If there were any doubts that the pressure would ease up on homeowners' insurers after last year's comprehensive reforms, they have quickly been erased as the industry finds itself practically surrounded because lawmakers, regulators, and Governor Charlie Crist continue to move forward and up the ante. Case in point: Senate President Ken Pruitt's (R-Port St. Lucie) move to create a Senate Select Committee on Property Insurance Accountability that so far has “invited” at least five insurance executives to testify under oath about their companies' rate filings. The invitation even comes with a helpful reminder that the committee has the statutory authority to issue subpoenas to compel the executives to attend.

The latest action by lawmakers and regulators, and supported by Crist, should come as no great surprise, although they don't follow the normal pattern of insurance reform. Typically, a comprehensive reform bill is enacted, and then lawmakers restrain from making any major changes based on the view that it will take the reforms several years to fully influence the market. That position is why lawmakers for the most part have avoided making any major changes to the workers' compensation and medical malpractice laws after successfully rewriting the laws in the early 1990s. The same thinking is expected to hold true with automobile personal injury protection insurance, which lawmakers enacted with few changes last year. Even among those who fought with all their resources to eliminate the law concede the PIP issue is dead for the foreseeable future.

Property insurance, however, is a different issue. Crist and the majority of lawmakers were voted into office on the promise that they would bring rate relief to Floridians. As a result, they felt emboldened to turn Citizens Property Insurance Corporation into a competitive state fund, a proposition that past legislatures and public officials would have viewed as unthinkable. Lawmakers also targeted the industry's rating law, a move that had the effect of handing McCarty wide-ranging authority to confront the industry with all the statutory tools at his discretion.

And so gone is a rate flex provision that had allowed insurers to increase rates statewide by five or 10 percent in any territory without seeking the approval of the Office of Insurance Regulation. Lawmakers also wiped from the books the much-maligned and controversial arbitration process to resolve a rate dispute until Jan. 1, 2009, the same period of time lawmakers suspended the use-and-file option, which allowed carriers to increase 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.

Even as public officials embraced those changes, they are well aware that they would not produce the kinds of changes that would satisfy consumers. They also recognized that while the other rating changes may have an effect, what is really driving the market is the price of reinsurance. Along with the changes to Citizens, the most substantive change in last year's bill was the increase in the capacity of the Florida Hurricane Catastrophe Fund. After lengthy deliberations, lawmakers took steps to increase the fund's resources, a move that increased the money available to carriers from $16 billion to $28 billion. In exchange, the insurers were required to pass on the savings to policyholders in the form of lower rates, based initially on a “presumed factor” calculated by regulators, which is designed to reflect a carrier's estimated savings from the reforms. Secondly, insurers were required to submit a second “true up” filing after the insurer negotiated its 2007 reinsurance contracts.

The public officials' viewpoint is that providing more Cat Fund reinsurance at lower prices should result in lower rates. However, the problem is that, due to the wide variation in insurers' financial position, regulators cannot calculate an across-the-board rate cut, as was the case with workers' compensation. So the question once again emerges of whether insurers' rates are fully reflecting the changes in their reinsurance costs. From any perspective, it's a question that is difficult to answer, but that's where the battle lines have been drawn.

Cat Fund

In last year's law, lawmakers cleared the way for the Cat Fund to expand its capacity on both the upper and lower limits for the 2008 and 2009 hurricane seasons. For the 2008 and 2009 contract years, lawmakers decided insurers could purchase additional coverage, referred to as the Temporary Increase in Coverage Limits in increments of one billion, up to a total of an additional $12 billion. This increased 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 allowed insurers to gain access to 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 gain access to the Cat Fund when the total industry retention equals $3 billion, $4 billion, or $5 billion. At those levels, insurers could 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 at significantly lower levels.

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 is indirectly offsetting the increases in private reinsurance, which, in turn, is expected to reduce rates.

Under Oath

Senate Select Committee on Property Insurance Accountability Co-Chair Jeff Atwater (R-North Palm Beach) made it clear that the committee's main goal is to answer the question of why premiums have not decreased to the degree expected given the expansion of the Cat Fund.

“Insurance industry representatives gave hours of testimony telling us that the price and scarcity of reinsurance was the reason they needed to keep rates high,” said Atwater. “Last January, we expanded the coverage provided by the Cat Fund from $16 billion to $28 billion to provide insurers with enough lower-cost reinsurance to reduce homeowners' rates, yet many property owners' rates have not come down as promised.”

The committee has the authority to issue subpoenas in order to compel insurance executives to testify, even though it is couching its request in the form of an invitation. Make no mistake, though: the committee is dedicated to getting the executives on record. “I am looking forward to hearing again from those who have testified before the Banking and Insurance Committee,” said Senator Bill Posey (R-Rockledge). “Perhaps the risk of perjury will help shed some light on why the promises they made last January are not being kept.”

So far, the committee is calling on five executives to publicly testify under oath as to their companies' reinsurance program, use of computer modeling, and other factors used to calculate their rates. The companies were chosen based on two categories: companies whose rates went down and — when compared to other carriers requesting rate decreases — companies who are in the top three carriers in terms of market share. The same formula held true for companies whose rates increased despite taking into account the presumed factor and true-up filing.

Called on to testify is Michael Dury, chief financial officer for The Hartford Insurance Company of the Midwest and Hartford Group, John Auer, chief financial officer of the American Strategic Insurance Corp., William G. Jurgensen, chief financial officer of Nationwide Insurance Co. of Florida, Michael Hill, vice president/chief financial officer of the Florida Farm Bureau, and Joseph Richardson, chief financial officer of Allstate Floridian Insurance Co.

So far, the industry is taking a wary view of the committee, while hoping that lawmakers take into account both sides of the issues. Based on recent experience, however, they are also concerned that the committee's hearings could be just one more forum used by public officials to attack the industry. For example, some of the committee members' statements seem to suggest that company executives will only be forced to “tell the truth” by appearing under oath before the committee. However, under Chapter 627.062(9) (a), Florida Statutes, as of March 1, 2007, the CEO, CFO, and chief actuary of a company must certify under oath that the information they submit in a filing is accurate. If not, the company and company officials could face any number of penalties, including having the company's certificate of insurance revoked.

For now, however, industry representatives remain hopeful that the committee's work will lead to a greater understanding between lawmakers, regulators, and the industry, which will lead to a long-term solution. “We hope insurance companies get to tell their sides of the story because we are rapidly reaching a point where the middle ground is disappearing,” said William Stander, assistant vice president with the Property Casualty Insurers Association of America. “All of the hearings in the world won't change the fact that the coastal exposure in Florida is growing.”

The Florida Insurance Council is concerned that the committee may draw conclusions that are not fully substantiated because the law has yet to work through the system. “The OIR acknowledged in its presumed factor report last spring that company filings in response to the presumed factor would vary widely, and this is exactly the case,” the council said in a statement reacting to the committee's formation. “It is important to note that rate increases sought by some carriers have not taken effect. They were denied by OIR. Companies and OIR now take their differences to the state Division of Administrative Hearings, and if there remains a dispute after the judge's ruling, they will go to the State of Florida Court System. That process should be allowed to work.”

Factors and Filings

To understand the clash over rates, it helps to realize just how concentrated the market is. The top 10 insurers in terms of marketshare are as follows:

Citizens: 21.4 percent (1.3 million policies in force)

State Farm Florida Insurance: 16.4 percent (1 million policies in force)

Universal Property Insurance: 5.8 percent (363,000 policies in force)

Allstate Floridian: 3.8 percent (241,000 policies in force)

Nationwide Insurance: 3.3 percent (204,000 policies in force)

United Services Automobile: 3.1 percent (192,000 policies in force)

American Strategic Insurance: 2.4 percent (150,000 policies in force)

Universal Insurance Co. of North America: 2.2 percent (136,000)

St. Johns Insurance Co.: 2 percent (128,000 policies in force)

Royal Palm Insurance: 1.9 percent (120,000 policies in force)

Under the 2007 law, carriers were given until June 1, 2007, to implement the presumed factor rates. As of Oct. 1, 2007, carriers must have submitted its true-up filing, which would take effect 90 days later. According to the OIR, there are 24 homeowners' insurers with presumed factor and true-up filings pending. Thirty-two rate filings have been approved and 31 have either been sent a notice to disapprove or have been disapproved. Five companies have withdrawn their rate requests.

Looking at the filings as a percent of the total market, 45.9 percent of the market falls under pending filings, which have a proposed average decrease of 11.1 percent. The proposed decreases range from between minus two percent to 22.4 percent and could affect nearly 1.9 million policyholders. The approved filings cover 17.6 percent of the market with an average decrease of 21.9 percent. The range is between minus 0.9 percent and 43.1 percent, affecting 717,700 policyholders. The OIR has denied filings that cover 32.5 percent of the market, which has requested an average increase of 12.8 percent. The range falls between minus 21 percent to plus 50 percent and affects 1.3 million policyholders.

Special Reports /

The Homeowners' Market on Trial

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