Milliman Study Helping PCI Florida Effort

A spokesman for an insurer trade association said his organization's campaign to secure legislative changes next year for Florida's home insurance market has received a boost from an objective actuarial study commissioned by the group.

The study–by San Francisco-based Milliman Consultants–was unveiled in May “to lay the groundwork for additional reforms in 2008,” and “acceptance of that study by editorial boards and legislators was validation,” according to Joseph Annotti, vice president for public affairs at Property Casualty Insurers Association of Americas (PCI).

Mr. Annotti said the positive reaction to the report came despite a “misguided” attack by J. Robert Hunter, the Consumer Federation of America's insurance director.

Insurers–following 2005 claims controversies, non-renewals and rate increases–had credibility issues, and, Mr. Annotti said, “we had our heads handed to us” in the legislature this year.

“We needed an objective study from a qualified actuary to back our positions,” he said.

Milliman's report examined consequences of legislation this year that held down premium rates for Citizens–the state's homeowners insurer of last resort–and expanded the Florida Hurricane Catastrophe Fund to offer more reduced-rate reinsurance to primary carriers.

As a result of those measures, according to Milliman, there is increased risk that policyholders will have higher premiums in future years to cover Citizens and FHCF deficits.

Some costs would be transferred from policyholders in high-risk areas to those in less risky locations, and property insurance risks would be transferred to auto and commercial insurance policyholders.

A few days after the report was issued, Florida Chief Financial Officer Alex Sink commented that Citizens was writing “actuarially unsound” policies.

Besides Ms. Sink, Mr. Annotti said the report was shown to Gov. Charlie Crist's policy staff, legislative leaders and newspaper editorial boards.

The 2008 legislative package that PCI is working on would provide financial incentives for storm-proofing homes, and return Citizens' status as a true last-resort carrier.

Proposals aimed at restoring “some sanity to rating and pricing mechanisms,” according to Mr. Annotti, would include a method to provide financial assistance to insure the truly needy, authorization for policies with 15-to-20 percent deductible amounts, and a grant fund to help fill in the deductible coverage gap.

The Milliman Florida report came out at the same time it produced a study for ProtectingAmerica.org, which advocates a national catastrophe fund to support regional cat funds throughout the nation. Milliman estimated such a national program could save homeowners $11.6 billion annually.

Mr. Hunter charged that the two studies were in contradiction because the study for ProtectingAmerica.org showed Florida with zero additional savings.

Milliman said in a letter to National Underwriter that the reason the ProtectingAmerica.org study includes zero additional savings from the Florida Hurricane Catastrophe Fund is that the study assumes federal legislation will not change the FHCF, so there will be a zero impact.

The PCI study does not address the question of whether the original establishment of the FHCF resulted in a cost savings to policyholders, Milliman explained.

Mr. Hunter said the Florida study implied the state was “a time bomb waiting to go off,” but Milliman said that “nowhere in the PCI study do we say or imply that Florida is a time bomb.”

Actuary Nancy Watkins–the report's chief author–said Mr. Hunter had created a straw man for his attack, and there was “no discrepancy” in the report.

Milliman's letter noted that it did say increasing FHCF limits would provide immediate reductions in homeowners premiums, and also that the legislation could jeopardize the state's credit rating.

In the ProtectingAmerica.org study, Milliman said it did not hold Florida up as a model, but used its cat fund reinsurance structure as a starting point for a nationwide analysis.

“This analysis concluded that, if other states were to form their own catastrophe funds and a federal structure were put in place to back them up, some of the adverse cost-shifting effects of a single-state fund like the FHCF could be avoided,” Milliman said.