Florida lawmakers will enter the 2009 legislative sessionfixated on the state's economic woes and how to balance a statebudget that keeps running in the red.

But this year's session could be far-reaching for the state'sinsurance industry as well. The explosive news that State Farm, thestate's largest private insurance carrier, has decided to pull outof Florida's property market over the next two years threatens totransform the 60-day session into an all-out battle over insuranceissues. Any number of actions could have dramatic consequences onthe property and casualty market.

Senate President Jeff Atwater (R-North Palm Beach), had alreadysignaled that he is willing to tackle several thorny items,including the size and scope of the Florida Hurricane CatastropheFund and whether Citizens Property Insurance Corp. should end itsrate freeze.

When asked at a recent forum with business leaders about anotherinsurance landmine, he was less forthcoming. Atwater refused topredict whether lawmakers would deal with the recent Supreme Courtruling (Emma Murray v. Mariners Health/ACE USA) that upended theworkers' compensation market.

The situation in the House is even more uncertain. House SpeakerRay Sansom (R-Destin), stepped down from his duties in the wake ofan ethics investigation, a move that thrust Rep. Larry Cretul(R-Ocala), into the post. But Cretul has spent his first few weeksas the House leader getting a better understanding of the state'sdire finances instead of diving into insurance matters.

While the GOP remained in firm control of the FloridaLegislature following the 2008 elections, insurance legislationwill not be settled in a strictly partisan fashion. The finaldecisions that emerge from this year's session will be guided byother factors, such as geography and the prevailing politicalwisdom at the time.

Some Republicans, for example, remain skeptical of stateintrusion into insurance matters, while other GOP lawmakers say asouring economy is not the time to lift state regulation. Gov.Charlie Crist, who will have veto power over whatever lawmakersapprove, has generally shared the latter viewpoint.

Sometimes the prospect of legislative discord results ininaction; the idea of leaving a messy controversy unresolved untilanother time begins to look enticing as problems mount. Theproperty insurance challenge, Citizens, and the Cat Fund come tomind. But some top Republicans say that it is too risky to wait toaddress these issues in the hopes that the state escapes anotherpunishing hurricane season.

"I think this is one of the most potential significant risks tothe Florida economy," Sen. J.D. Alexander, a Lake Wales Republicanwho is chief of the Senate budget committee, said about the loomingshortfall in the state's Cat Fund.

And while property insurance issues and perhaps workers'compensation will draw the most attention, there will be dozens ofproposed bills that impact the state's insurance industry,addressing everything from health insurance coverage to whetherdrivers should be forced to put down their cell phones when behindthe wheel.

In the end, the only bill that lawmakers are obligated to passis an annual state budget. But even that could have ramificationsfor those who follow insurance. There is mounting pressure for newrevenue sources, and lawmakers may also choose to divert money thatnow pays for the regulation of the insurance industry. The issue oftaxing insurance products or services also could rise again thisyear.

Agent associations and industry groups are vitally interested inand involved with the legislative process. Four of the majorplayers present their views of the issues they believe deserveattention during the 2009 session.

Bad Odds for Cat Fund

By Gary Landry, vice president, Florida Insurance Council

Florida's public policy for financing hurricane losses seems tohave been dreamed up in another sunny state — Las Vegas. Ourstate's policy for financing storm losses is tantamount to bettingthe house and our life's savings on one wild Nevada crapshoot.

It has taken a while for Florida taxpayers to fully comprehendthe ill-conceived public policy adopted by lawmakers over the pasttwo or three years and the huge financial liability that policy hasplaced on their backs, but they understand it now and, to say theleast, they are not happy about it. They like even less the factthat it effectively forces working class inland residents tosubsidize multi-million dollar coastal homes creating an "us versusthem" mentality that is good for no community.

The wild card in the scenario being played out before us is thereal villain — hurricanes. Florida, fortunately, has been sparedfrom any major hurricane impact the past three seasons after beingdevastated by eight back-to-back hurricanes during the 2004-2005seasons. However, it's not a question of if we are struck again;it's a question of when. The even bigger question is, will thestate be financially prepared?

Clearly, the answer is "no". The Florida Hurricane CatastropheFund (Cat Fund) created following 1992′s Hurricane Andrew, wasrepeatedly tinkered with over the past couple of years, to thepoint that it is financially incapable of coming close to meetingits obligations, should disaster strike. That has a direct impacton every homeowner in the state.

In addition to obligating the fund way beyond its means,lawmakers forced private insurers to utilize the fund's unrealisticcapacity as a financial backstop. The purpose of the Cat Fund is toprovide ready access to cash to immediately pay claims following amajor storm strike. However, the fund's inadequate surplus ofdollars and its inability to raise the cash in a timely mannercould severely jeopardize this process.

Bad Public Policy

Then there's the government-created Citizens Property InsuranceCorp., which has now grown to be the largest single propertyinsurer in the state with more than one million policies. Almosthalf of the cash Citizens would need to pay claims in the event ofa major hurricane are designed to come from the Cat Fund — and, asjust noted, the fund doesn't have the cash on hand. Further, thedirector of the Cat Fund has testified before the Florida Cabinetand the House and Senate that current financial market conditionshave made it impossible to raise the cash.

Neither the troubled Cat Fund nor the topsy-turvy financialmarkets are to be cited as the root cause of ourhurricane-financing dilemma, however. What is at fault is thepublic policy that has forced the Cat Fund to far overreach itsability to pay. That bad policy was driven by a priority philosophyof artificially holding down rates of insurance premiums withoutregard to the impact of that rate suppression to the stability orfinancial solvency of our financial mechanisms for paying for stormlosses.

Despite the gloomy outlook, there is good news emerging out ofthe state capital. A new crop of legislators is coming to town thisyear following the November election cycle. Many of them heardtheir constituents' displeasure regarding the flawed policy as theycampaigned last summer and fall. Many returning lawmakers also arebringing with them a change of heart as a result of the campaignseason.

Floridians want realistic, sound solutions to thehurricane-financing crisis we face. They have had enough of thepolitical solutions of recent years.

Lawmakers of every political stripe, from all corners of thestate, are moving away from the rate suppression philosophy thatgot us into this mess. They have pledged to work to find the properbalance that will bring stability to the property insurance marketand keep rates affordable.

Rate Freezes Must End

Among those solutions being talked about is an end to the unwiserate freezes that are producing too little premium for the growingrisk, and the restoration of a realistic Cat Fund. Rates must beallowed to match the risk. The longer we put it off, the larger thedisparity grows and the harder it will be for homeowners to absorbthe cost when the day of reckoning finally comes.

The Cat Fund must be as large as possible without overreachingits cash on hand or its ability to readily access cash to meet itsobligations to both Citizens and to private insurers that rely uponthe fund as a stable financial backstop.

With a realistic Cat Fund, companies will have to seek otherfinancial backstops in the private reinsurance market. That willmean higher costs that companies must be allowed to pass on —something that flawed public policy of recent years refused toallow, giving companies no other choice but to reduce the number ofpolicies they can write. That reduction led to the massive growthof Citizens and to the availability problems that plague us to thisday.

Senate President Jeff Atwater (R-North Palm Beach) has come upwith a reasonable plan to transition to rate adequacy through whathe terms a "glide path" that allows rates to rise in a series ofsteps to ease the financial impact on homeowners.

The insurance community supports these solutions and is eager towork with all of our public officials in reversing the Vegas-likepolicy that got us where we are today. The last thing our state andour economy need to hear is that Elvis has left the building andthe insurance industry has left with him.

STOLI is Best Left to Vodka

By Bob Lotane, communications and political affairs director,National Association of Insurance and Financial Advisors –Florida

In an early look toward the 2009 legislative session regardinginsurance issues, it appeared things would be relatively quiet onthe property insurance front. That certainly changed with StateFarm's withdrawal announcement and the release of the report fromthe Citizens Property Insurance Corp. Mission Review Task Force.Both of these issues are significant to Florida's insuranceindustry and residents, and we hope lawmakers will seriouslyconsider all the ramifications of the proposals that will surely bepresented to them.

In the life insurance arena, the National Association ofInsurance and Financial Advisors (NAIFA) has long been in thevanguard of working to limit the threat we see to both consumersand the industry from stranger originated life insurance (STOLI).Thankfully, Insurance Commissioner Kevin McCarty saw the need toinvestigate STOLI's potential effects on the market, and last yearheld a comprehensive informational hearing on the subject.

New STOLI Regulations

This led the Office of Insurance Regulation to providelegislative language to the House and Senate for this session thatcontains many provisions of the National Association of InsuranceCommissioners (NAIC) Viatical Model Act. The viatical model wasamended to address STOLI, and we look forward to debate about howSTOLI should be regulated in Florida.

In STOLI deals, investors induce seniors to purchase lifeinsurance, loan them money for the premiums, and after the two-yearcontestability period, assume ownership of the policy. The soonerthe person dies, the more profitable the death benefit that theinvestor(s) collects. Consumers lured into such deals are oftenunaware of the tax consequences and legal fees. Additionally, theyare using up their insurance capacity, which may be needed forfuture estate planning. STOLI schemes also are expensive to monitorand detect.

The current NAIC model contains many sober features, such as afive-year settlement prohibition on deals that contain STOLIfeatures like life expectancy evaluations, non-recourse financingand settlement guarantees. It protects consumers who haveself-financed their premiums and want to sell their policy afterthe two-year contestability period or at any time for causes suchas death of a spouse, divorce, disability, bankruptcy, loss of job,or terminal illness. It prohibits ads that identify insurance as"free" or "no cost," and it establishes reporting requirements tohelp regulators identify and stop STOLI transactions.

With our large senior population, life insurance is vital to ourstate. In 2006 alone, individual life insurance coverage purchasedby Floridians totaled $120 billion and group coverage amounted toover $380 billion.

With massive budget deficits at the federal level, Congress hasits eye on all sources of revenue, and the tax-exempt buildupinside life insurance policies has not escaped its gaze. In fact,NAIFA-Florida discovered a congressional study that conservativelyestimated this buildup over the next five years at $1.5 trillion.Amazingly, this study referred to this as lost revenue.

Taxation of life insurance products would be disastrous. Thedeath benefit received by a widow or an annuity benefit to aretiree must not be reduced for seniors living on fixed or limitedincomes. NAIFA began this fight almost 100 years ago when the firstincome tax code included taxes on life insurance. NAIFA workedpersonally with President Woodrow Wilson to draft amendments toinsert vital tax advantages into these products. The bottom line isthis: If life insurance becomes the product of Wall Street fat catsrather than a benefit for widows, orphans and business planning,then Congress will remove its tax advantages.

Taxes, Churning, and Penalties

Another issue in which we will be very involved this session issenior annuity suitability. This follows passage of legislationlast year that required a comprehensive analysis when sellingannuities to seniors and imposed stiffer penalties for "twisting"or "churning" and for fraudulent use of signatures.

Florida's CFO Alex Sink formed the Safeguard Our Seniors TaskForce last year, which held meetings across the state to heartestimony, both pro and con, about annuities and other issuesinvolving seniors and insurance. She would like to see even stifferpenalties for abusive annuity sales practices involving seniorsbecause prosecutors are not as likely to take cases that do notcarry felony violations (current law classifies these asfirst-degree misdemeanors).

We continue to support Sink in her efforts to go after the fewbad apples who purposefully defraud seniors. However, in assessingthe level of penalty that such actions warrant, we also believethat severe penalties require severe tests as to how and when theyare imposed, so the wording and details of any emerging legislationwill be very important. What we do not want to see is a young orinexperienced advisor facing a jail sentence due to an honest erroror because of poor training.

With the desperate budget situation facing lawmakers, weanticipate that all spending and revenue proposals will beconsidered, and that could include sales taxes on services. Thosepotentially subject to such a tax dodged a bullet last year whenballot language calling for such taxes was judged to beunconstitutional. Prior to the ruling, NAIFA-Florida obtainedpledges from a number of senators and representatives that theywould not support a tax on agent commissions. Since, under theFlorida Insurance Code, such a tax could not be passed along butwould have to come out of commissions, they agreed that it wouldamount to an income tax, which is not allowed under the stateconstitution. We will keep a vigilant watch for any efforts toresurrect such a levy.

Finally, we plan to use this year's required review ofexemptions to the public records laws to tighten a loophole wediscovered regarding access to sensitive agent information filedwith the state. Sink's office is working closely with us to morefully safeguard this information from the media and others.

Attorneys' Fees Battle Goes Into Overtime

By William H. Stander, assistant vice president and regionalmanager, Property Casualty Insurers Association of America

"Inevitably, the new law will become the target of repeatedattacks, while the three-year reform effort will become fodder forthe revisionists. Interested parties will start anew looking forloopholes, trying to game the system. Indeed, despite the best ofintentions, no legislative proposal can hope to stand unadulteratedby the vagaries of human nature and the passage of time."

- William Stander, Florida Underwriter, December 2003,commenting on the workers' compensation reform bill, SB 50A.

Well, the inevitable is here. In October 2008, the FloridaSupreme Court dealt a major setback to the workers' compensationmarket by reinstating hourly attorneys' fees in its Emma Murray v.Mariners Health/ACE USA ruling. Once again, the insurance andbusiness communities must come together and fight for what isright.

In December, the Florida Office of Insurance Regulation (OIR)released its 2008 Workers' Compensation Annual Report on the stateof the market. The report described the market as competitive andhealthy. As proof, it pointed to the low policy count in theWorker' Compensation Joint Underwriting Association, and trumpetedthe overall average rate decrease of more than 60 percent since thesuccessful 2003 reform effort. The report was right on target.

But now all of that is at risk. The Murray v. Mariners decisionsingle-handedly reinstated one of the biggest cost drivers in theworkers' compensation system. Unless corrected, the awarding ofhourly attorneys' fees will severely undermine the positive impactsdelivered by SB 50A by re-incentivizing claim churning andbenefit-seeking behavior. This will naturally drive unnecessaryincreased costs into the system.

Prior to the 2003 reforms, the cost of litigated claims inFlorida was 40 percent higher in Florida than in any other state.SB 50A eliminated claimants' attorneys' fees based on hours worked,and linked the amount strictly to the value of benefits securedthrough a sliding fee percentage schedule. The National Council onCompensation Insurance (NCCI) estimates that Florida employers havesaved close to $2.9 billion in premiums since the bill tookeffect.

While eliminating hourly attorneys' fees was only one componentof the reforms, PCI believes it was the most important. After thepassage of SB 50A, NCCI filed, and the OIR approved, a "law-only"rate filing decrease of 14 percent. Ostensibly, this representedall the savings the market could expect from the legislation. Yetsince that time, rates have continued to drop like a rock.

In our support of SB 50A, we said that eliminating the hourlyfees would change claimant and claimant attorney behaviordrastically, and that only experience would prove it — and ithas.

Back to Square One

But now the court's decision has pushed us back to square one.Shortly after the ruling, NCCI made a new filing with the OIR,asking for an 18.6 percent increase over two years. In support ofits filing, NCCI stated, "Because workers' compensation ratemakingis prospective only, insurers are not afforded the opportunity torecoup premium to cover such unforeseen increases in system costs.Therefore, it is expected that a significant unfunded liabilitywill be created because of the retroactive impact of this courtdecision. NCCI has estimated the statewide (including individualself-insurers) magnitude of the unfunded liability at potentiallyup to $400 million."

The OIR rejected that filing, but ultimately approved a rateincrease of 6.4 percent effective April 1 for new and renewalbusiness.

Substantial efforts to reform the workers' compensation systemcome few and far between, and for good reason. Underlying allinsurance is a reliance on stability and predictability. Frequentsystem changes prevent the orderly adjudication of claims andincrease frictional costs. At the same time, participant gaming,conflicting court decisions, and over-litigation can turn anotherwise stable workers' compensation system into disarray.

It took three years of persistent and consistent effort by theCoalition of Business & Insurance Industry to convince theFlorida Legislature to pass one of the best reform bills everdeliberated. Yet, in Murray v. Mariners, the Florida Supreme Courtchose to substitute its judgment for that of the Legislature.Unless addressed during the 2009 regular session, thereintroduction of hourly attorneys' fees into the workers'compensation system will increase litigation and raise costs.

The Florida Legislature has a full plate this year. Budgetissues and the slowing Florida economy will no doubt take centerstage, but the Coalition of Business and Insurance Industry, ofwhich PCI is a founding member, will be urging the FloridaLegislature to say "we meant what we said when we said it the firsttime," and once again prohibit hourly attorneys' fees. Especiallyin these difficult times, Florida cannot afford anything less.

Will The Legislature Get It Right This Time?

By Mary Frederick, communications director, ProfessionalInsurance Agents of Florida

The Florida Legislature must think that insurance companies andagents are made of rubber. That is, both must bend and bend, (butnot break) while providing the best possible coverage atrock-bottom prices for their customers. The well-known problem inthe homeowners' market is that hurricanes are inevitable — and withmassive buildup of buildings along Florida's coastline (the longestin the continental U.S.), the risk is enormous.

Yet some legislators want to bend and stretch the propertyinsurance market to their will. They keep tweaking Florida'sinsurance regulatory system so they can go home to theirconstituents with news of ever-lower insurance rates. But the onlyrate control they really have is with Citizens Property InsuranceCorp., and in recent years they have directed Citizens to chargeactuarially unsound rates, morphing it from a "market of lastresort" to a de facto "market of first resort." Other companies,fed up with regulatory and rate limitations, have simply reducedtheir risk or left the state, shifting even more risk toCitizens.

Is it any wonder that State Farm is packing its bags? State Farmindicates it does not want to leave Florida but it cannot afford tostay, claiming it is losing an estimated $20 million a month in ourstate. While some regulators (and Gov. Charlie Crist) are sayinggood riddance to State Farm, these same regulators are also tryingto mandate that State Farm limit its non-renewals to two percent ayear. This doesn't make sense.

Some Sound Recommendations

Legislators did a positive thing in the 2008 session when theymandated the creation of a Citizens' task force to develop a reportof statutory and operational changes needed to return it to itsoriginal mission of being the market of last resort. The task forcedeveloped a comprehensive report outlining suggestedrecommendations in time for the 2009 session.

The first and foremost recommendation was to implement Citizens'rate increases beginning in 2010. Actuaries have estimated thatCitizens is facing more than $400 billion in potential exposure,yet it only has about $3.4 billion in net assets. Not only doesthis put all Floridians on the hook for Citizens' losses, but italso puts insurance agents in a terrible position: Do they placecustomers in Citizens to save some money, knowing that Citizenscould be on the brink of financial disaster, or do they place therisk with another company that may or may not be properlyfunded?

Currently, agents are prohibited from discussing the FloridaInsurance Guaranty Fund with their customers. This limits agents intheir duty to provide important information so their customers canmake wise insurance choices. The task force recommends repealingthis onerous statutory language, and Professional Insurance Agentsof Florida agrees.

The task force has some other far-reaching recommendations tocurb Citizens' risk. The members recommend that any new structureerected on Florida's coast be ineligible for Citizens' coverage.Developers and coastal municipalities will not like that, butFlorida, as the most hurricane-prone place on earth, should takesteps to mitigate its overall hurricane risk.

In addition, the task force recommends that home-strengtheningprograms be developed and promoted. The popular My Safe FloridaHome program exhausted its funding last year. We are not sure whereadditional money would come from to continue the program, butregardless, homeowners need to take the necessary steps (and assumethe responsibility) to strengthen their homes.

Some Not-so-Sound

Other task force recommendations include a number ofbureaucratic steps for agents that put them in a position ofchasing after coverage that everyone knows is not readily there.Knowing that the devil is in the details, we hope that theLegislature weighs these carefully.

The recommendations include a series of provisions for agents toensure that their customers are in fact eligible for Citizens —from certification of the 2007 "15-percent rule," reconfirmation ofCitizens' eligibility every year for their Citizens' policyholders,and limiting automatic renewals. If the agent or the applicantviolates any of the eligibility requirements, then the task forcerecommends that both can be fined or penalized. Let's not putagents in an even worse position by mandating that they spin theirwheels, instead of ensuring that their customers are properlyinsured.

Other recommendations just do not take into account the factthat Florida's insurance market is extremely volatile. It soundsnice to recommend the elimination of Citizens' coverage ofnon-residential commercial properties, especially now that thatmarket has opened a bit, but what happens if the market tightensagain? The same thing goes for the recommendation thatCitizens-appointed agents demonstrate their appointments withactively writing companies. That's an exercise in futility.Companies are very fickle in opening and closing of territories,and agents must bend with the market flow the best they can.

Let the Market Determine Rates

There's one recommendation that is beyond the scope of the taskforce, but that we hope our legislators will heed: It is time tolet the free market come to the Florida insurance arena and allowcompanies to compete with one another with actuarially sound rates.We're sure that this basic principle of capitalism will ruffle thefeathers of some legislators who promise their constituents lowinsurance rates, even at the risk of putting Florida in seriousfinancial jeopardy. But the free market is the only way the FloridaLegislature can reduce Citizens' market share, reduce the state'sliabilities in the Cat fund and in the guaranty fund, and letinsurance companies actually compete with one another. That's theonly way our insurance market will stabilize, providingpolicyholders the best coverage and the best price.

Let's look at another coastal state's insurance market as acomparison. Louisiana's private property insurance companies canadjust their rates as necessary, and as a result their insurancemarket thrives. For the most part, Louisiana's last-resortinsurance company cannot offer competitive prices. And guess what?The number of policies placed there continues to drop.

Agents, by Florida law, must act in "good faith… with respect tothe public." Although an agent's fiduciary responsibility is notcodified in Florida statute, it is clear that Florida agents are ina Catch-22 when placing coverages for their clients. Let's hope theLegislature will take the necessary steps to allow agents toactually act in good faith.