Insurers Join Call for Review of Florida’s Insurance Mitigation Discounts

The arbitrary assignment of premium discounts for certain mitigation features without regard to insurance companies’ base rates or premium calculations for existing business has proven to be the downfall of the movement to “harden homes” in Florida, according to insurers.

The National Association of Mutual Insurance Companies (NAMIC) told Florida officials that the state’s windstorm mitigation program “simply isn’t working.”

In a letter to the Windstorm Mitigation Committee of the Florida Commission on Hurricane Loss Projection Methodology, Liz Reynolds, NAMIC’s Southeast state affairs manager, urged committee members to ensure that steps are taken so that premium discounts are recalibrated to reflect true mitigation efforts and that oversight of home inspections is tightened.

Reynolds wrote that there is strong anecdotal evidence showing that the home inspection system is flawed; that private inspections are inconsistent from one house to the next; and that “active” and “passive” fraud are rampant.

In August, the Florida Association of Insurance Agents (FAIA) issued a white paper charging that the program is riddled with fraud and inefficiencies and not doing its job of protecting homeowners.

The agents said faulty implementation by the state’s insurance regulator — including what they said has been a misplaced emphasis on granting insurance credits over making sure mitigation efforts are effective– and apparent fraud in the inspection process are largely to blame.

NAMIC also planned to testify at a meeting of the windstorm committee today.

“The purpose of mitigation discounts is to incentivize the hardening of homes. This effort cannot achieve full benefit when many people are receiving credits though they’ve done nothing to mitigate their homes,” Reynolds wrote. “The resulting tragedy is that many homeowners are led to believe their homes are safer than they really are. It also means that those Floridians who have truly hardened their homes do not receive the full benefit for their efforts.”

Reynolds also urged the committee to look closely at how mandated discounts are being applied to the premium as they are currently applied to the entire wind portion of the premium, including expenses, other structures, and contents coverage provisions.

Florida Insurance Commissioner Kevin McCarty has acknowledged there may be fraud problems with the program. He also said the state might have to augment its fraud investigation efforts surrounding the mitigation program.

Reynolds said discounts in many areas of the state can be “enormous,” often more than 50 percent of the premium.

According to McCarty, there may be some duplication in the implementation of credits by insurers. He also said that some insurers have underestimated the impact on their revenues of the mitigation discounts.

Reynolds said NAMIC members support risk-based incentives to encourage strengthening of homes but that the state’s enforcement of the program must result in overall premium levels sufficient to pay claims.

Today’s committee hearing is the second one for the committee, which was established by legislation passed during the 2009 session and charged with examining residential insurance hurricane mitigation discounts that are based on studies from Applied Research Associates and were implemented in two stages by the Office of Insurance Regulation.