- January 21, 2011
What. Insurance legislation.
Issue. Will key bills pass the Legislature only to get the governor's veto?
Impact. Insurance companies' solvency at stake.
Hurricane season is just six weeks away and Florida's property insurance market remains a mess.
With two weeks left in the legislative session, time and patience are running short on several bills critical to addressing the looming crisis.
The battle lines are drawn.
Gov. Charlie Crist and CFO Alex Sink say they oppose legislation giving consumers freedom to choose whether or not to pay more for a more reliable insurance company's product. Crist even made a rare appearance at a committee meeting to oppose the “Consumer Choice” bill and has dared the Legislature to override his threatened veto, saying, “They would do so at their own peril.” (See “Free to Choose” in the Feb. 5, 2010 Business Review.)
The evidence for the coming insurance disaster is mounting:
• This month, Miami-based Northern Capital Insurance was shut down, taking with it 70,000 policyholders who will be scrambling to find property insurance.
• Florida TaxWatch issued a report April 5 stating, “Florida faces a property insurance crisis.”
• State Farm is dropping 125,000 policies even with a 14.9% rate increase last fall.
• And on April 8, The Heartland Institute economic research think tank released the results of a 50-state insurance report card giving Florida an “F”.
Northern Capital, despite being less than four years old, not having experienced any hurricanes since it started up, and receiving a 10% increase in rates for some policies last October, could not maintain the minimum $4 million in reserves.
Just last year, the company was recognized by Inc. Magazine as one of the fastest growing private companies. Much of that growth came from taking out 20,000 policies from Citizens Property Insurance Corporation, the state not-for-profit that's become the state's largest residential property insurance company, and which has its own sets of financial problems.
Now, Northern Capital's two sister companies are two of 10 Florida property insurance companies whose ratings have been downgraded by rating agency Demotech.
A.M. Best has downgraded five other Florida-based insurers for not meeting capitalization or other requirements.
Florida had 206 companies with active policies in force at the end of 2009.
The Miami Herald reports that 50 out of out 70 Florida-based companies posted losses on their insurance business for 2009 with 31 reporting a decline in surplus — money available to pay claims. That was with no major storms.
According to state Insurance Commissioner Kevin McCarty, in all, 60 companies reported reductions in surplus and 100 companies reported underwriting losses at the end of 2009. In his report to the cabinet last month, McCarty, says, “ ... the marketplace still faces serious challenges.”
And yet, on April 9 McCarty posted a statement on his office's Web site criticizing the facts stated above as “a 'Chicken Little' mentality” stating, in part, “ ... the public policy debate is being adversely affected by alarmists who mischaracterize the issues, shock the public, and propose vague and untenable solutions.”
Jeff Grady, president and CEO of the Florida Association of Insurance Agents, sees it far differently: “What is occurring right now is an absolute portrait of failure from the governor's office.”
The following summarizes key provisions of major insurance bills' and some of the issues being debated during the final weeks of the legislative session.
Commercial insurance rates
Senate Bill 2176, as amended by the Banking and Insurance Committee, revises the insurance “Rating Law.”
Typically, insurers need prior approval from the Office of Insurance Regulation to increase rates, as is the case for proposed rate increases for residential property insurance. This is known as the “file and use” method. Under this method, the insurer submits its proposed rate at least 90 days before the rate's effective date and can't start charging the new rate until it's approved.
Under the amended bill, at least eight specified types of commercial lines of insurance would be exempt from state law rate filing and review requirements. As such, the specified commercial lines would not fall under the “file and use” method allowing insurers to implement the new rate before filing for approval. The insurer must still submit the filing within 30 days of the rate's effective date.
Proponents of the bill maintain that the lines of insurance to be exempted are part of a competitive market, and that buyers of these commercial lines are likely to be sophisticated purchasers who don't need government to judge for them if a rate is too high.
If any portion of the new rate is later found to be excessive, policyholders receive a refund of the portion of the rate determined to be excessive. Rates for all classes of insurance may not be excessive, inadequate, or unfairly discriminatory.
Insurance lines that would become exempt include: excess or umbrella; surety and fidelity; errors and omissions; directors and officers; employment practices and management liability; advertising injury and Internet liability insurance; and property risks.
An amendment by Sen. Mike Fasano, R-New Port Richey, would place new financial reporting requirements on insurance companies to provide more information about payments to affiliated companies.
Those requirements are targeted largely at management companies to keep insurers from tacking on inflated costs when seeking higher rates. Fasano plans to bring the amendment up on the Senate floor if necessary, warning industry lobbyists at a meeting, “If you think you're going to run the clock out, you're seriously mistaken.”
“If the insurance industry doesn't come up with a compromise or work out a solution that is satisfactory then [Fasano] will pursuee an amendment on the floor through an appropriate vehicle,” says Greg Giordano, Fasano's Chief Legislative Aide. “He's not letting it go.”
Grady considers Fasano and Crist the two lead architects of the state's imploding property insurance framework.
Homeowners property insurance
Currently, Florida law prohibits property insurers from using the “use and file” option for filing rate increases with the office of insurance regulation until Dec. 31, 2010. Senate bill 2044 extends this prohibition until Dec. 31, 2012.
But it also goes much further.
Sen. Garrett Richter, R-Naples, the bill's sponsor, says it tackles the “cost drivers” of property insurance, primarily current laws that increase the cost of residential property insurance.
In a report to the governor and cabinet last month, McCarty identified these cost drivers as:
• Increased reinsurance costs;
• Replacement cost methodology;
• Reported sinkhole claims;
• And premium reductions from full implementation of mitigation discounts.
Grady says, “2044 is probably one of the more important bills to the industry because it carries the cost drivers.”
One of the more controversial provisions changes how replacement cost coverage for damages is handled. Currently, the law requires insurers to pay the full cost of replacing all damaged items prior to repairs.
As proposed, for losses on dwellings an insurer would be required to pay only the cash value of the loss after depreciation. The insurer would later pay the holdback — the difference between the depreciated value and the actual replacement cost — when the policyholder shows the receipt or repair contract.
“Holdback is insurance 101. Until it's replaced you get the depreciated value,” says Grady. That is because some people simply pocket the cash without replacing the item and that windfall drives rates up.
Grady notes that no other state has such a provision and that it used to be the law in Florida until 2005. “It creates a license to steal,” he says, and also notes that McCarty agrees that the provision needs to be changed.
And for personal property losses, the insurer may either pay the greater of the actual cash value or 50% of the replacement cost value, and then pay the holdback after the receipts are provided for the replaced property by the policyholder.
That doesn't sit well with two Tampa Bay area senators.
Sen. Ronda Storms, R-Valrico, a member of the Banking and Insurance Committee chaired by Richter, opposes this language. In a March 10 committee meeting, Storms argued that it effectively requires the homeowner to pay for half the replacement cost with cash they may not have, or have to pay with a credit card though sufficient credit may not be available.
Fasano agreed with her, as did Sen. Alex Villalobos, R-Miami, but the bill passed on a 7-3 vote. Fasano, as well as Villalobos, who chairs the powerful Rules Committee, may have a lot more to say on the bill before it becomes law. Storms also sits on the Rules Committee.
The Legislature aims to reign in home inspectors and public adjusters accused of inflating mitigation discounts. Some homeowners have been getting property insurance discounts they didn't deserve for home improvements intended to fortify dwellings against hurricanes.
A study of 452 homes by Citizens Property Insurance Corporation, the state's property insurance company, found that 311 were not eligible for discounts. Another study shows that the Division of Insurance Fraud received 937 fraud complaints related to public adjusters from 2004 to 2009, investigated 269, and made 31 arrests.
The bill went to a Senate committee April 6, but proposed amendments tied up the bill and it was temporarily postponed. According to an aide to committee Chairman Cary Baker, R-Eustis, because it's the last committee stop for the bill the committee needed more time to work on the amendments.
The bill also increases the minimum surplus required for new residential property insurers from $5 million to $15 million, and increases the minimum for current residential property insurers from $4 million to $5 million until July 15, 2015, and to $15 million after that date.
Among several other provisions, the bill also extends by three years the exemption of medical malpractice insurance premiums from Florida Hurricane Catastrophe Fund emergency assessments.
Property and casualty insurance rate filings jumped sharply this century. The state received an 84% increase in rate filings from 2004 to 2008, followed by a slight drop off last year.
Note: 2009 values estimated based on filing counts as of Sep. 3, 2009. Source: Florida Office of Insurance Regulation.