When the legislature takes the formal step of titling a bill, it is usually trying to keep the public's attention focused on the positive aspects of the bill while downplaying some of its less-appealing aspects. Such is the case when the legislature named this year's version of the property reform bill the “Homeowners' Bill of Rights Act.” Depending on one's perspective, this either signals a victory for consumers or another round of industry restrictions. In truth, it is a little bit of both. More than anything, however, it is largely a victory for the status quo. While there are positive aspects to the bill, it doesn't change one fundamental fact: the burden of paying for hurricane-related costs rests squarely on the backs on policyholders.

There is no obvious sign that this will change in the near future. Why? Governor Crist swept into office in 2006 running on a platform that mainly focused on reversing the trend of upward-heading homeowners' rates. Having survived one hurricane season without significant losses, the state could find no compelling reason to change the formula. Hence, lawmakers continued to rely on Citizens Property Insurance Corporation, the Florida Hurricane Catastrophe Fund, and policyholder assessments to pick up any losses.

Along with this stamp of approval for the status quo came the tightening of industry regulations, ending arbitration and extending the prohibition of the use-and-file rating method. Thus, even though the bill is not as drastic as its 2007 predecessor, it largely codifies the same features, the same risks, and the same promises for another year.

Sink on the Cat Fund

Although most lawmakers' attentions were centered on Citizens, and rightly so given its 1.2 million policyholders, the most significant proposal was one that didn't make the cut. Proving once again that when a moving force meets an immovable object, a collision will invariably result, Chief Financial Officer Alex Sink faced the reality of what the legislature will, or more importantly, what it will not do during an election year. In this case, the necessary process of reducing the financial burden on the Cat Fund began.

The Cat Fund is the key to dealing with homeowners' rates, as the quasi-state agency offers reinsurance well below the private market. When Crist and the legislature searched for a way to artificially decrease rates, the only real solution was to increase the availability of affordable reinsurance to provide insurers with a viable financial base. Lawmakers certainly met that goal when they increased the Cat Fund's single season capacity last year by $12 billion — from $16 billion to $28 billion.

In what Sink characterized as a “modest proposal,” she pushed the legislature to reduce the so-called Temporary Increase in Coverage Limits (TICL) program from its current level of $12 billion to $9 billion. The program had offered the coverage for a premium of 2.2 percent of an insurer's portion of the $12 million, a pittance compared to the 10-to-20 percent charged by the private market at that time. At that rate, insurers snatched up $11.5 billion of the TICL coverage for a mere $242 million in total premiums.

However, Sink, some lawmakers, and the industry realized that the $28 billion far exceeded what could be raised in the capital markets. Right now, the Cat Fund has approximately $2 billion in cash and another $6.3 million in pre-event notes, for which it is currently making payments. To reach its ceiling of a potential $28 billion liability, the fund would therefore have to go to the capital markets and convince investors to pour $25 billion in 30-year bonds to ensure the Cat Fund could fully reimburse carriers. The single largest municipal tax-exempt, long-term debt issuance in the country was only $6 billion. Many experts didn't believe the Cat Fund could raise the $25 billion at once, and thought that it would probably take several bond issues over a period of 12-to-18 months.

Sink's proposal ran straight into that public policy debate of what is the worse of two options: rates or assessments. During an election year, assessments was the clear answer. When lawmakers realized that reducing the fund's exposure by $3 billion could increase homeowners' premiums from between 1.5 to 3.2 percent on average, it was a deal breaker for most lawmakers

However, Tara Klimek, a spokesperson for Sink, said that the CFO is far from done with the issue despite this year's failure. “Obviously, she is disappointed and concerned,” Klimek said. “Her main message is still to reduce risk, and this issue is not going to go away.”

Citizens' Liabilities

There is an argument to be made that the Sink's Cat Fund proposal might have garnered more support if not for the fact that Citizens accounts for 40 percent of the fund's liabilities. It seems that lawmakers regard Citizens as their largest gamble. For example, consider the simplest change that could have a major effect on the insurer. Namely, the continuation of the previous rate freeze from January 2009 until 2010 that actually keeps rates at 2007 levels. This alone caused the industry to link the state's largest insurer with the burden on the Cat Fund.

Sam Miller, executive vice president of the Florida Insurance Council, pointed out that extending the latitude to Citizens to increase rates would have brought more stability to the market. “That equates to $150 million in claim-paying capacity that the government insurer could have had but doesn't now,” he said. “In turn, we could've placed $150 million less stress on the Cat Fund, had rates not been artificially frozen.”

Dr. David Sampson, president and CEO of the Property Casualty Insurers of Association of America, echoed Miller's comments. “We remain convinced that Floridians face thousands of dollars in insurance policy assessments if a major storm hits, and the state-run insurer Citizens does not have enough cash on hand to potentially pay claims,” he said. “Whatever post-storm costs remain that the state cannot collect in bond revenue will be shifted to the taxpayers, who will then be on the hook through assessments on their property and auto insurance bills.”

Adding to Citizens' exposure is another change that expands the eligibility for high-value homes. Current law provides that policyholders with homes valued at $1 million or more are eligible for coverage if they cannot find it with one admitted carrier and three surplus lines carriers. The bill raises that amount to $2 million, to take effect in Jan. 2009.

From agents' perspectives, they dodged one important bullet. Citizens' President Scott Wallace lobbied ardently for the insurer to have the authority to issue multi-peril policies statewide. Agents heavily opposed the measure because they could potentially lose the ex-wind coverage and, despite the fact that consumers may pay lower rates, they could lose the discounts obtained when they insure their homes and vehicles with the same company.

Florida Association of Insurance Agents Vice President Scott Johnson said that an aggressive public relations effort was one reason the House failed to sign off on the Senate proposal. He also said it would have been bad public policy, given the insurance burden already placed on the state. “I can't imagine how Citizens could take on more policies and more exposure,” he said. “That is the key. How much more is our state willing to fund?”

Lawmakers did at least offer some indication that they were willing to explore reverting Citizens to its market-of-last-resort status. The bill mandates that a Citizens' Property Insurance Corporation Mission Review Task Force review the insurer's role in the market. However, taking into consideration the rate structure and its population, even those supporting the idea admit that reversing the role of Citizens in the market will be a tall order at best.

Still, it is possible that the task force could signal the end of Citizens' rate freeze. Sink supports a proposal by Senate President Kevin Pruitt (R-Port Saint Lucie), which would have created a “glide path” to increase the insurer's rates. That way, instead of raising rates by a substantial amount — it is estimated that a 40-to-50 percent increase would be necessary to make Citizens' rates actuarially sound — the state could raise rates in smaller increments. This would prevent sticker shock for policyholders. Klimek said this approach would create a gradual drop off in exposure instead of “postponing the problem.”

Industry Setbacks

The sheer size of the numbers dictated that most of the lawmakers' attentions were focused on the state-run Citizens and Cat Fund, but the industry didn't go unnoticed. Based on the findings of the Senate Select Committee on Property Insurance Accountability, regulators obtained the justification they needed to make various legislative changes that they have been advocating for years.

For example, for a second year the law prohibits insurers from using a use-and-file option to implement property rate increases. Under the use-and-file option, insurers are able to raise rates prior to securing regulatory approval. If regulators regarded the rates as excessive, then the insurer was required to return that portion of the increase to their policyholders. For that reason, the industry has long argued the state was a de facto file-and-use state, and the law change is likely to have little effect.

The same situation is applicable to suspending arbitration to resolve rate disputes. Last year, the state suspended the method until Jan. 2009. This proved to be a first step, as the bill now fully repeals the rate dispute method. Given the fact that rate arbitration has been revoked, lawmakers set provisions so that insurers would have an expedited path to resolve rate disputes within a timely manner. Specifically, the law requires the Florida State Division of Administrative Hearings (DOAH) to hold a hearing within 30 days after an insurer requests a rate hearing. The DOAH judge must issue an order within 30 days of the hearing.

Additionally, regulators must issue their own final orders within 30 days of receiving the judge's report.

Insurance Commissioner Kevin McCarty said these changes would do much to benefit consumers. “The provisions of the bill are very important,” he said. “They would prevent insurance companies from bypassing the OIR and increasing rates through the use-and-file option.

Unfinished Business

After all of the property changes, one would think that the legislature and the industry would reach an end point. With Sink's promise to pursue her reduction in the Cat Fund's liability, however, it is unlikely that property will no longer be a legislative issue. There are still concerns about the use of models to calculate potential hurricane losses and a host of open record law changes.

Moreover, there are other substantive changes that could alter the forecast of other sections of the market. David Daniel, vice president of government affairs for the Florida Chamber, said the business community would continue to pursue legislation that would allow business owners to purchase non-assessable policies exempting them from paying Citizens, the Florida Hurricane Catastrophe Fund, and the Florida Insurance Guaranty Association assessments. In exchange for paying higher rates, the policyholders would be subtracted from Citizens' assessment base and exempt from paying any assessments levied by the insurer.

The business community's position is that business owners opting to buy non-assessable policies and pull out of the insurer's assessment base would be offset by the decrease in the insurer's exposure. Experts note there is no way to actuarially judge that proposition, which leaves open whether an exodus of businesses to the private market under non-assessable policies would simply increase the assessment burden on the remaining policyholders.

Tom Enright, president of surplus broker Enright and Wilson, said the industry survived the session fairly well. He did comment though that the non-assessable bill would have been tough to swallow because it would have created an uneven playing field. “The Chamber came real close to getting it done,” he said.

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