Florida’s Insurance Store…More Than You Want to Know!

This blog responds to comments made by Citizens Chairman Jim Malone about an RFP to study outsourcing of Citizens policy issuance and service functions. Malone’s comments were directed at the Florida Association of Insurance Agents (FAIA) and they were made during a public board meeting attended by the media and others. For these reasons and because the comments were both critical and inaccurate, there is a need to set the record straight.

The SB-408 provision in question says the following:

“To ensure that the corporation is operating in an efficient and economic manner while providing quality service to policyholders, applicants, and agents, the board shall commission an independent third-party consultant having   expertise in insurance company management or insurance company management consulting to prepare a report and make recommendations on the relative costs and benefits of  outsourcing various policy issuance and service functions to private servicing carriers or entities performing similar  functions in the private market for a fee, rather than performing such functions in house. In making such  recommendations, the consultant shall consider how other residual markets, both in this state and around the country, outsource appropriate functions or use servicing carriers to better match expenses with revenues that fluctuate based on a widely varying policy count. The report must be completed by July 1, 2012. Upon receiving the report, the board shall develop a plan to implement the report and submit the plan for review,  modification, and approval to the Financial Services Commission. Upon the commission’s approval of the plan, the board shall begin implementing the plan by January 1, 2013.”

During a staff presentation to the Citizens board on the impact of SB-408 including the above provision, Malone pushed back on the need for such a study as reflected in this paraphrasing:

“You mean to tell me that some association was able to convince lawmakers to waste money on such a study?”

Malone may not have known he was calling out those who dared to question whether Citizens predecessor, the FRPCJUA, made the right decision when it eliminated the servicing carrier approach to processing and servicing of policies–a particularly relevant question since the ultimate goal of depopulation is to eliminate Citizens.  The servicing carrier “question”, then as now, is driven by two relevant historical scenarios.

Scenario #1: At one point the FRPCJUA had a population of 936,000 homeowners policies. It depopulated to only 60,000.  If it managed those policies using only employee’s there would’ve not only been a disincentive to depopulation but,  exorbitant employee termination costs when it occurred. Citizens annual salary expense today is approximately $90 million.  Much of it is needed to service approximately 1.2 million multi-peril homeowners policies similar to those in the FRPCJUA.  If it depopulates to, say… 100,000 such policies; how many employee’s would no longer be needed and how much would the termination expenses, through assessments, cost policyholders around the state? Further, it’s logical to ask…how much do 1400 employee’s cost vs. the number needed if servicing carriers were still being used?

Scenario #2: Citizens automobile counterpart, the Florida Automobile Joint Underwriting Association (FAJUA), at one point insured 850,000 private passenger vehicles. It depopulated to only “six” automobiles and did so with roughly the same, single digit number, of employee’s. Because it utilized the servicing carrier approach, it’s termination expense was zero and there was little or no disruption to operations; at least by comparison.  Servicing carriers appointed agents, processed business, paid claims and, in general, did what they did best which was sell and service automobile insurance. Agents chose their carrier based on compatibility and other factors and the servicing carriers were paid based on their response to RFP’s and the volume of business they processed. There was more cooperation as well, between agents and companies, because processing was done with industry standards, usually, and problems were more quickly addressed–remember agents could choose another servicing carrier if they weren’t satisfied.  With the servicing carrier approach, the FAJUA and the state of Florida were free of the immense financial burdens of a huge multi-billion dollar store front like Citizens; and, they were free of the substantial costs associated with closing the store altogether.

While it’s doubtful Chairman Malone was aware of the above, that’s not where he made the error. It’s almost certain he didn’t know that the provision in SB-408 requiring the study was not the provision advocated by FAIA; which proposed a more efficient method via the regularly scheduled audit conducted by the Auditor General’s (AG) office. The AG was poised to begin it’s regular study of Citizens operations and FAIA proposed that, at no additional cost, it could examine the feasibility of moving to the servicing carrier approach as part of its usual examination. What Malone  didn’t know is that Citizens staff actually proposed that the study be done by an independent consultant instead–that’s what necessitated a costly additional exam and the cumbersome RFP process to which he was objecting.

In fairness to Malone, in addition to being quite vocal promoting the “privatization” of Citizens, it’s likely he knew Citizens staff already makes material and commendable use of “outsourcing”.  For example, Citizens outsources: the policy issuance of all new personal residential policies (both multi-peril and wind-only) and a significant amount of policy service functions for these policies such as endorsements and changes; the policy printing and  mailing functions are electronically transmitted to outsourced vendors for printing, invoicing and mailing;  all underwriting property inspections are sent to third party vendors as are all policy billing (the printing and mailing of a premium invoice; the adjustment of approximately 75% of its claims is sent to outside firms; and, in 2011 Citizens will outsource about 75% of its first notice of loss calls and has even contracted with a third party to take policy service and underwriting-related calls as well. Well done!

Like I said in the title; this is more than you want to know about this subject.  But…to be fair to all sides, all sides of the story have to be told.  No one is blindly advocating servicing carriers but, neither should such be rejected simply because Citizens already does some outsourcing.

I’m hopeful the entity that wins the right to advise Citizens and the people of Florida on how it can operate in an “…efficient and economic manner while providing quality service to policyholders, applicants, and agents”  will learn of this blog and what gave rise to the study in the first place.

In this way both the board of Citizens and the people of Florida might gain more complete and more accurate decision making information for the future of Florida’s state operated insurance store.

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