Fla. legislative package targets Citizens deficits, mitigation; establishes oversight policies

The hurricane insurance package passed by the Florida Legislature just before adjournment May 5 is the most significant property insurance bill since major legislation following Hurricane Andrew in the early 1990’s, according to the Florida Insurance Council. The bill was signed May 15 by Florida Governor Jeb Bush.

Sam Miller, executive vice president of the Insurance Council, a panelist at the May 12 Professional Insurance Agents of Florida member summit on “Winning Strategies,” commended 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 offsets a portion of a looming 20 percent state-wide insurance surcharge to finance a Citizens Property Insurance Corp. deficit from the 2005 hurricane season.

Ed Sowers, Citizens catastrophe agency advocacy manager, was a participant in PIA of Florida’s panel. He said Citizens processed a record number of claims, 120,000 in 2004, and 175,000 in 2005.

A large portion of the discussion centered on FIC’s analysis of the bill’s major objectives, which had its support throughout the session. Relevant portions of the bill included:

* Focus on Citizens, with rates 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 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.

* Attempt to keep private insurance already in Florida in the residential market, while minimizing small company non-renewals contemplated due to a crisis 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 and entice new carriers into 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, obtained 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.

CAT Fund provision
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 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 said of the package. “We will be analyzing it and identifying key implementation dates and issues for our members in the coming days.”

The Florida Senate Banking & Insurance Committee worked through the day on May 5, the final day of Legislative sessions and gave final approval to (CS/CS/SB 1980) in the late evening.

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
The purpose of the program 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 may not exceed $25 million or 20 percent 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 July 1, 2006, but before June 1, 2007, 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 three years). The Florida Insurance Commissioner must approve payments unless he determines the payment would substantially impair the financial condition of the insurer.

The 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.

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

The bill appropriates $250 million from general revenues to the SBA. Non-recurring; unexpended balance reverts June, 30, 2007.

Hurricane loss mitigation
This bill establishes the Florida Comprehensive Hurricane Damage Mitigation Program within DFS.

Provisions provide 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.

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

An Advisory Council must be appointed for the program.

There is an appropriation of $250 million from general revenues to DFS for this program. Non-recurring; unexpended balance reverts after three years (June, 30, 2009.)

It creates a Manufactured Housing and Mobile Home Mitigation and Enhancement Program. This provides grants for manufactured home communities and mobile home parks, administered by Tallahassee Community College. It appropriates $7.5 million of the $250 million of the amendment.

Funding Citizens 2005 deficit.
A $715 million appropriation was approved to Citizens to offset the 2005 deficit. It will reduce the 11 percent premium assessment to about 2.5 percent. The bill also requires that the emergency assessment be amortized over a 10-year period. (This replaced a $140 check to homeowners which had been in the bill under consideration earlier in the day.)

Rates: OIR requirements and exceptions
The OIS is required 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.

It 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. The insurer must provide OIR with loss and expense information, upon request.

OIR is required 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 5 percent statewide average, or 10 percent 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: Hurricane loss projection models
The public hurricane loss model must be submitted for review by the Florida Commission on Hurricane Loss Projection Methodology by March 1, 2007. It 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
The legislation 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. It 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.

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

The public hurricane model must be the minimum benchmark for determining windstorm rates for Citizens.

It 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.

It 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.)

Citizens must 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
The legislation 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 providing for a 25 percent surcharge and a second 25 percent surcharge on designated Citizens policyholders under certain circumstances.

Removing $1 million-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 $1 million or more would not be eligible for coverage by the HRA. (This property already is ineligible for the Personal Lines Account.) The property-owner 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
Citizens’ plan of operation must be approved by the Financial Services Commission (governor and Cabinet), rather than OIR.

The executive director of Citizens must be confirmed by the Senate.

Citizens must have an internal auditor.

OIR must do a market conduct examination of Citizens every two years.

The Auditor General is required to conduct an operational audit of Citizens every three years.

Competitive bidding is required on contracts with board approval of contracts of $100,000 or more.

OIR must do background checks on applicants for senior management positions.

Board members and senior managers must adhere to a code of ethics and financial disclosure requirements.

Board members and employees are prohibited from accepting gifts from any person or entity under contract with Citizens or under consideration for a contract.

Citizens can not retain lobbyists, but employees may register as lobbyists.

For two years, senior managers can not represent any person or entity before Citizens after they end their Citizens employment.