A product of a special session lasting just a handful of days, at 176 pages the recently enacted property bill is a classic study of how the laws of political pressure can work to change the government's agenda when it comes to a regulated industry such as insurance. Since Hurricane Andrew in 1993, the overall perspective in Tallahassee has been that the role of government has been to assist the private market, which was viewed as the real solution to the state's high-risk homeowners' market. It was that guiding principle that saw government create the Florida Hurricane Catastrophe Fund and the initially residual markets that were created as a market of last resort. Subsequent bills set out the framework to attract new capital and spread out the state's resources over two hurricane seasons.

For many, the proof of the wisdom of those choices came in the 2004/2005 hurricane seasons when private insurers had to foot the bill to the sum of $37 billion while handling over three million claims. Were there problems, yes, especially when it came to the Citizens Property Insurance Corporation's claims handling. Two companies -Poe Financial and its other insurance operations, and more recently Vanguard Fire and Casualty, collapsed under the financial weight of losses. Even so, however, past rate increases and other factors kept the private market intact. And the private market remained the solution of choice. But the recent action by lawmakers represents a fundamental step backwards from that point of view.

Commenting on the industry's attempts to block an emergency order calling for a moratorium on the non-renewal and cancellation of policies, Governor Charlie Crist made a comment that will, in all likelihood, be admitted into the pantheon of infamous political quotes. “They can't win in the legislature any more, they can't win in the Cabinet any more, so they're going to try the court system,” Crist said.

The so-called “people's governor,” Crist, like many other lawmakers, felt they had a mandate for change, and indeed they did. But by casting the debate as the people vs. a monolithic industry, they may have insured their popularity in the short term, but at great risk and cost. With the private market firmly crowned as the problem, it begs the question of what and who is responsible for the solution. For now, the one over-riding answer is firmly the government. As remarked by William Stander, lobbyist for Property and Casualty Insurers of America, “The bill is a virtual takeover of the insurance market by the state.”

Looking at the bill, on the surface consumers are the big winners. Promised rate relief, unfettered access to a competitively priced residual market, all backed by a populist governor and Cabinet, homeowners are feeling empowered and no longer at the mercy of the rising cost of a coverage that many consumers don't understand. But while consumers can declare victory today, they have also placed themselves at risk of assessments that could far outstrip any perceived gains. However, those risks barely registered during the special session. Out of the entire legislature, only two lawmakers summoned the political courage to vote against the bill, Reps. Don Brown (DeFuniak Springs) and Dennis Ross (R-Lakeland). So as hurricane season approaches, the industry finds itself on the sidelines while the government takes the lead. And only the tropical winds of the summer know which way the market will go.

Rate Cuts: Look to the Cat Fund

The property bill contains many elements that, in some form or another, have been attached to every bill previously debated or enacted. It creates ways to strengthen the Florida Building Code and reinforces the emphasis on hurricane mitigation and inspection. For example, the bill calls for the Financial Services Commission to adopt a uniform home grading scale to calculate a home's ability to withstand a hurricane, and another industry-wide form to verify mitigation inspections for the purposes of factoring discounts. The bill also calls on the Department of Financial Services to conduct a background check–which includes fingerprinting–on all wind inspectors. The department is also charged with maintaining a list of authorized wind inspectors and hurricane mitigation inspectors.

Lawmakers also targeted the industry's rating law. Gone is a rate flex provision that had allowed insurers to increase rates statewide by five percent or 10 percent in any territory without seeking the approval of the Office of Insurance Regulation. It also eliminates the use of the much maligned and controversial arbitration process to resolve a rate dispute until January 1, 2009, the same period of time lawmakers suspended the use-and-file option, which allowed carriers the option of increasing rates prior to seeking regulatory approval. Under the bill, carriers can only utilize the use-and-file method if they are seeking a lower rate.

While provisions such as these will have their effects, the real heart of the bill lies in the changes to the Cat Fund and Citizens. Looking at the Cat Fund changes, they are designed specifically to offset the cost of private reinsurance. A white paper issued by the Florida Insurance Council noted that the industry paid out $20 billion in losses in 2004 and $40 billion in 2005. Most of the approved or pending rate increases are being driven by reinsurance.

The Cat Fund provisions expand its capacity on both the upper and lower limits for the 2007, 2008, and 2009 hurricane seasons. For 2007, the Cat Fund is estimated to have a capacity of $16 billion in cash and bonding ability. In order for the fund to be triggered, the industry must meet a total retention of $6 billion, with each carrier's share of that retention based on its Cat Fund premiums. For example, in 2006 for every $1 million a carrier paid in Cat Fund premiums, the carrier must pay out roughly $5 million before it can access its Cat Fund reimbursement. Due to the Cat Fund's capped capacity, each insurer can only access a certain amount of reimbursement, which is calculated using a pay-out multiple. For 2006, for each $1 million in premiums a carrier could access up to $14 million.

For the 2007, 2008, and 2009 contract years, lawmakers decided insurers could purchase additional coverage in one billion increments up to a total of an additional $12 billion. This will increase the Cat Fund's capacity from $16 billion to $28 billion and the State Board of Administration could increase the capacity by another $4 billion for a total of $32 billion. The bill also allows insurers to access more capital at the lower end of the Cat Fund. Currently, each carrier must pay its share of the retention to reach the $6 billion mark. Under a Temporary Emergency Additional Coverage Option, an insurer can choose a lower retention whereby it could access the Cat Fund when the total industry retention equals $3 billion, $4 billion, or $5 billion. At those levels, insurers can draw on the fund to pay 90 percent, 75 percent, or 45 percent of its losses. Additionally, some insurers could purchase up to $10 million in additional coverage.

In addition to changing the Cat Fund limits, lawmakers also set the price for the lower levels of coverage at near private market prices. In taking these actions, the state indirectly is offsetting the increases in private reinsurance, which, in turn, is expected to reduce rates. In fact, the bill calls for the Office of Insurance Regulation to calculate a presumed savings factor by March 15 and then calls for all residential insurers to submit a rate filing by June 1 to reflect the savings. Insurance Commissioner Kevin McCarty recently announced that the state has hired Robert Hunter as a consultant to work out the savings factor. “I want to make sure consumers get the full benefit from the reforms, while also making sure insurers retain rates that accurately reflect the risk they are bearing,” Hunter said.

Citizens: An Explosion in the Making?

While some welcome the Cat Fund changes, many point out that they dramatically increase the chance of assessments. However, the changes to the fund pale in comparison to the changes dictated to Citizens. Bluntly put, lawmakers have made the once market of last resort a competitive state fund by deleting the requirement that Citizens' rates be non-competitive with the private market. “It's criminal what they are doing with Citizens,” said Tom Enright, executive vice president of Enright & Wilson.

These are the major changes to Citizens, as contained in a Senate and Banking Insurance Summary of the bill:

It deletes a requirement enacted in 2006 that required Citizens to charge rates sufficient to cover a probable maximum loss for each of its three accounts. This has the effect of voiding a 56.5 percent premium increase for the high-risk account.

Rescinds the approved actuarially sound rate increase that took effect January 1, 2007, and requires Citizens to refund policyholders affected by the rate increase. This voids an average 23.1 percent rate increase in the high-risk account.

Freezes rates at the December 31, 2006 level for the remainder of 2007, except for any rate decreases implemented under the January 1, 2007 rate filing, and any further rate decreases that may be approved during 2007.

Requires the OIR to annually establish Citizens' rates within 45 days after Citizens files recommended rates and prohibits Citizens from legally challenging the OIR determination.

Requires a new rate filing to be submitted, effective January 1, 2008. The bill requires the rate to be actuarially sound, but fails to define the term.

The bill deletes a 2006 provision that made non-homestead property ineligible for coverage unless the property owner submitted a certification from an agent that the property had been rejected by three surplus lines carriers and one admitted insurer.

If a new applicant to Citizens is offered coverage from a private insurer, the property is not eligible for coverage unless the insurer's premiums are 25 percent greater than Citizens for comparable coverage.

A Citizens' policyholder remains eligible for coverage regardless of whether they receive an offer of coverage from a private company.

The bill moves the Commercial Joint Underwriting Association that was set up for commercial property under Citizens' commercial lines account. Currently, the commercial lines account only contains commercial residential accounts. In the case of commercial business accounts, Citizens could issue a multi-peril policy. A commercial business account would also qualify for non-wind coverage under the commercial lines account if they obtain wind-only coverage from the high-risk account.

Citizens' assessment base would be expanded to include auto insurance, but not workers' comp, medical malpractice, or accident, or health. This would substantially make the assessment base the same as the Cat Fund. By making these changes, Citizens' assessment base would leap from $8.2 billion to $35 billion.

As the industry attempts to digest the many changes by lawmakers there is a concern of whether this bill will be the final word this year on the homeowners' market. The fear is that many of the provisions are placeholders for other more radical alterations in the legislative session. As distasteful as the bill may be to the industry, it did avoid some more ominous measures such as one that would have ended the ability of national companies to establish so-called “pup' companies. Other earlier iterations of the bill also would have required carriers marketing auto policies in the state to write homeowners policies if they did so in other states in the country. With Crist and the leadership in the House and Senate having proved they are not afraid of making radical changes in the market, the industry finds itself on shaky ground indeed.

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