Guy Carpenter Florida Operating Committee
This weeks’s topics include:
- Committee Sends Property Insurance Bill to Full Florida Senate
- Non-Assessable Property Policy Legislation Clears Senate Banking & Insurance Committee
- Florida Seeks Federal Funding to Back up FHCF
- Florida SBA Presented on FHCF to the Florida Cabinet
- MSFH Could Reduce Hurricane Losses Significantly
The Florida Senate Ways and Means Committee approved proposed legislation that would reform the Florida Hurricane Catastrophe Fund (FHCF), revise regulations governing Citizens Property Insurance Corporation (Citizens) and make significant changes to homeowners’ property insurance ratemaking.
Committee debate on amendments to the bill, however, elicited concerns from several senators regarding provisions that would allow for expedited rate increases by private insurers. To continue to move the bill forward, its sponsor - Sen. Garrett Richter (Rep.-Naples) — withdrew some amendments, leading the committee to approve the bill and send the measure to the floor of the Senate.
The committee debate provided a window on what is expected when the full Senate considers the bill. For example, before all amendments were withdrawn, the committee voted down one which would allow carriers to recoup 10 percent of the cost of certain financial products (e.g., letters of credit or liquidity instruments) purchased on an expedited basis (i.e., within 30 days) to replace anticipated shortfalls in the FHCF. As the bill currently stands, insurers can pass on to policyholders, via rate increases, the cost of Temporary Increase in Coverage Limits (TICL) replacement, the FHCF cash buildup factor, and TICL cost increases on an expedited basis up to an average of 10 percent statewide or a maximum of 12 percent for a single policyholder. The streamlined rate process was sought to alleviate possible cash flow problems that could affect insurers in such a scenario.
A similar bill is under consideration in the Florida House. Action by the House and Senate — and, if necessary, a reconciliation of the two versions — is expected in the coming days, as the Legislature is scheduled to adjourn by May 1, 2009.
A Comparison of the Two Bills
Both versions extend the TICL layer of the FHCF through the end of 2013, but reduce the USD12 billion TICL layer each year in USD2 billion increments. For the 2009 contract year, therefore, USD10 billion in USD1 billion increments would be offered. The coverage will be reduced by an additional USD2 billion each subsequent year until its elimination.
Both bills would also give insurers the option of purchasing private reinsurance to replace the TICL layer and to recover that cost in rates, which cannot exceed 10 percent of total premium.
The House version reduces coverage options available through TICL, something not addressed in the Senate bill, increasing the co-payment made by insurers for TICL coverage. Beginning in the 2009 FHCF contract year, coverage options of 45 percent and 75 percent of loss coverage will be available, but the 90 percent coverage option will be eliminated.
Under the House bill, Citizens - which purchased 40 percent of TICL during 2008 - would no longer qualify as a “TICL insurer,” making more TICL capacity available for private insurers if they choose to buy it. This could cause much of the TICL layer to go unsold, thus helping to reduce TICL total coverage closer to a level that could be financed.
Both the House and Senate bills also:
- Extend until January 1, 2012, the USD10 million optional drop-down limited apportionment FHCF coverage for insurers who qualified for it during the 2008 hurricane season
- Reestablish the 25 percent rapid cash buildup factor in FHCF premiums, beginning with 5 percent this year and growing to 10 percent in 2010, 15 percent in 2011, 20 percent in 2012 and 25 percent in 2013, becoming a permanent part of the FHCF premium. The factor would apply only to the mandatory program and not to TICL
- Change the FHCF contract year to begin on January 1 and end December 31 (starting in 2011)
The ratemaking provisions of the bill sparked the most debate among committee members on April 17. Some senators questioned whether the expedited rate process would conflict with current provisions of state law that protect against “unfairly discriminatory” rates or provide for public hearings on rate increase requests.
Under the Senate bill, insurers would be allowed to make a separate expedited rate filing limited to recovery of increased costs that would result from:
- The rapid cash build-up factor in the mandatory program of the FHCF
- Incremental costs of replacing reinsurance formerly provided through the TICL layer of the FHCF
- Incremental costs resulting in increased premium for the remaining layers of TICL
The filing would not subject to full rate review by the state Office of Insurance Regulation (OIR) and would be capped at 10 percent statewide and 12 percent for individual policyholders.
The House bill differs only in that it does not include the 12 percent cap for individual policyholders.
The House legislation also would allow residential property insurers to submit a rate filing not subject to OIR review for excessiveness — if it produced an average statewide impact of no more than plus or minus 10 percent and no more than a 15 percent increase in any one rating territory. This is not included in the Senate bill.
The Senate bill allows the Citizens rate freeze to expire as scheduled on Jan.1, 2010, and stipulates that actuarially sound rates for Citizens be developed and phased in over a period of years — in effect, however long that takes. Rate increases would be capped at 10 percent per year on any individual policyholder, adjusted for exposure change. The likely effect of the 10 percent cap would be to prohibit an average statewide increase of anything above 5 percent.
During the April 17 committee debate, Sen. Mike Fasano (Rep.-New Port Richey) asked Richter what level of rate increases could result if the Citizens rate freeze were allowed to expire, but without any caps. Richter said that that personal lines insurance provided by Citizens could increase by as much as 40 percent, with commercial lines and high-risk lines policyholders facing increases as high as 55 percent.
The House version differs only in that it would allow for higher annual rate increases to achieve actuarially sound rates: 10 percent per year on a statewide average, 15 percent in a rating territory, and 20 percent for an individual policyholder.
The Senate Banking & Insurance Committee passed legislation on Monday afternoon allowing insurance companies to sell non-assessable residential property insurance — free from any determination by the OIR that the rate is excessive or actuarially unfairly discriminatory. Two provisions, included in amendments, are particularly important.
One provision changes the USD500 million surplus provision (in the original bill) to an “either/or” provision. Companies offering the non-assessable policy must have a surplus of at least USD500 million or have a net written premium (NWP)-to-surplus ratio not to exceed two-to-one. The NWP calculation considers “only reinsurance placed with reinsurers that have been given a financial strength rating of ‘A’ or better by the A.M. Best Company, or have been given a comparable rating by another rating agency which is generally considered accurate or acceptable.”
The other includes language indicating that the bill does not apply to residential property insurance policies that exclude coverage for windstorm or hurricane perils.
While this isn’t an immediate option, reports state that the State of Florida may explore ways to seek support from the U.S. government regarding the FHCF. The U.S. Treasury Department has said that it does not have the authority to issue a letter of credit for the FHCF, but Congress could pass legislation to change this fact. A bill was introduced last February to this effect. Other options include loans from the Federal Reserve Bank and loan guarantees from the private sector.
Normally, the FHCF would issue bonds to raise the money it needs, but the lack of access to credit in financial markets has made its normal approach to raising capital virtually impossible. At present, the FHCF, in conjunction with its lead bond underwriters, is estimating post-event bonding capacity of USD8 billion in addition to the pre-event bonds and cash on hand.
There is a concern that a gap in the FHCF’s capitalization could cause Florida insurers to be downgraded by rating agencies and that the risk transfer methods used to prevent this development may not be available. In order to alleviate the effects of this, the OIR has been focused on achieving market transparency with the UK and the Bermuda Monetary Authority (BMA). To explore alternatives, contact your Guy Carpenter account team.
The Florida Cabinet met on April 14, 2009, with the Florida State Board of Administration (SBA) presenting an agenda pertaining to the FHCF. The Cabinet approved all measures on the agenda except a request for the FHCF to purchase financial products to support its ability to cover insured losses for the 2009/10 reimbursement contract year. The issue was changed from a voting item to a discussion item, as the FHCF does not believe that any alternatives presented to date meet their requirements.
The FHCF faces a coverage gap of approximately USD18 billion, though an upswing in the financial markets has increased the FHCF’s access to post-event capital from USD3 billion to USD8 billion. It was reported that the fund could cover insured losses of USD12 billion to USD15 billion. The probability of the FHCF’s capital being outpaced by losses was reduced recently from 6 percent to 3 percent.
At the meeting, the Cabinet was told that the FHCF is not planning to purchase a financial product because the cost is too high and the likelihood of needing it is too low.
Proposed FHCF Premium Formula and Rates for 2009/10
The FHCF is recommending a rate increase of 0.84 percent, which is the same as last year’s. The proposed increase is based on a decline in interest income, which has fallen from above 4 percent last year to below 1 percent this year. The FHCF proposed rates have now been approved and are posted on the FHCF web site. Guy Carpenter will be updating FHCF structure estimates using the newly released rates.
TICL Legislation Pending
As noted above in the Legislative discussion, the Florida House and Senate are both considering measures that would lower the TICL layer of the FHCF over a five-year period - and accelerate a capital build-up over a two-year period by two percent more than the actuarial rate. The objectives are to scale back the TICL layer and capitalize the FHCF.
Every dollar provided under the My Safe Florida Home (MSFH) program could reduce hurricane losses by as much as USD1.0, according to a preliminary analysis by RMS. This would add up to the prevention of USD140 million in total losses for the close to 30,000 homes in the program — more than 50 percent greater than the USD93 million invested in grants. By targeting the homes that contribute most substantially to the risk in the state, the results could reach USD2.75 for every grant dollar applied.
Statements concerning, tax, accounting, legal or regulatory matters should be understood to be general observations based solely on our experience as reinsurance brokers and risk consultants, and may not be relied upon as tax, accounting, legal or regulatory advice which we are not authorized to provide. All such matters should be reviewed with your own qualified advisors in these areas.