Florida Leaves Regulatory Reengineering Hanging

However, lawmakers will have to return sometime this month or next to resolve the future regulation of banking and insurance, as they are required to do this year under the mandate set by a voter-approved constitutional amendment. The state legislature faiiled in the closing hours of their 2002 session to get the job done on the new regulatory system.

A 1998 constitutional amendment reduces the state's cabinet and merges the state comptroller's office with that of the treasurer/insurance commissioner.

Lawmakers almost agreed to a plan to merge the offices into a new position designated the Chief Financial Officer. Additionally, the plan would have created a Department of Financial Services and two new commissioners to oversee a division of insurers and a division of financial services. Appointed by the governor and confirmed by the remaining cabinet members, the commissioners would have had final agency authority.

The plan was on track to pass, but failed when House and Senate lawmakers failed to agree on an unrelated matter before the session adjourned on March 22. Florida Governor Jeb Bush is expected to call a special session this month or next on the issue, which must be resolved before the November general election.

As for the merger of the residual property markets, for much of the legislative session, Mr. Gallagher's plan languished as lawmakers showed little enthusiasm for the complex plan. That changed, however, when U.S. Northern District of Florida Chief Judge Roger Vinson ruled that the FRPCJUA is an "integral part of the state" and should be exempt from federal taxation.

FRPCJUA Executive Director Jay Newman said the ruling will result in the association receiving a tax refund of $172 million plus interest. The money will nearly double the association's surplus, greatly enhancing its claims paying ability.

Additionally, the ruling could ease the potential assessment burden on all Florida policyholders. "When the big storm comes, the FRPJCUA can issue tax-exempt debt," said Mr. Newman. "That means there is the choice of smaller assessments or paying off the debt faster."

Because of the circuit court's decision, Mr. Gallagher was able to obtain a private letter ruling from the Internal Revenue Service stating that his CPIC plan would be tax-exempt. As spelled out in the authorizing legislation, CS/SB 1418, sponsored by Senator Rudy Garcia, R-Miami, a new seven-member board that will serve at the pleasure of the insurance commissioner will replace the FWUA's 15-member board and the FRPCJUA's 13-member board.

CPIC will operate three accounts that will include personal lines, commercial lines, and so-called high-risk or wind-only policies. The wind-only risk accounts will feature quota-share policies, whereby insurers and CPIC each would be responsible for a portion of the losses.

Significantly, the plans would cap CPIC rate increases for wind-only policies at 10 percent between July 2002 and July 2003, thus negating remaining rate hikes scheduled by the FWUA.

Surplus line carriers' premiums will be considered in residual market assessment calculations for the first time. The bill also includes agent protection measures that allow residual market policyholders to decline offers of coverage from private carriers.

Mr. Gallagher praised the legislature for passing the CPIC bill, which by all accounts will be the most radical change in the market since the current structure was formed following Hurricane Andrew in 1992.

He attributed the victory in part to the IRS private letter ruling, which could translate into a savings of $80 million per year. "We were confident we would get the letter, but it's better to have had it in hand," he said.

Florida Farm Bureau Vice President Rade Musulin said CPIC's tax-exempt status is an important development in the ongoing struggle to create claims-paying ability. He cautioned, however, that much work remains to iron out all the details before the merger takes effect on July 1. "I'm glad it passed," he said. "The commissioner worked hard for the tax-exempt [status] and that's good for all Floridians."

Gov. Bush is expected to sign the measure into law shortly.