Citizens contracted with ISO to analyze the impact of the sinkhole reforms in SB 408 from the 2011 legislative session on its sinkhole losses.

Key Conclusion: The “aggregate impact due to specific provisions of SB 408 will reduce Citizens' expected incurred sinkhole loss and ALAE by 54.7% for policy year 2013. This reduction is relative to what the incurred loss and ALAE would have been had SB 408 not been implemented.”

Citizens Property Insurance Corporation contracted with Insurance Services Office, Inc. ("ISO")  to conduct an actuarial study to estimate the impact of  SB 408  on its prospective sinkhole loss experience for purposes of establishing indicated sinkhole rates as part of the Citizens January 1, 2013 rate filings. The report was released on the Citizens Internet site July 24 as part of massive backup materials for the Citizens board meeting July 27 in Miami.

The study was required by the Office of Insurance Regulation in the order establishing Citizens sinkhole rates for 2012. In particular, the OIR requested that the report should address, according to the ISO introduction in the sinkhole report:

  1. The impact of the statutory definition of "structural damage";
  2. The requirement that repairs be made in accordance with the specifications of a structural engineering report;
  3. The impact of changes to public adjuster compensation;
  4. The impact of the statutory requirement that insureds use insurance proceeds to repair damages;
  5. The impact of excluding damage to appurtenant structures, driveways, sidewalks, decks, or patios that are directly or indirectly caused by sinkhole activity from sinkhole coverage;
  6. The impact of the statutory requirement that the policyholder, upon demanding testing after denial of a claim without sinkhole testing, pay the lesser of 50% of the cost of the testing or $2,500 to be refunded if a sinkhole loss exists;


© Insurance Services Office, Inc., 2012 Section 2 – Page 1


Based on a comprehensive actuarial analysis of available Citizens' claims data, including a review of results from engineering and geotechnical testing, we estimate that the aggregate impact due to specific provisions of SB 408 will reduce Citizens' expected incurred sinkhole loss and ALAE by 54.7% for policy year 2013. This reduction is relative to what the incurred loss and ALAE would have been had SB 408 not been implemented.

Our analysis reflects estimated savings for the following provisions of SB 408:

  • The impact of the new definition of structural damage.
  • The impact of requiring policyholders to use loss payments to repair damages according to specifications of a structural engineer's report.
  • The impact of reducing public adjuster compensation.
  • The impact of excluding sinkhole coverage for structures other than the primary structure.
  • The impact of policyholders sharing in the cost of geotechnical testing under certain conditions.

Section 3 of this report (along with the attached exhibits) provides the full details of our analysis.

We discuss each of the above provisions, and estimate the marginal savings due to each of the individual items.

With regards to the estimated savings due to excluding sinkhole coverage for structures other than the primary structure, this analysis only reflects the impact of such excluded items that are currently being coded as part of the Coverage A loss payment. The reason for this is that Citizens will be excluding all Coverage B sinkhole losses when preparing its 1/1/2013 rate filings. If we had accounted for these Coverage B sinkhole losses in this analysis, then Citizens would run the risk of double-counting the savings due to this issue.

Although not specific to sinkhole losses, SB 408 authorizes insurers to initially pay just the actual cash value for many types of claims. The remaining cost associated with the full replacement cost of the claim would be paid if actual repairs are made. Citizens' 1/1/2013 rate filings will include an explicit adjustment to account for the estimated savings due to this issue for all non-hurricane causes of loss (including sinkholes). So as not to double-count the savings associated with ACV holdbacks, this analysis does not address this issue.

As with any actuarial analysis that projects future results for events that have yet to occur, there is uncertainty associated with our estimate of the savings to be generated by SB 408. However, in this particular analysis, the magnitude of the uncertainty is significant. The following is a non-exhaustive list of contributing factors that tend to increase the uncertainty associated with predicting the impact that SB 408 will have on prospective incurred sinkhole loss and ALAE:

  • Potential litigation regarding the interpretation of new provisions of SB 408 may impact the ultimate sinkhole loss and ALAE payments that are made by Citizens.
  • During the time this analysis was being prepared, we were aware of about 46 sinkhole claims that had been reported to Citizens that will be subject to the provisions of SB 408. These claims are very immature, with little or no loss payments having been made. Results of engineering testing were available for only two of these 46 claims. As such, it is not possible for our analysis to rely solely on actual sinkhole claims that will be settled under the provisions of SB 408.
  • Certain provisions of SB 408 are expected to result in changes in the "behavior" of various parties. For example, reducing compensation for public adjusters may impact the level of their involvement in sinkhole claims. As another example, subjecting apolicyholder to the chance that they will need to pay for a portion of geotechnical testing will likely reduce the frequency in which policyholders demand such testing. Actual data from Citizens does not exist regarding these types of potential changes in behavior.

Although we have approached these issues in a thoughtful manner, actual future results may differ from our projections.

The above discussion helps illustrate why predicting the expected impact of SB 408 on Citizens' future incurred sinkhole loss and ALAE involves significant uncertainty. In light of these limitations, we believe that our report contains a thorough analysis of the available information and results in a reasonable estimate of the expected impact of SB 408.

We have made full disclosure of the methodology and assumptions used in our analysis.


This report is being provided to Citizens to help it assess the potential impact that SB 408 will have on their future incurred sinkhole loss and ALAE. It is our understanding that the results of this study will be incorporated into Citizens' 1/1/2013 rate filings. We have taken this intended use into consideration when preparing this report.

Our analysis relies on Citizens' historical sinkhole loss experience, which reflects the unique characteristics of the company's book of business, policy language, and claims handling practices. Because of this, the results of this study are intended to be applicable only to Citizens.

In particular, the conclusions of this report may not be applicable to other insurers that write sinkhole coverage in the state of Florida.