On the heels of certain reforms in Florida's 2013 Legislative Session, the James Madison Institute and the R Street Institute released a policy study that outlines pragmatic reforms that would have a meaningful effect on stabilizing the Florida property insurance market without requiring big hikes in primary insurance rates.

The study — titled “Ten Reforms to Fix Florida's Property Insurance Marketplace – Without Raising Rates” — reports that, despite storm risks, Florida has seen its population and its built environment grow dramatically; growth has increased the state's coastal exposure by $2.9 trillion, the most of any state.

Additionally, the report notes that the property insurance market is plagued by uncertainty, government intrusion and regulatory overreach, and that there is an ongoing risk that multiple government agencies might levy assessments on property insurance policies after a major storm or series of lesser storms poses a meaningful risk.

“What makes Florida unique is not only the meteorological risks it faces, but its political, regulatory, tort and judicial environment,” writes R Street Senior Fellow R. J. Lehmann (pictured), the study's author. “For too long, Florida has bet its public safety and fiscal health on the weather, but the state's ongoing, statistically implausible winning streak cannot continue indefinitely.”

Reforms recommended include:

1. Implement the Hager incremental Cat Fund reduction plan

To take advantage of falling private reinsurance rates, gradually reduce the Cat Fund's mandatory coverage by $3 billion over a three-year period, but allow an “override” in an emergency situation or if private reinsurance rates spike to permit the Cat Fund to return to offering up to $17 billion in coverage.
Revamp the current nine-member Cat Fund Advisory Council to include financial advisors, actuaries and other experts.

2. Establish requirements for “assignment of benefits” provisions

Third parties that enter “assignment of benefits” arrangements with insureds should be bound by the same contract requirements as the original policyholder.
To protect consumers, assignment of benefits agreements should include an opt-out period for those who may have felt compelled into signing over their insurance benefits under pressure by a vendor or the stressful circumstances surrounding a claim.

3. Implement incremental Citizens eligibility reform with a “circuit breaker”

Increase the eligibility standard for Citizens – currently at 15 percent— by 2.5 percentage points until it reaches 100 percent.
To avoid rate increases, the hike in eligibility requirements would take effect only in years in which overall prices decline.

4. Allow excess and surplus lines carriers to do voluntary take-outs from Citizens

Only surplus lines insurers meeting strict financial criteria should be allowed to take policies out of Citizens.
They should maintain at least $50 million in surplus; receive or maintain an A.M. Best Financial Strength Rating of A- or better; maintain resources to cover a 100-year probable maximum loss at least twice in a hurricane season; and gree to provide coverage substantially similar to that of Citizens.

5. Remove non-primary residences from Citizens and continue reduction of Citizens' maximum coverage

Continue annual reduction in Citizens' coverage limit for two additional years, until it reaches $500,000.
Examine an effective way of removing non-primary residences from Citizens.

6. Expand 2013's coastal preservation concept to bar other state programs from providing coastal subsidizes

End government-funded incentives for development seaward of the CCCL and in areas lying within the Coastal Barrier Resources System, with exceptions for public safety, wildlife protection and recreation.
Private citizens should be free to develop their own land at their own expense, but government should not fund, subsidize or otherwise encourage development in high-risk and/or environmentally sensitive areas.

7. Implement tough, new Citizens and Cat Fund conflict-of-interest policies and make protecting taxpayers a focus of both entities

Reexamine both Citizens and the Cat Fund's core missions to include protecting taxpayers as a focus of each organization.
This may require: taxpayer-protection clauses as part of the job descriptions of all senior management; requiring an annual hearing on taxpayer protection; requiring an independent report on taxpayer protection each year that examines discretionary expenditures and organizational actions taken to reduce the likelihood or severity of post-hurricane assessments.

8. Create an expert panel to advise the state on the use of RESTORE Act funds

Create an ad hoc panel of experts and task them with advising the state on how to best invest RESTORE Act funds on eligible projects that yield the greatest hurricane mitigation benefits

9. Establish fair settlement procedures

Treat first- and third-party claims in the same manner.
Require all claimants to submit written notification to the Department of Financial Services of an insurer's failure to pay a claim, waiting at least 60 days before filing a lawsuit alleging bad faith during this period by tendering either the amount demanded in the notice or the applicable policy limits.
Require third-party claimants to provide basic notice to an insurer of his or her loss ad establishing a set, reasonable time frame – such as 45 days – for an insurer to pay either an agreed-upon amount of the policy limits.

10. Require an annual report on the combined post-storm bonding capacity of Citizens, the Cat Fund and the Florida Insurance Guaranty Association

Direct the Investment Advisory Council of the State Board of Administration to provide an annual report estimating the bonding capacity of Citizens, Cat Fund and FIGA, taking into account the possibility that all would seek to execute bond issues in close proximity to one another following a hurricane season that adversely impacted Florida.

“Loopholes in the legal process have created fraud, increased litigation and unprincipled claims practices,” said Dr. Bob McClure, JMI president and CEO. “It's unfortunate that interconnected policies pursued by the Legislature, previous governors, and the Office of Insurance Regulation have led to a dysfunctional property insurance system – one that has distorted pricing, undermined competition, and placed a heavy burden on the state's taxpayers.”

In summary, the study encourages the Legislature to shrink its state-run, taxpayer-backed entities – Citizens Property Insurance and the Cat Fund – to decrease the likelihood or severity of post-hurricane taxes that could threaten to impair the state's economic recovery. Additionally, the Legislature should take steps to address cost drivers that are adversely impacting consumers, even during these hurricane-free years and ultimately find market-based ways to discourage risky development in coastal areas also as to make Florida more physically resistant to storms.

“Although the ten proposals outlined in this study would not solve all of Florida's insurance-related problems, they could make significant headway without raising rates on consumers during a fragile economic recovery,” said Lehmann.

The full study is available at:

http://www.rstreet.org/policy-study/ten-reforms-to-fix-floridas-property-insurance-marketplace-without-raising-rates/

Special Reports /

10 Reforms to Fix Florida's Property Insurance Market Without Raising Rates

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