Goodbye 2005 - Hello 2006

Miller: The only issue of these three that got a lot of attention this past session was sinkholes. There was extensive sinkhole legislation in the big property insurance package intended to restore the private market in Pasco County and other Tampa Bay areas beset with sinkhole problems and issues. The legislation probably did not go far enough. Citizens continues to grow in sinkhole areas, with private carriers reducing their writings there. Several issues remain, which will be addressed in the 2006 session through a bill sponsored by Sen. Mike Fasano (R-New Port Richey) and Rep. John Legg (R-Port Richey) [SB 286 and HB 217]. FIC supports this bill.

An issue not covered in the Fasano/Legg bill is the creation of a sinkhole reinsurance facility, perhaps in the Florida Hurricane Catastrophe Fund. This was included in the sinkhole recommendations to the 2005 legislature from Florida State University. FIC does not have a formal position on this, although there is broad support from our members for the concept. Our position likely would be determined by details of a particular plan.

Group health remained under the radar most of the year, except for informational press on new products, such as health savings accounts. Do you anticipate any compelling news or activity in group health during 2006?

Johnson: We don't have an opinion on that issue at this time.

Miller: Health insurance probably will receive limited attention for another year. There may be an effort to open the Florida Health Insurance Plan to provide coverage to people unable to get it from the private market. FIC will continue to support a high-risk pool as long as financing of the inevitable deficit comes from state general revenue dollars and not a tax on health insurance, the funding source for huge deficits from the Florida Comprehensive Health Association when it operated on a wide-scale basis in the past. The Florida Health Insurance Plan is not insurance – it is a social program, and an important one to many people. As a social program, it must be supported through state funds and not a tax that increases health insurance premiums.

Long-term care insurance, a very specialized health insurance, may receive significant attention from the 2006 legislature. Office of Insurance Regulation Commissioner Kevin McCarty is encouraging the long-term-care insurance industry to work with the state and key legislators on a "focused" legislative package addressing LTC issues, including protections for elderly policyholders about to lose their coverage because of steep rate increases for "first-generation" products. (First-generation products are policies issued prior to the NAIC LTC Model Act, which was adopted by Florida in 2003.) McCarty received a commitment from the American Council of Life Insurance, America's Health Plans, and FIC that good faith discussions would take place.

OIR held a public hearing in Tampa in October on long-term-care insurance. The hearing was, by and large, a balanced and fair discussion of the various issues, with little insurance company bashing. Frank Dino, OIR chief actuary, denied that carriers deliberately under-priced early LTC policies and noted that the rates were set by the state, then the Florida Department of Insurance.

While there was little insurance company bashing, McCarty, Robleto, and Dino acknowledged the concerns that some Floridians who purchased the products two decades ago and are now elderly and on fixed incomes cannot absorb the rate increases they have been facing. There should be some option for people who can no longer afford premiums on a first-generation policy, so that if they cancel the coverage, they do not lose everything. The option could be a paid-up policy with some level of benefits, as required for newer products by the NAIC model act adopted by Florida in 2003.

PIP is due to sunset in October 2007. Consequently, legislators are expected to address the issue in this year's session. What do you think should happen? What do you think will happen?

Johnson: PIP should not be allowed to sunset. The statute, if flawed, should be repaired, but it makes no sense to change the key provision of an automobile marketplace that is more competitive than any of us have ever seen. The Auto JUA has less than 900 private passenger vehicles, and many of those are motorcycles. Commercial vehicles are around 3,000 and are almost exclusively non-emergency medical transport vehicles, migrant worker buses, or Dade county school buses. There's no need to repeal the no-fault law when all but about 900 vehicles are being insured by carriers voluntarily.

O'Connell: The Senate has done an exhaustive study on what needs to change in order for PIP to work. Just looking at that study should be a reasonable indication that PIP has serious problems. With these needed reforms, PIA would support the continuation of PIP. But if that doesn't happen, we are all probably better off if it simply fades away. It'll be interesting to see how serious the 2006 legislature is about fixing this problem.

Miller: There is no support among Florida Insurance Council members for outright reenactment of the no-fault/PIP statute. FIC members have reached split decisions on repeal of no-fault/PIP versus reform. There is unanimity, however, in the belief that the current system is in disarray as a result of statutory and judicial changes during the past three decades.

The position of FIC's Select Committee on No-Fault Sunset Review is:

o No-fault/PIP is broken.

o Florida policymakers should work toward creating a more efficient auto reparation system.

o The industry and legislature should identify problems with the present system.

o The current auto reparation system results in a lack of certainty and unnecessary frictional costs to the detriment of insurance consumers.

o The Senate Banking & Insurance Committee interim project report frames most, but not all, of the problems.

o If the legislature is unsuccessful in restoring certainty and eliminating the unnecessary frictional costs, it should consider other alternatives.

The American Insurance Association is in favor of repeal, with Florida joining Colorado and other states in reverting to pure tort. Property Casualty Insurers Association of America is supporting reform and has a long list of changes. The Senate Banking & Insurance Committee, in an excellent report released in November, proposed re-enactment of PIP, but with a medical fee schedule on PIP payments and attorney fee reform. The trial lawyers, doctors, chiropractors, and other groups involved in the PIP/no fault system want no changes.

If no bill passes during the 2006 session, no-fault apparently sunsets effective October 1, 2007. It is possible the bill that does pass puts off the actual decisions on PIP/no fault until the 2007 session because the legislature will be so occupied with property insurance. It is also possible a compromise will be reached between the trial lawyer-doctor/chiropractor coalition and the insurance community, but maybe not. This is about as clear a crystal ball reading as I can get right now.

Workers' compensation is a perennial topic for discussion. However, debate has been less heated since the 2003 reform bill. Rate reductions were implemented in 2003 and 2004. A third decrease proposed by NCCI in late 2005 would have lowered rates another 7.2 percent on average, effective on all new and renewal policies January 1. Florida Insurance Commission's Kevin McCarty rejected that number, and instead approved a filing with an overall statewide premium reduction of 13.5 percent. Rates have now dropped by a cumulative 32.6 percent since the 2003 reforms. Is workers' compensation resting easy for now?

Johnson: Yes, don't expect major reform of workers' compensation.

Miller: We supported the NCCI's original rate reduction recommendation. There are concerns about the higher 13.5 percent rollback OIR ordered. Hopefully, it will not force carriers to cut back on their current business or reduce the new business they take on. There are no signs of this yet, but it seems clear that the 30+ percent cumulative rollback from the 2003 reforms is all we can squeeze out of the system for the moment. This is a dramatic turnaround and a firm indication that the industry, state regulators, business community and legislature can work out reforms that truly reduce insurance rates. It is unfortunate that we have been unable to reach effective agreements like this in other lines

There is one major workers' compensation issue looming for 2006. The Florida Workers' Compensation Joint Underwriting Association (FWCJUA) will levy an almost $5 million assessment on all workers' compensation policyholders (except individual self-insured firms, which are exempt) unless steps are taken by the legislature and the FWCJUA to prevent it.

This past fall, Jim Watford, OIR's chief actuary on workers' compensation, told the State Administration Appropriations Committee that the projected deficit for the old Subplan D is $19.7 million. Even with $15 million of that red ink financed by a transfer from the Workers' Compensation Administrative Trust Fund (WCATF) authorized by the 2004 legislature in HB 1251 (the bill reorganized the JUA), that still leaves a $4.78 million hole to be filled.

The legislature has options, including an additional transfer to the WCJUA from the WCATF, Watford said. The 2004 bill actually provided for an additional $10 million if the $15 million was insufficient, but that option was vetoed by Governor Jeb Bush.

Tom Maida, FWCJUA general counsel, told the House committee the association also is examining ways to avoid the assessments, including a loss portfolio transfer (LPT), a reinsurance-like program that would finance the deficit. That plan would prevent assessments, but it has to be financed somehow, Maida noted. The FWCJUA has actually used only about $8 million of the $15 million transfer from the WCATF at this point, leaving $7 million, which could go toward the LPT. The FWCJUA would still need about $3.5 million. It is possible this money could come from a surplus in the old Subplan C account, Maida said.

Unless some alternative is put in place, the FWCJUA will have no choice but to impose a below-the-line assessment, probably beginning on July 1, Watford said. The percentage of the assessment would be determined by dividing $4.8 million, the deficit amount, by $3.4 billion, the workers' compensation premium base in Florida.

Also on the workers' compensation front, FIC, like local government lobbyists, opposes the First Responders bill that gives special and much more extensive workers' compensation benefits to emergency personnel. This bill will be around again in 2006.

The past two hurricane seasons and other natural disasters across the county have led many in the industry, including CFO Tom Gallagher, to once again call for a national catastrophe fund. Do you think this is something that actually may happen in our lifetime?

Johnson: We sure hope so. For the past eight years FAIA has sent a delegation of agents to Washington to lobby for a Federal Cat Fund. After Katrina, other states are realizing that the federal government pays for disaster relief one way or the other and they are on the hook through FEMA, the National Flood Insurance Program, and other federal disaster programs, whether or not there is a Federal Cat fund. Also, Florida is responsible for paying almost 48 percent of the nation's flood premiums, yet only collects around 22 percent of the claims. So, because of our good flood plain management, we've been subsidizing other states' floods. I'm hopeful they will realize that some national fund for disasters of all types, including terrorism, is needed.

O'Connell: Few in Florida would argue against a need for a national natural catastrophe plan. The challenge is going to be whether or not we can convince lawmakers outside of Florida that this need is truly national in scope. If we can find even one benefit coming out of the widespread devastation of the 2005 hurricanes, it would be the fact that it touched more Americans than any previous natural disaster in history and it has raised the public's awareness of a possible pending crisis.

As the 2004 and 2005 hurricane recoveries deplete the reserves of America's insurance industry and threaten the solvency of the insurance system, the real challenge is whether insurance companies can adequately reserve for future events. Obviously, PIA members, their customers, and carrier partners all have a stake in the overall stability of the insurance system. Perhaps our best and only chance of making this a reality is to create a natural-catastrophe funding mechanism through a public-private collaborative effort. If we hope to provide immediate financial stability to markets in the aftermath of natural disasters, then Congress needs to act.

Last Spring several members of the PIA Board visited in D.C. with key staff members of both of our U.S. Senators and several of our members of Congress. A discussion on the need to support and promote a national natural disaster program was a key part of our agenda. We talked about the need to generate interest outside of Florida and we left with a clear understanding that any chances of this becoming a reality were totally dependent on building support from non-hurricane-impact states. We were successful in getting PIA National to adopt this issue as one of their legislative priorities. They are committed to using their resources toward building a national coalition behind this initiative.

Two years ago I would have said that the likely passage of a national natural catastrophe program was nil. Today there is glimmer of hope.

Miller: Congress is considering a national hurricane fund seriously for the first time in five years. The eight hurricanes that struck Florida in 15 months, Hurricane Katrina (the largest natural disaster insurance event in world history and one of the largest events period), and the likelihood we face another decade of high hurricane activity, all have policymakers and the insurance community struggling to ensure we can continue to finance our hurricane losses. Options under discussion at the federal level include establishing a national catastrophe fund, providing a tax exemption to private insurance companies that enables them to accumulate hurricane reserves tax-free in years when there is no hurricane (assuming we will ever have a year without hurricanes again), allowing homeowners to set up tax-exempt savings accounts that they can use to cover their hurricane deductibles, and reassessing the National Flood Insurance Program.

A study released in September by the Insurance Research Council's Public Attitude Monitor examined public perception of the profitability of homeowners' insurance. Findings showed that the public substantially overestimates insurers' profits and underestimates the cost of paying claims. The public's estimates were remarkably consistent across subgroups and geographic areas and had not changed since last assessed in 1998. How do you think we did as an industry in the minds of the public this past year? Were we seen as "money-grubbing leeches feeding on the misery of others" or "well, at least they aren't FEMA"?

Johnson: The industry will never be seen as heroes in the public's eye. However, the poor performance of government-run insurers like FEMA and Citizens has put into perspective for many that the industry isn't so bad by comparison. And, we don't have to assess people we don't insure to cover our losses.

O'Connell: "Well, at least they aren't FEMA" probably is what the public thought. That's not really fair, though. The insurance industry, as a whole, responded extremely well to the widespread devastation of the storms of 2005. The media tends to lay the blame for all of the problems coming out of the aftermath of a major storm right in the lap of the insurance industry.

Insurance companies are fast learners. In 2004 they were much better prepared than they were when Andrew hit. In 2005 they were much better prepared than in 2004. Much has been written about the delays recovering from the storms but very little of that has focused on the shortages of construction materials, delays in local permitting, and too few contractors and construction people to handle the demand.

Miller: Polling by the new Florida Insurance Education Foundation, supported by several key FIC members, confirmed that the public incorrectly believed we paid out far less in hurricane claims than we collected in insurance premiums. The Florida industry paid $30 billion in claims from eight hurricanes in two years, almost as much as the insured losses from mega-Hurricane Katrina. Five of the eight hurricanes striking Florida did as much devastation each as Hurricane Rita in Louisiana/Texas.

Many Floridians are upset at the industry, especially because of recent rate increases. Some 2.4 million Floridians who filed claims from the eight hurricanes probably think a little better about us. With the exception of several thousand claims winding up in court, policyholders generally were satisfied with their insurance settlement and are able to rebuild their property and lives.

The Florida Insurance Education Foundation is developing major initiatives to connect with insurance consumers in the next couple of years, including area community opinion leaders. At the very least, we can communicate that the insurance community paid out billions more in hurricane claims than it collected in premiums or made in profits in Florida. A true fact, whether members of the public believe it or not.

What were the industry's or your association's successes in 2005?

Johnson: There were countless successes – too numerous to mention here. But FAIA is most proud of the response we gave to our agents in the wake of storms in 2004 and 2005. Literally, as our staff pulled up in the Cat Van we saw tears, in many cases from agents who were completely at a loss as far as what to do. Having the resources to assist on site and to give their employees in need a check for necessities was one of the most rewarding experiences of the last two years. Our agents on the CAT team, who gave so unselfishly to the effort, are some of the most giving and caring people anywhere.

O'Connell: Looking back after the tumultuous hurricane seasons of 2004 and 2005, it has to be considered no small achievement that companies continue to write in Florida. Sure, we continue to find it tougher to access new markets, but very few companies have pulled out of the Florida market entirely, and over the past two years only one went out of business. This speaks volumes for the industry and may, in itself, be the major success of 2005.

Regarding legislation, PIA applauds the retooling and modernization of Citizens. We remain guardedly optimistic that the changes implemented will result in a significant improvement in service and help them to better meet their ever-growing demand. Their response to Hurricane Wilma put some of the new processes to the test–and from the feedback we received, the response was a major improvement over last year.

One of the most hotly debated insurance items this past session was the valued-policy law in response to the Mierswa lawsuit and the subsequent court decision. This might have been one of the most complicated insurance issues to surface in years, and legislators should be commended for resolving this with as much clarity as they did. The new statute makes clear that legislative intent regarding the valued-policy law is not to create new or additional coverage, nor to require an insurer to pay for a loss caused by a peril other than the covered peril.

We're also happy about the restructuring of the windstorm deductibles. This was a win-win for all–companies, agents, and the insureds. One of the benefits of the new law is that it mandates that the policies must clearly disclose the costs (premium, out-of-pocket, deductibles) resulting from each deductible choice. PIA feels that will do much to build goodwill between agents and their customers.

There was going to be an agency licensing bill no matter what, so the passage of the current bill shouldn't be considered a success. The content of the bill, however, reflects the tireless efforts of all the agent groups working closely with OIR to ensure that the resulting legislation accomplished the goals of OIR without creating undue hardship on current agency owners who follow the rules. PIA worked hard to ensure that any process adopted be as painless as possible for licensed agents owning agencies.

Miller: The hurricane insurance package adopted in the final hours of the 2005 session (CS/SB 1486) was the most significant – and controversial – property package in years. FIC, working with insurance community allies and key legislators, helped fashion it into a good product overall–all good for what it contained and for what it did not contain.

SB 1486 includes legislative intent that the Mierzwa decision incorrectly interpreted the valued-policy law, a major rewrite of sinkhole insurance laws, reduction of the Cat Fund retention, and a multi-event retention solution. Reversing Mierzwa was at the very top of the FIC Property Committee's priority list. In addition, some of the most onerous proposals considered throughout the session were defeated and did not stay in the final bill. These included repeal of arbitration; the requirement that all claims be settled within 30 days, with some exceptions; a mandatory offer of a one-percent hurricane deductible; and proposals that would have artificially capped rates for Citizens. The package lowered the Cat Fund retention and addressed the multi-event season. Effective with the 2005 hurricane season, the retention was lowered from $5 billion to $4.5 billion for the two largest storms in a hurricane season and one-third of that for other storms.

FIC believes another key legislative achievement was its defeat of a bill authorizing investor-owned life insurance products. If the bill had passed, the heart of life insurance as it is known and practiced in Florida by companies, agents, and consumers would have been undermined.

The bill would have allowed a university that receives state funds to establish a trust that could be named as the irrevocable beneficiary of a life insurance policy or annuity contract. FIC and other life insurance industry groups noted that President Bush was proposing a 25 percent tax on IOLI products, opening the door to a federal tax on life insurance. They also noted that the legislation provided no safeguards for the university, so the entity issuing the product could make excess profits at the expense of the university beneficiary.

Our greatest success outside the legislative arena was surviving another four hurricanes -eight in two years – along with four tropical storms, $30 billion in insured losses, and 2.4 million claims over the two seasons. We did a fairly good job in handling our claims and satisfying policyholders. No other state in the country could face eight hurricanes, five of them major, and still have a property insurance system around for the next year.

What is at the top of your agenda for 2006? What major legislative activities do you foresee?

Johnson: Reform of Citizens with our Windstorm Coverage Fund proposal.

O'Connell: There is little doubt that Citizens will again be the focus of the Florida legislature. Many of the changes mandated by the 2005 legislature were barely in place before the 2005 hurricane season hit us head-on, so it's difficult to assess how those changes affected the performance of Citizens. Most of the changes appear to be positive.

A second consecutive assessment due to losses at Citizens will be a major issue. There are already proposals to create a new mechanism for insuring wind damage in Florida and that will certainly garner a lot of interest. It's simply not realistic to expect the people of Florida to sit back and accept a billion-dollar assessment without expecting something be done about it. While recognizing the need for change, we need to be very cautious. Citizens was recognized as the new and improved version of the former wind pool JUA and the property JUA when it was proposed four years ago. Unless we can guarantee that we'll do a better job of identifying the shortfalls in a new organization than any of us did with Citizens, we need to proceed very cautiously.

We're very interested in seeing what kind of retooling is shaping up for Florida's wind pool. The devil is in the details though, and the legislature must move carefully to avoid anything that is broad based.

PIA also thinks that the limits in the guaranty fund are too low. The limit of $300,000 has been on the books for more than 30 years. It's time that the legislature raised the limits to more closely reflect Florida's real estate values.

Miller: We want to see adequate, effective legislation on property insurance and PIP/no-fault sunset review. On the property and casualty side, hurricane insurance will be the most significant issue in 2006, just as it was in 2005. Everything is on the table. This includes (although passage is probably not likely) a plan by the Florida House Democratic Caucus to create a state fund providing hurricane insurance and removing this peril from private insurance companies. Other proposals include dedicating a portion of sales tax revenues to the insurance system to supplement insurance premiums. The funds could go to Citizens to prevent a $1 billion, 11 percent statewide assessment next year and/or to the Florida Hurricane Catastrophe Fund to rebuild the fund's $7 billion cash reserves depleted by the 2004 and 2005 hurricane seasons.

Other issues include moving Citizens to adequate rates to reduce subsidization of southeast Florida property by other regions of Florida through the statewide assessments and, because Citizens' rates usually act as a ceiling for private market rates, allowing carriers to charge the premium they need to take on more of Florida's hurricane peril. Another Citizens' issue is improvement of quality of service. Possible remedies include returning to servicing carriers/insurance companies who contract with the residual market, or determining a way to allow companies providing underlying coverage such as fire, liability, and so on, to adjust hurricane claims in the High Risk Account, with the hurricane coverage still provided by Citizens. Policymakers also are considering charging more for vacation homes and less for primary residences, and providing relief to low-income Floridians having trouble paying their insurance premiums.

The Task Force for Long-Term Solutions to Florida's Hurricane Insurance Market will provide a roadmap on many issues for the legislature in a report in February or March. Other groups also are preparing recommendations, including a commission appointed by Governor Jeb Bush to investigate over-development and high hurricane losses in coastal areas; the House Democratic Caucus; and various insurance community groups, including FAIA and FIC.

Were there any big surprises in 2005?

Johnson: Katrina, Wilma, Dennis, and friends on top of the 2004 quartet of storms were a bit of a surprise.

O'Connell: There were really no big surprises on the legislative front. Our pre-session review of issues looked virtually identical to the post-session recap.

Miller: The biggest surprise in 2005 probably was four more hurricanes hitting Florida, while, thank goodness, we were spared the worst of mega-catastrophe Hurricane Katrina.

What is your worse fear for 2006?

Johnson, O'Connell, and Miller: More storms.

Tropical Storm Risk (TSR) recently warned that the United States and the Caribbean should brace themselves for yet another active Atlantic hurricane season in 2006. TSR's long-range forecast anticipates Atlantic basin and U.S. landfall hurricane activity being 60 percent above the 1950-2005 norm this coming season.

According to TSR, whose long-range outlooks for the exceptionally active 2004 and 2005 hurricane season and active 2003 hurricane seasons proved accurate, it is 81 percent likely that U.S. landfall hurricane activity in 2006 will be in the top one-third of years historically.

Uh oh.