New Florida legislation, if signed into law by Gov. Rick Scott, would provide relief to the state's private market insurers and potentially attract new private capital to the Sunshine State.

Citizens Property Insurance Corporation, Florida's residual market insurer, has grown to become the state's largest homeowners' insurer with about 1.5 million policies covering approximately $510 billion in total insured value.

By statute, Citizens currently has the authority to raise money to fund a deficit created by catastrophic losses by issuing bonds and levying assessments on almost all policyholders in Florida. Some of these assessments (called regular assessments) are collected from private market insurers, who must "front" large amounts of cash to Citizens within 30 days of an assessment and recoup the assessment over time from its policyholders.

The new legislation would eliminate the need for private market insurers to "front" these large amounts to Citizens for two of its accounts, and substantially reduce these upfront payments for the third account.

This article summarizes the current state of the law and the proposed changes by House Bill 1127, which passed during the recently-concluded Florida Legislation Session.

Current Law

Citizens maintains three accounts: a Personal Lines Account (PLA); a Commercial Lines Account (CLA); and a Coastal Account. Assessments may be levied for deficits in each account separately. There are three types of assessments that may be levied under Florida law for each account.

First, a Citizens policyholder surcharge may be levied per account on Citizens policyholders in an amount up to 15% of premium. This surcharge is imposed at the time a new Citizens policy is issued or renewed.

If the surcharge is insufficient to fund any Citizens post-event deficit, regular assessments may be levied on almost all private market property and casualty policies, excluding medical malpractice, workers' compensation, and Citizens policies. Regular assessments are collected from private market insurers within 30 days after they are levied. Insurers then recoup the amount they paid from their policyholders as policies are issued and renewed.

The problem with this collection process is that insurers must take an immediate reduction to their surplus for the amount of the assessment. Also, because insurers have to estimate a recoupment percentage based on reasonably projected future premium production in a filing subject to review and approval by the Florida Office of Insurance Regulation (OIR), they may not actually recoup the full amount they paid in assessments as quickly as anticipated.

The obligation to pay a substantial assessment up front, thereby reducing its surplus and related accounting and recoupment issues, have been cited by OIR as some of the reasons given by private market insurers for not doing business in Florida.

Should a deficit remain in any Citizen account, emergency assessments may be levied on nearly all property and casualty policies in the state, including Citizens policies. Emergency assessments can be up to 10% of direct written premium statewide or 10% of the deficit per account, whichever is greater. They are not collected up front from insurers, but rather are passed through by insurers to policyholders as policies are issued and renewed. These assessments can be collected over as many years as necessary to satisfy the assessment.

Proposed Changes to the Law

HB 1127 would eliminate regular assessments for the PLA and CLA accounts entirely. The bill would also reduce the maximum regular assessment for the Coastal Account from 6% of aggregate statewide direct written premium, or 6% of the projected deficit, whichever is greater, to 2% for each. The Citizens surcharge and emergency assessment would remain intact as funding sources for any post-catastrophic event account deficits suffered by Citizens.

The bill also authorizes the Citizens Board of Governors to levy policyholder surcharges, regular (only for the coastal account) and emergency assessments in advance–based upon their projection of a deficit in any of the three Citizens accounts, rather than only post-event. This will allow Citizens to secure loss funding in a more controlled manner as circumstances and market conditions permit and presumably to mitigate the need for post-catastrophic debt issuance under what may be unfavorable terms and conditions.

There are other provisions in the bill, such as extending the timeframe in which Limited Apportionment Companies must remit regular assessments for the Coastal Account from 12 months to 15 months.

Effect of the New Legislation

A main focus of this legislation is to prevent a drain on the surplus of P&C insurers writing in Florida's private market, which is caused by insurers having to pay the full amount of a Citizens regular assessment up front, and then recoup this amount from policyholders over the following year. This will also affect surplus lines insureds who are subject to Citizens assessments.

Additionally, since assessments previously levied as regular assessments—which Citizens' policyholders do not pay—would now be levied as an emergency assessment—which Citizens' policyholders do pay—Citizens policyholders may pay a higher share of assessments levied. The amount paid by non-Citizens policyholders in an emergency assessment may decrease correspondingly.

This Citizens assessment bill, which enjoyed support from consumer groups, insurance companies and real estate agents originally passed the Florida House of Representatives, then was unanimously approved by the Florida Senate on the final day of Florida's 2012 Regular Legislative Session, March 9, 2012. It will be sent to Gov. Scott who can either sign the legislation or veto it. If Gov. Scott fails to act upon this legislation within 15 days after he receives it, it becomes effective automatically on July 1, 2012.

Fred E. Karlinsky, a shareholder at Colodny, Fass, Talenfeld, Karlinsky & Abate, practices in the areas of insurance regulatory and transactional law and governmental affairs. He represents foreign and domestic insurers and reinsurers in Florida, throughout the United States and internationally in all aspects of insurance and reinsurance law.

Katherine Scott Webb joined Colodny, Fass, Talenfeld, Karlinsky & Abate as an associate in 2005, was named partner in 2009 and Shareholder in 2012. Webb is involved in both lobbying and regulatory work, representing clients' needs to the legislative and executive branches of government. She is the recipient of the 2011 "Outstanding Lobbying Efforts" award from the Florida Insurance Council.

Richard J. Fidei, a partner at the law firm of Colodny, Fass, Talenfeld, Karlinsky & Abate, represents insurance and reinsurance companies, brokers and other related entities in a broad spectrum of regulatory, transactional and corporate matters, as well as in-claim and dispute resolution proceedings. Fidei leads the Firm's Insurance Regulatory Law Division.

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