On the heels of certain reforms in Florida's 2013 LegislativeSession, the James Madison Institute and the R StreetInstitute released a policy study that outlines pragmaticreforms that would have a meaningful effect on stabilizing theFlorida property insurance market without requiring big hikes inprimary insurance rates.

The study — titled “Ten Reforms to Fix Florida's Property InsuranceMarketplace – Without Raising Rates” — reports that, despitestorm risks, Florida has seen its population and its builtenvironment grow dramatically; growth has increased the state'scoastal exposure by $2.9 trillion, the most of any state.

Additionally, the report notes that the property insurancemarket is plagued by uncertainty, government intrusion andregulatory overreach, and that there is an ongoing risk thatmultiple government agencies might levy assessments on propertyinsurance policies after a major storm or series of lesser stormsposes a meaningful risk.

“What makes Florida unique is not only the meteorological risksit faces, but its political, regulatory, tort and judicialenvironment,” writes R Street Senior Fellow R. J. Lehmann(pictured), the study's author. “For too long, Florida has bet itspublic safety and fiscal health on the weather, but the state'songoing, statistically implausible winning streak cannot continueindefinitely.”

Reforms recommended include:

1. Implement the Hagerincremental Cat Fund reduction plan

• To take advantage of falling private reinsurance rates,gradually reduce the Cat Fund's mandatory coverage by $3 billionover a three-year period, but allow an “override” in anemergency situation or if private reinsurance rates spike to permitthe Cat Fund to return to offering up to $17 billion incoverage.
• Revamp the current nine-member Cat Fund Advisory Council toinclude financial advisors, actuaries and other experts.

2. Establish requirements for“assignment of benefits” provisions

• Third parties that enter “assignment of benefits” arrangementswith insureds should be bound by the same contractrequirements as the original policyholder.
• To protect consumers, assignment of benefitsagreements should include an opt-out period for those who mayhave felt compelled into signing over their insurance benefitsunder pressure by a vendor or the stressful circumstancessurrounding a claim.

3. Implement incrementalCitizens eligibility reform with a “circuit breaker”

• Increase the eligibility standard for Citizens – currentlyat 15 percent— by 2.5 percentage points until it reaches100 percent.
• To avoid rate increases, the hike in eligibility requirementswould take effect only in years in which overallprices decline.

4. Allow excess and surpluslines carriers to do voluntary take-outs from Citizens

• Only surplus lines insurers meeting strictfinancial criteria should be allowed to take policies out ofCitizens.
• They should maintain at least $50 million insurplus; receive or maintain an A.M. Best Financial StrengthRating of A- or better; maintain resources to cover a 100-yearprobable maximum loss at least twice in a hurricane season;and gree to provide coverage substantially similar to that ofCitizens.

5. Remove non-primary residencesfrom Citizens and continue reduction of Citizens' maximumcoverage

• Continue annual reduction in Citizens' coverage limit fortwo additional years, until it reaches $500,000.
• Examine an effective way of removingnon-primary residences from Citizens.

6. Expand 2013's coastalpreservation concept to bar other state programs from providingcoastal subsidizes

• End government-funded incentives for development seawardof the CCCL and in areas lying within the CoastalBarrier Resources System, with exceptions for public safety,wildlife protection and recreation.
• Private citizens should be free to develop their own landat their own expense, but government should not fund, subsidizeor otherwise encourage development in high-risk and/orenvironmentally sensitive areas.

7. Implement tough, new Citizensand Cat Fund conflict-of-interest policies and make protectingtaxpayers a focus of both entities

• Reexamine both Citizens and the Cat Fund's core missionsto include protecting taxpayers as a focus of eachorganization.
• This may require: taxpayer-protection clauses as part ofthe job descriptions of all senior management; requiring anannual hearing on taxpayer protection; requiring anindependent report on taxpayer protection each year thatexamines discretionary expenditures and organizational actionstaken to reduce the likelihood or severity of post-hurricaneassessments.

8. Create an expert panel toadvise the state on the use of RESTORE Act funds

• Create an ad hoc panel of experts and task themwith advising the state on how to best invest RESTORE Actfunds on eligible projects that yield the greatest hurricanemitigation benefits

9. Establish fair settlementprocedures

• Treat first- and third-party claims in the same manner.
• Require all claimants to submit written notificationto the Department of Financial Services of an insurer'sfailure to pay a claim, waiting at least 60 days before filinga lawsuit alleging bad faith during this period by tenderingeither the amount demanded in the notice or the applicablepolicy limits.
• Require third-party claimants to provide basic notice toan insurer of his or her loss ad establishing a set, reasonabletime frame – such as 45 days – for an insurer to pay either anagreed-upon amount of the policy limits.

10. Require an annual report on the combinedpost-storm bonding capacity of Citizens, the Cat Fund and theFlorida Insurance Guaranty Association

• Direct the Investment Advisory Council of the State Boardof Administration to provide an annual report estimating thebonding capacity of Citizens, Cat Fund and FIGA, taking intoaccount the possibility that all would seek to execute bondissues in close proximity to one another following a hurricaneseason that adversely impacted Florida.

“Loopholes in the legal process have created fraud, increasedlitigation and unprincipled claims practices,” said Dr. BobMcClure, JMI president and CEO. “It's unfortunate thatinterconnected policies pursued by the Legislature, previousgovernors, and the Office of Insurance Regulation have led to adysfunctional property insurance system – one that has distortedpricing, undermined competition, and placed a heavy burden on thestate's taxpayers.”

In summary, the study encourages the Legislature to shrink itsstate-run, taxpayer-backed entities – Citizens Property Insuranceand the Cat Fund – to decrease the likelihood or severity ofpost-hurricane taxes that could threaten to impair the state'seconomic recovery. Additionally, the Legislature should take stepsto address cost drivers that are adversely impacting consumers,even during these hurricane-free years and ultimately findmarket-based ways to discourage risky development in coastal areasalso as to make Florida more physically resistant to storms.

“Although the ten proposals outlined in this study would notsolve all of Florida's insurance-related problems, they could makesignificant headway without raising rates on consumers during afragile economic recovery,” said Lehmann.

The full study is available at:

http://www.rstreet.org/policy-study/ten-reforms-to-fix-floridas-property-insurance-marketplace-without-raising-rates/