context: Following the catastrophic impact of Hurricane Andrew in 1992, many insurance carriers either went out of business or significantly limited the number of new policies they would issue.
• Evolution of the Organization:
  • 1992: Creation of the Florida Residential Property and Casualty Underwriting Association to provide a market for homeowners unable to find voluntary coverage.
  • 2001: The Florida Residential Property and Casualty Underwriting Association merged with the Florida Windstorm Underwriting Association to form Citizens Property Insurance Corporation.
• Eligibility Requirements: To qualify for a policy with Citizens, an applicant must certify that they cannot obtain residential property insurance from any authorized private insurer at a premium that is less than $15\%$ greater than the rate quoted by Citizens.
• Underwriting and Uninsurable Properties: While Citizens provides broad access, it maintains basic underwriting criteria. Examples of properties that Citizens will not insure include:
  • Properties that are unoccupied or vacant.
  • Dilapidated properties or those in poor condition.
  • Properties that have been condemned.
  • Structures built over water.
  • Properties subject to excessive risk of loss.
• Property Insurance Clearinghouse: This program was approved by the Florida Legislature to maximize private-market participation. Before a Citizens policy can be issued, all new applications must be entered into the clearinghouse to determine if a private market insurer is willing to take the risk.

Florida Automobile Joint Underwriting Association (FAJUA)

• Target Audience: The FAJUA serves customers who are unable to secure automobile insurance through normal market channels.
• Organizational Structure: It is comprised of a syndicate of all licensed companies in Florida that write automobile insurance.
• Service Delivery: Direct operations of the association are performed by a specific group of "servicing carriers."
• Available Policies: The association offers both Personal Auto and Business Auto policies.
• Eligibility Criteria: Coverage is available to:
  • Residents of Florida.
  • Military nonresidents who are currently stationed in Florida.
  • Nonresident owners of automobiles that are registered in Florida and are therefore subject to the Florida No-Fault Law.

Florida Workers' Compensation Joint Underwriting Association (FWCJUA)

• Purpose: This association provides workers' compensation coverage for employers who cannot self-insure or obtain coverage through traditional insurance channels.
• Eligibility Mandates:
  • The employer must provide evidence of being unable to secure coverage from at least two other authorized insurance carriers.
  • The employer must not have any outstanding debt related to previous workers' compensation premiums.

Protection Against Insurer Insolvency

• Insurers Rehabilitation and Liquidation Act: Florida adopted this act to address scenarios where an insurance carrier becomes insolvent or enters bankruptcy.
• Objectives of the Act:
  • Protect the interests of the public, policyholders, claimants, and creditors.
  • Establish a comprehensive methodology for administering receiverships for failed insurers.
  • Maximize the recovery of assets for stakeholders.
• Guarantee Associations: These organizations were created to fulfill the objectives of the Rehabilitation and Liquidation Act.
• Key Florida Guarantee Associations:
  • Florida Insurance Guarantee Association (FIGA).
  • Florida Workers' Compensation Insurance Guarantee Association (FWCIGA).
• Roles and Responsibilities: These associations "step into the shoes" of failed property and casualty insurers. They are responsible for handling and settling outstanding claims in a timely manner, adhering to the original insurance policy, Florida's insurance laws, and the provisions of the Act.