Fla. Deduction Law Insurer Impact Seen Limited

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NU Online News Service, April 28, 4:23 p.m.EDT?Florida's new law reducing homeowner hurricanedeductibles will have a minimal effect on insurers, according to arisk modeling firm.[@@]

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Newark, Calif.?based Risk Management Solutions said thelaw--which goes into effect Sunday for the state's residentialpolicyholders--will increase insurers' average annualized loss byless than 3 percent for deductibles common to Florida homes.

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Instead of a single event, the new hurricane deductible law forresidential policyholders provides an annual hurricane deductiblecovering losses from all hurricanes in a calendar year. Once thedeductible is met, losses from additional hurricanes in the sameyear are subject to the policy's "other perils" deductible, whichis typically lower than the hurricane deductible.

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To quantify the impact of this policy change, RMS said itreviewed the historical record to determine the long-term potentialfor multiple damaging hurricanes hitting the state in one season--aphenomenon called hurricane clustering.

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"When clustering occurs, it is possible for one home to be hitby more than one hurricane, as was the case for some propertieslast season. In this case, a seasonal deductible will result inhigher insurance claims relative to a single-event deductible,"said Kyle Beatty, meteorologist at RMS.

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However, he said an RMS simulation covering "over one millionyears of hurricane activity shows that this is extremely rare. Themajority of risk is driven by years when a location is impacted byonly one storm."

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The impact of the new legislation on hurricane insurance riskvaries based on the size of the deductible in force and thelocation of the property. The impact is greatest in areas of highhurricane frequency, such as Southeast Florida, and for policieswith high deductibles.

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Commercial and multi-location policies with blanket deductibleswould experience different effects, and are not addressed under thenew legislation.

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RMS said its analysis of seasonal deductibles is part of acomprehensive research initiative it launched in November 2004 toanalyze the unprecedented level of data generated by the 2004Atlantic Hurricane Season. The program includes research intohurricane frequency and an extensive analysis of industry claimsdata.

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