Legislation Targets Citizens Deficits, Mitigation, Private Insurance

The hurricane insurance package passed by the Florida Legislature just before adjournment Friday night is the most significant property insurance bill since major legislation following Hurricane Andrew in the early 1990’s. Florida Insurance Council members largely support the package, although we do have some concerns.

The Florida Insurance Council commends the legislators for tackling such tough issues as moving to end subsidized insurance rates for $1 million-plus homes and vacation homes and bracing a fragile private insurance market. The legislation also offsets a portion of a looming 20 percent statewide insurance surcharge to finance a Citizens Property Insurance Corp. deficit from the 2005 hurricane season.

Below is FIC’s analysis of the major objectives of the bill, which have had its supported throughout the session:

• Focus Citizens, with rates to be subsidized by either assessments on all Florida residential insurance consumers or, for the first time this year, state general revenue dollars – on primary residencies, not vacation and seasonal homes.

• Force owners of $1 million-plus dwellings out of Citizens and into either the voluntary market or surplus lines market at unsubsidized rates.

• Minimize statewide assessments from Citizens when they do occur by forcing the Citizens High Risk Account, which produces the most massive assessments, to rates covering a 100-year probable maximum loss and requiring private market reinsurance when it is affordable and feasible.

• Work to keep private insurance already in Florida in the residential insurance market and minimize non-renewals being contemplated by small companies because of a crisis affecting many of them in the private reinsurance market and the severe need for new capital among larger insurers. In a related goal, expand the role of the surplus lines industry in the state and entice new carriers to Florida despite its severe threat of hurricanes.

• Establish an unprecedented mitigation system, including free statewide inspections so homeowners know what must be done to make their houses more likely to stand through hurricanes what mitigation steps qualify for insurance discounts and potential buyers of homes know what they are getting into.

The insurance community has serious concerns about some provisions, including a requirement that ex-wind carriers on High Risk Account policies adjust hurricane claims for Citizens. House leaders, working with insurance lobbyists, did get a one-year delay until the 2007 hurricane season, plus procedures for development of the contracts and opportunities for insurers to appeal to OIR for an exemption from the adjusting requirement.

A special $10 million layer of Florida Hurricane Catastrophe Fund reinsurance is available in the bill for limited apportionment companies. An amendment including companies with pending, but not finalized applications for LAC status failed, leaving several small companies unhappy and facing private reinsurance issues. There was a proposal to allow larger companies to purchase additional, lower layer Cat Fund coverage and that did not pass. Many of these companies, however, will benefit from the capital/surplus note loan program in the final bill.

“This has a lot of good stuff, a lot of bad stuff and a lot of ‘I don’t know stuff,” one FIC lobbyist says of the package. We will be analyzing it and identifying key implementation dates and issues for our members in the coming days.

From the Senate Banking & Insurance Committee Summary of (CS/CS/SB 1980) given final approval in late evening May 5, 2006.

Florida Hurricane Cat Fund

• Requires a 25 percent rapid cash build-up factor in the premiums paid by insurers for coverage from the FHCF.

• Allows limited apportionment companies (i.e., $25 million in surplus or less) to buy a $10 million layer of coverage (for each of two hurricanes) above a retention of 30percent of company’s surplus, at a rate of 50 percent of the coverage selected. For one year only.

• Allows Citizens and the SBA to determine method of providing Cat Fund coverage for policies assumed by Citizens of insolvent insurers (for one year only).

Does not extend the exemption of medical malpractice premiums from assessments.

Capital Build-Up Incentive Program

• Purpose is to provide funding in the form of ” surplus notes” to new or existing authorized residential property insurers, under specified conditions.

• The amount of the surplus not may not exceed $25 million or 20percent of total funds available for the program.

• The insurer must contribute new capital to its surplus at least equal to the surplus note and must apply to the State Board of Administration (Gov., Atty. Gen., and CFO) by July 1, 2006.

• If the insurer applies after 7/1/06, but before 6/1/07, the surplus note is limited to one-half of the new capital contributed by the insurer.

• The combination of surplus, new capital, and surplus note must be at least $50 million.

• The surplus note must be repayable to the state, with a 20-year term, at the 10-year Treasury Bond interest rate (interest only for first 3 years). Insurance Commissioner must approve payments unless he determines the payment would substantially impair the financial condition of the insurer.

• Insurer must commit to meeting a minimum writing ratio of net written premium to surplus of at least 2:1 for the term of the surplus note. The writings must be residential property insurance in Florida, covering the peril of wind.

• SBA may approve issuing the surplus note, unless SBA determines that the financial condition of the insurer and its business plan place an unreasonably high level of financial risk to the state of nonpayment in full of the interest and principal. SBA shall consult with OIR and may contract with independent financial and insurance consultants.

• State is a preferred creditor if insurer becomes insolvent. (State first in line after costs of receiver and claims to policyholders.)

• Appropriates $250 million from G.R. to the SBA. Non-recurring; unexpended balance reverts June, 30, 2007.

Hurricane Loss Mitigation

• Establishes the Florida Comprehensive Hurricane Damage Mitigation Program within the Department of Financial Services.

• Provides for free inspections of site-built, residential property, to determine what mitigation measures are needed to reduce vulnerability of hurricane damage. (RFP process by DFS).

• Home inspections must include a rating scale specifying the current and projected wind resistance rating, and insurer-specific information on insurance credits and discounts..

• Provides for 50percent matching grants to encourage single-family, site-built homes to retrofit. Home must have insured value of $500,000 or less. Grants limited to $5,000 (for $10,000 project), with up to 100percent grants ($5,000) for low-income homeowners.

• Advisory Council must be appointed for the program.

• Appropriates $250 million from G.R. to DFS for this program. Non-recurring; unexpended balance reverts after 3 years (June, 30, 2009.)

• Creates Manufactured Housing and Mobile Home Mitigation and Enhancement Program.

• Provides grants for manufactured home communities and mobile home parks, administered by Tallahassee Community College. Appropriates $7.5 million of the $250 million of above amendment.

Funding Citizens 2005 Deficit

• $715 million appropriation to Citizens to offset the 2005 deficit. Will reduce 11 percent premium assessment to about 2.5 percent. Also requires that the emergency assessment be amortized over a 10-year period. (This replaces the $140 check to homeowners which had been in the bill under consideration earlier Friday.)

Rates: Requirements, Exceptions for Approval by OIR

• Requires OIR to approve a rating factor that provides an insurer a reasonable rate of return that is commensurate with the risk of covering hurricane losses, for that portion of the rate for which the insurer has exposed its capital and surplus and has not purchased reinsurance.

• Places the burden on OIR to establish that a rate is excessive for personal lines residential coverage with insured value at $1 million or more. Insurer must provide OIR with loss and expense information, upon request.

• Requires OIR to reevaluate the discounts for homes built to meet the Florida Building Code and to determine the full actuarial value of such discounts. This reevaluation must be completed by July 1, 2007.

• Effective July 1, 2007, for residential property insurance in any areas for which OIR determines that a reasonable degree of competition exists, an insurer may increase or decrease rates by up to 5percent statewide average, or 10percent for any territory, without being subject to a determination by OIR that the rate is excessive or unfairly discriminatory (except for unfairly discriminatory rating factors prohibited by law). May be used once in a 12-month period.

Rates: Use of Hurricane Loss Projection Models

• Requires the public hurricane loss model to be submitted for review by the Florida Commission on Hurricane Loss Projection Methodology by March 1, 2007. Allows OIR to continue to use the public model in reviewing rate filings until the Commission determines it is not accurate or reliable.

• In a rate hearing, the hearing officer, judge, or arbitration panel may determine whether OIR and the consumer advocate were provided with access to all of the assumptions and factors used in developing the model and rule on the admissibility of the findings and factors.

Citizens Rates

• Requires rates of the high-risk account of Citizens to be set at the 70-year PML for policies issued after March 1, 2007, 85-year PML for 2008 and 100-year PML for 2009. Requires Citizens’ rates in the Personal Lines Account and Commercial Lines Account to be sufficient to provide for the procurement of reinsurance, including the Cat Fund, to pay all claims resulting from a 100-year Applies to policies issued or renewed after March 1, 2007.

• Provides that Citizens rate filings for the high-risk account must be approved or disapproved by OIR within 90 days.

• Requires use of the public hurricane model as the minimum benchmark for determining windstorm rates for Citizens.

• Makes the current “top 20” requirement that Citizens’ rates not be competitive with authorized insurers inapplicable in a county or area for which OIR determines that no authorized insurer is offering coverage.

• Requires that deficit assessments against insurers (and recouped from their policyholders) be reduced by amounts to be collected from surcharges on Citizens’ policyholders (previously called the market equalization surcharge,” but be collected in addition to the full assessment on the voluntary market.)

• Requires Citizens to track non-homestead properties, policy counts, premiums charged and losses and requires reporting to the Office of Insurance Regulation and Legislature for future reviews.

Citizens Assessments Following a Deficit

• Requires an assessment of up to 10 percent on non-homestead property if a deficit occurs in any Citizens account, with the funds used to offset the deficit. If this assessment is insufficient to eliminate the deficit, the Citizens board shall levy an additional assessment of up to 10 percent on all Citizens policyholders to be collected at the time or issuance or renewal of a policy, with funds used to further offset the deficit. The remaining deficit would be covered through a statewide Citizens assessment under current procedures. This replaces controversial provisions in the bill on the Senate floor earlier Friday providing for a 25 percent surcharge and a second 25 percent surcharge on designated Citizens policyholders under certain circumstances.

Removing $1million-plus Property

• Effective July 1, 2008, a personal lines residential structure or a single condominium unit that has a combined dwelling and content replacement cost of $1million or more would not be eligible for coverage by the HRA. (This property already is ineligible for the Personal Lines Account.) This property may reapply to the HRA as non-homestead property with a sworn statement that the risk was declined by one admitted carrier and three surplus lines carriers. This new coverage would be available for only three years.

Removing Non-homestead Property

• Effective March 1, 2007, non-homestead property would not be eligible for coverage by the HRA. This property may reapply to the HRA with a sworn statement that the risk was declined by one admitted carrier and three surplus lines carriers.

Oversight and Internal Controls

• Requires the Financial Services Commission (Governor and Cabinet), rather than the Office of Insurance Regulation (OIR), to approve Citizens’ plan of operation.

• Requires the Executive Director of Citizens to be confirmed by the Senate.

• Requires Citizens to have an internal auditor.

• Requires OIR to do a market conduct examination of Citizens every two years.

• Requires the Auditor General to conduct an operational audit of Citizens every three years.

• Requires competitive bidding on contracts and board approval of contracts of $100,000 or more.

• Requires OIR background checks of applicants for senior management positions.

• Subjects board members and senior managers to the code of ethics and financial disclosure requirements applicable to public officials.

• Prohibits board members and employees from accepting any gift from any person or entity under contract with Citizens or under consideration for a contract.

• Prohibits Citizens from retaining lobbyists, but allows employees to register as lobbyists.

• Prohibits senior managers from representing any person or entity before Citizens for two years following termination of employment from Citizens.

Other Citizens Changes

• Requires a 10-day waiting period for new applications. If an authorized insurer offers coverage during this period, the applicant is not eligible for coverage in Citizens regardless of whether the insurer appoints the agent who submitted the application.

• Requires limited apportionment companies to pay the full amount of a regular assessment by Citizens, but allows them up to 12 months to pay the assessment, while recouping the assessment.

• Allows Citizens to adopt policy forms that contain more restrictive coverage than provided in the voluntary market..

• Allows Citizens to assume policies of an insolvent insurer under such forms and rates deemed appropriate and approved by OIR.

• Requires insurers writing the non-wind coverage to contract with Citizens to provide claims adjusting services for the wind coverage provided by Citizens in the high risk account, but delays the requirement until July 1,2007. Provides procedures for development of contracts..

• Requires Citizens to report to the Legislature on the feasibility of requiring insurers providing the non-wind coverage to issue and service Citizens’ wind policies.

• Requires Citizens to offer quarterly and semiannual premium payment plans.

• Extends the requirement that the board reduce the boundaries of the high risk (wind-only) area for three years (until Feb. 1, 2010).

• Requires any take-out bonus paid to an insurer be conditioned on the insurer keeping the policy for five years. Requires Citizens to monitor whether such policies are later insured by Citizens. Also limits take-out bonuses to $100 per policy.

Annual Report

• Requires the Financial Services Commission to provide an annual report to the Legislature of the probable maximum losses, financing options, potential assessments of Citizens and the FHCF, and the assessment burden on Florida policyholders.

Florida Insurance Guaranty Association

• Authorizes FIGA to impose annual emergency assessments on insurers of up to 2 percent of written premium for specified lines of property and casualty insurance to fund revenue bonds issued by a municipality or county to pay claims of an insurer rendered insolvent due to a hurricane.

• Increases the maximum amount of FIGA’s liability for a covered homeowners insurance claim against an insolvent insurer from $300,000 to $500,000.

• Provides that FIGA covers claims of a business (as a policyholder or claimant of an insolvent insurer) that has its principal place of business in Florida, rather than incorporated in Florida.

• Allows FIGA to pay claims of unearned premium refunds, under certain conditions, without requiring the policyholder to file a proof of claim form.

Direct Payment to Policyholder for Dual-Interest Property

Specifies that when an insurer makes a claims payment to a primary policyholder without an endorsement from a lien holder or mortgage holder, that payment must be made for only:

a. Personal property & contents;

b. Additional living expenses;

c. Other covered items not subject to a security interest recorded in the duela interest provision of the insurance policy.

Strikes language allowing payment without an endorsement for the first 20 percent up to $20,000 of property subject to a security interest under the insurance policy’s dual interest provision.

Emergency Orders; Rules

• Authorizes the Commissioner of Insurance Regulation to issue orders when the Governor declares a state of emergency.

• Requires the Financial Services Commission to adopt rules standardizing requirements that may be applied to insurers after a hurricane, addressing claims reporting requirements, grace periods for payment of premiums, and temporary postponement of cancellations and nonrenewal.

• Provides that any emergency rule that conflicts with the standardized rules must be by unanimous vote of the Financial Services Commission.

Other Provisions

• Allows insurers to make electronic payment of insurance claims, under certain conditions, without written authorization.

• Permits alien surplus lines insurers to use letters of credit meeting certain criteria to fund the required minimum $5.4 million trust fund.

• Clarifies that if a property insurer does not obtain a written rejection from the policyholder for law and ordinance coverage, the policy is deemed to include such coverage limited to 25 percent of the dwelling limit (and not the alternative 50 percent limit that must also be offered).

• Requires OIR to conduct a study an report on the insurability of attached or free standing structures.

• Requires OIR to conduct a study and develop a program that will provide an objective rating system that will allow homeowners to evaluate the relative ability of Florida properties to withstand the wind load from a hurricane.

• Prohibits public adjusters from engaging in conflicts of interest by participating in the repair of damaged property that he adjusted.

• Provides procedures for the cancellation of an insured’s homeowners insurance policy if such insure submits a check which is subsequently dishonored by a financial institution. Also provides that an insured’s insurance policy can be cancelled ” ab initio” if the insured does timely cure a dishonored check within 5 days of notice.

Insurance Consumer Advocate

The final bill did not include an amendment adopted by the Senate earlier Friday extending to residential insurance rate-making the authority of the Office of the Public Counsel in the utility-regulating Public Service Commission.

The final legislation retains the Insurance Consumer Advocate Office in the Department of Financial Services currently directed by Steve Burgess. As Banking & Insurance Chairman Rudy Garcia explained this provision Friday night, the insurance consumer advocate is given standing in arbitration proceedings between insurers and the Office of Insurance Regulation and is given a $200,000 appropriation.

Source: Florida Insurance Council