Citizens Commissions…Three Realities!

During his December 6th cabinet presentation, Citizens Chairman Carlos Lacasa responded to a question from Governor Scott about agents’ commissions. In essence he said he thought commissions  impacted depopulation and that the Citizens board would examine the issue, including consideration of a “flat” fee.  Rumors have swirled ever since; mostly about proposals and approaches to reduce what, as with any insurer, is a significant Citizens budget item.

Of course, setting producer compensation is a perilous undertaking without credible data. Citizens, to my knowledge has never analyzed what it costs to write and service business for the corporation and no one, including Chairman Lacasa, has said that agents, who pay assessments on their personal and business policies, should subsidize Citizens even more by doing its work at a loss.

That said, if an analysis of their costs and functions were performed, I believe it would show agents already subsidize Citizens more than anyone else. But, again, Citizens has not conducted such an analysis.

On the other hand, proving that commissions don’t impede depopulation is much easier. It starts by merely examining the assumption underpinning Chairman Lacasas’ response to Governor Scotts’ question; which is…paying someone less creates an incentive for them to do less of whatever it is you are paying them to do.

Reasonable sounding, but…it doesn’t hold true for Citizens, especially not for those who understand the agency business.

Following are three realities that, when taken together, prove that no agent with a private market alternative would send business to Citizens because of producer commissions.

While the first two show why commissions may not even be a  factor in a producer’s decision process, the third reality goes to the heart of the proposition that paying less reduces incentive because it reveals that Citizens already pays less, much less.

Now, here are the three realities.

Reality #1) Agents cannot spend percentages.  They can only spend dollar bills that are left over after they pay their expenses.  While Citizens has made commendable improvements in its procedures and processing requirements, it still generates more work and expense for agents than private carriers who acquire new customers via a motivated and efficient sales force. Analysis has shown that agents do not recoup their costs for processing business in Citizens PLA until the third renewal.

Reality #2) The value of an insurance agency is based on its customer list; often referred to as “expiration dates” or the “list of expirations”. Agents have contracts with insurance carriers that recognize an agents ownership of such information.  Citizens does not recognize this common law doctrine and thus agents have little or no gain in equity based on business placed with the corporation. In fact, moving business to Citizens from a private carrier can significantly reduce an agency’s overall value.

Reality #3) The private market consistently pays a higher commission percentage than Citizens; and does so on premiums that are usually much higher, and for less work. Regulatory data through 2007 shows that, for Homeowners multi-peril, for all companies, producer compensation was 13.2%. (See Note 1 below)

Moreover, based on current data for both personal and commercial lines, new and renewal, Citizens percentages are again lower.  But, get this…for the PLA which was receiving nearly a thousand applications a day, Citizens percentage is not only lower than every carrier but it’s around 40% below the overall private market average, as follows:

 Personal Lines Average Commission

Voluntary Market……………………………………….. 12.55%

Citizens…………………………………………………….7.24%

 Commercial Lines Average Commission

Voluntary Market  ………………………………………..13.56%

Citizens…………………………………………………….11.56%

Summary: if one believes that cutting commissions would reduce new applications or increase non-renewals in Citizens, then it’s totally inconsistent to suggest that lowering Citizens commissions would have any impact because, as a percentage of premium, Citizens commissions are already lower than “any” other private carrier and private carrier premiums are markedly higher than Citizens.

With these facts in tow it’s not illogical to ask why such a proposal, to cut commissions or to pay a flat fee, would be pursued.

If someone was operating under the assumptions this data rebuts, well…that can be overlooked. But, to leave the above data unrefuted and continue on a path to cut Citizens producer compensation suggests something ulterior.

What a shame that would be when, for the first time in recent memory, all sides are coming together on those proposals that really will  reduce Citizens policy count.

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NOTE 1: Data was taken from cumulative year-end figures for all carriers, extracted from the OIR/DOI annual reports, 1987 through 2007; the years such was available. For the years  after 1992, the FRPCJUA, and later Citizens, were included; which means the average percentage paid by private carriers is even higher than reported above.

NOTE 2: It’s important to keep perspective on total producer compensation paid by Citizens. Budgeted to be nearly $297 million in 2012 it goes down as policy count declines via meaningful depopulation. Meanwhile agents in some counties are paid slightly over 5%.  Data from other state residual markets shows Citizens pays the lowest commission percentage in the country. It would be interesting to see how the work compares between Florida and other Gulf Coast beach plans and residual markets.

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