The much-debated and massive SB 2044 has appropriately beencalled an "omnibus" bill. The legislation was sent to Gov. CharlieCrist on May 17, who has until June 1 to act on it. Here is acloser look at two of the significant sections in thelegislation.
SB 2044 and Mitigation Discounts In SB 2044, theFlorida Legislature sought to address the required expansion ofwindstorm mitigation discounts without simultaneous rate increaseoffsets and a failed mitigation inspection program. Regardingmitigation inspections, the OIR and the insurance industry came torealize that a substantial percentage of the mitigation formssubmitted on behalf of insureds were inaccurate at best, andfraudulent at worst.
This has been exemplified by an ongoing pilot mitigationreinspection study undertaken by Citizens. As of April 30, 2010,inaccuracies have been found in almost 92 percent of the 566properties surveyed. The mitigation discounts were too high fortwo-thirds of these properties. Even accounting for a smallerpercentage of properties that should have received more mitigationdiscounts, and the costs of all reinspections, Citizens estimatesit lost premium of $452,000 for the 566 properties averaging $800per policy. SB 2044 provides for a reinspection program by insurersat their own expense, among other initiatives.
The bill further attempts to address the increase in windstormmitigation discounts that has resulted in a severe premium drainfor Florida insurers. While the bill states an intent that insurersshould not lose income from the application of mitigationdiscounts, it places the burden on the insurer to establish thatthe mitigation discounts will exceed the loss savings attributableto those discounts.
Mark Brannon, a principal actuary for Merlinos & Associates,Inc. said, "SB 2044 provides some changes on how mitigationdiscounts can be applied, but I'm not sure many companies will beable to provide an adequate demonstration to support a rate offsetat this time. For the most part, the premium reductions have workedtheir way into the companies' historical underwriting experience,so the impact of the differences in the premium and loss costaffects should be addressed in experience based rate filings. Also,I would expect that the OIR will exercise their discretion on howto apply the bill language."
Even if a company can recoup lost revenue from inappropriatemitigation discounts, that recoupment will be on a lagging basisover an extended period of time, which may negatively affect thecarrier's near-term underwriting results, cash flow and surpluslevel.
SB 2044 and Cost Drivers SB 2044 addresses thecurrent requirement for the payment of claims based on fullreplacement costs, with no holdback for depreciation. Under SB2044, claims payments for dwelling coverage would be based on theactual cash value of the property, which would include a holdbackfor depreciation, unless the property suffers a total loss. Theinsurer would be obligated to pay full replacement cost for thedwelling damage after the insured enters an agreement for repairsand as the repairs are undertaken.
The bill also provides that initial claims, as well as supplementaland reopened claims, must be submitted to the insurer within threeyears after the windstorm damage occurred. The purpose of thisprovision is to address the significant number of post-Wilma claimsfiled years after the event by public adjusters. While the intentis good, it is debatable how effective this provision will be inimpacting industry loss experience. Claimants will still have fiveyears to file their lawsuits. More importantly, public adjusterswill still have plenty of time to submit claims and will encouragepolicyholders to file placeholder claims within the new three-yeartimeframe. The legislation does not change the substance of anyrights, but merely the target date for public adjusters to staketheir claims.
Another intended rate relief feature of SB 2044 is the expansion ofthe expedited filing process for the recoupment of pass-throughcosts for reinsurance, alternate reinsurance financing and a newOIR inflation trend factor. However, the rate increase with thisfiling, in combination with any other rate filings, may not exceed10 percent per year.
Fred E. Karlinsky is a shareholder in the law firm of Colodny,Fass, Talenfeld, Karlinsky, Abate. Richard J. Fidei is a partner inthe firm. Karlinsky may be reached in the Ft. Lauderdale office at954-332-1749 or by e-mail at [email protected].Fidei may be reached in the Ft. Lauderdale office at 954-332-1758or by e-mail at [email protected].