Scott’s 777 Plan & Citizens Outsourcing

Let’s face it, Citizens is not only a major employer, it is a major player in Florida’s insurance market and therefore is ripe for review as we look for more private sector jobs. Governor Scott’s 777 Plan features 7 steps  to achieve 700,000 jobs over 7 years and cites the following:

“Government run wind insurance has driven private insurers out of the market and will result in an enormous tax increase or auto insurance rate increases if we get hit with a major hurricane or a number of costly hurricanes.”

Insurance is a “clean” industry that doesn’t pollute the atmosphere or consume Florida’s natural resources. Yet, it is a major contributor to Florida’s economy. The latest annual report of the state Office of Insurance Regulation (OIR),  contains the following :

“The Florida insurance industry continues to be an important economic driver for the state’s overall economy. According to data from the Bureau of Economic Analysis (BEA), in 2008 (the last year for which data are currently available) the insurance industry created $19.9 billion of the state’s $744.1 billion gross domestic product (2 percent). Moreover, the Florida insurance industry continues to be a significant driver to overall state employment. The BEA estimates that in 2008 the industry accounted for 181,757 jobs. For the same year, the BEA estimated the Florida aggregate labor force at 10.4 million jobs so that the insurance industry employment accounted for 1.7% of total state employment. Additionally, for Fiscal Year 2008-2009 the Florida Department of Revenue collected $667.4 million in insurance premium taxes.”

Despite the contribution of insurance to Florida’s economy, many insurers have been forced to leave the state, more are in financial peril and the rest are finding it impossible to compete with our market of so-called last resort. Citizens often has the lowest premiums and the best coverage; so much so that, any private market reforms will have little impact if Citizens competitive advantage isn’t substantially reduced in the near term.  It is also a player in the quest for more private industry jobs and, as such, should give serious consideration to outsourcing its policy issuance and servicing functions.

Consider the following bullet points:  

  • Late last year Citizens board approved a budget that included 1300 employee’s for fiscal year 2011.  These, of course, are potential private sector jobs attracted by a competitive pay scale often in excess of private market averages for similar qualifications.
  • Citizens annual payroll expense is substantial, around $90 million dollars annually.  But, its need for employee’s is based, in large measure, on how many policyholders it insures. In conflict with this are both legislative mandates and management goals to reduce policy count.
  • Because Citizens hires employee’s instead of outsourcing as other residual markets in Florida and around the country do, it will either have salary expenses for employee’s it no longer needs or exorbitant termination costs for those it must let go. Termination expenses (including unemployment taxes) are material and their avoidance is a prime reason to outsource policy related functions in residual markets like Citizens.
  • Other residual markets in Florida and across the country outsource in order to keep expenses at a minimum as policy count moves up and down based on uncontrollable market factors (such as hurricanes) or legislative mandates.  Citizens counterpart in Florida,  for example, the Auto Joint Underwriting Association, at one time insured 850,000 private passenger autos.  After its price became less competitive with the private market policy count declined to a total of only six motorcycles.  Fortunately, due to responsible use of servicing organizations and outsourcing, no staff adjustments or termination expenditures were necessary and the costs associated with the servicing carriers declined commensurately.
  • Citizens is the merger of two previous residual markets; the FWUA (wind pool) and the Florida Residential Property and Casualty Joint Underwriting Association or FRPCJUA.  The FRPCJUA  at one time insured 836,000 policies.  They were serviced via outsourcing through numerous servicing carriers.  Under several depopulation plans the FRPCJUA reduced policy count to only 60,000 homeowners.  The account of Citizens that has the FRPCJUA policies today, the multi-peril account, has a policy count roughly the same as the FRPCJUA had prior to its depopulation.  What would happen if, reforms are implemented and the voluntary market is allowed to compete thus creating the same level of depopulation ?

In order to entirely fulfill its legislative mandate to become an insurer of last resort, Citizens needs to immediately develop a plan to outsource any and all functions with costs that rise and fall based on policy count.

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