Guy Carpenter Florida Operating Committee
This week’s topics include:
- Florida Governor Receives Four Bills for Signature
- FHCF Update: Bonding Estimates and Rule Decisions
- Citizens Update: Rate Filings, Disputed Claims Forms, and Commercial Lines Policies
On May 15, 2009, Governor Charlie Crist received four insurance-related bills passed by the Florida House and Senate:
- HB 741 relating to Insurance Premium Financing
- HB 903 relating to Attorney’s Fees in Workers’ Compensation Cases
- HB 1495 relating to Insurance (omnibus bill)
- SB 1778 relating to the Florida Department of Highway Safety and Motor Vehicles
He has until May 30, 2009, to sign or veto the bills. If he does not take action, the bills will become law without his signature.
Recap of HB 1495
Major provisions of the Bill:
- Maintain the USD10 million limited apportionment company coverage option that allows eligible insurers to purchase this coverage until December 31, 2011 (this provision was also included in HB 569 in the event the Bill didn’t pass or was vetoed)
- Reduce the Temporary Increase in Coverage Limit (TICL) layer by USD2 billion a year for the next six years to decrease the Florida Hurricane Catastrophe Fund (FHCF) exposure
- Increase TICL premium by a factor of 2 for the 2009 contract year and then by factors of 3, 4, 5, and 6 in subsequent contract years
- Reinstate the cash build-up factor for the mandatory FCHF layer increasing premium by 5 percent for the 2009 contract year and then by 10 percent, 15 percent, and 20 percent for subsequent contract years and finally 25 percent in 2013 and thereafter
- Require the FHCF to reduce its reimbursement amounts to insurers uniformly if the FHCF lacks sufficient funds to pay all claims
- Repeal the USD4 billion State Board of Administration-approved FHCF coverage program that (a) has never been offered and (b) would be additional TICL limit
- Cap Citizens Property Insurance Corporation (”Citizens”) rate increases at 10 percent per policyholder per year
- Allow Citizens to include the cost of the FHCF cash build-up factor in its rates, in addition to the 10 percent per policy per year increase
Extend the required reduction of Citizens’ high-risk boundaries to December 21, 2010
- Permit insurers to recoup reinsurance costs in a regular rate filing by up to 10 percent for costs that correspond to replacing or financing TICL
The FHCF Advisory Council (”Council”) met in Tallahassee, Florida and approved three agenda items: the May 2009 FHCF bonding estimates, filing the FHCF premium formula rule, and filing the FHCF Reimbursement Contract Emergency Rule.
Though financial and insurance markets were severely troubled, they since have dramatically improved. Credit markets are no longer frozen, interest rates are lower and bonding capacity is improved. Further, the passage of House Bill 1495 will be helpful for capacity because the size of the FHCF TICL layer would be reduced if Governor Crist signs the bill into law.
At the federal level, U.S. Senator Bill Nelson has filed S. 886, which would provide a federal guarantee on debt issued by the FHCF.
Nonetheless, there is still significant uncertainty on whether the FHCF could bond to meet its necessary obligations if a catastrophic event occurred, with liquidity being the primary concern. If HB 1495 is signed into law, the FHCF’s “theoretical capacity” will be USD46.8 billion, but its “estimated capacity” for post-event bonding is currently USD8 billion within 12 months following an event. In addition to the post-event bonding estimate, pre-event notes total USD3.5 billion, which include floating rate notes maturing on October 15, 2012. Added to the FHCF’s estimated year end balance of USD4.33 billion the FHCF estimates USD7.83 billion in total liquid resources.
2010 Rate Filings
Citizens‘ Staff is in the process of completing the 2010 rate filings for all lines of business. The following elements are being incorporated into the rate indications:
- A 10 percent cap on premium increases per policyholder
- Pass-through options for FHCF rapid cash buildup
- The purchase of TICL layer reinsurance from the FHCF and no purchase of private reinsurance for the 2009 hurricane season
Statewide rate level indications for each product line will be presented to the Citizens Actuarial and Underwriting Committee (”Committee”) for approval during its June 2 meeting.
Disputed Claims Policy Forms
Citizens’ property insurance policies provide that, in the event of a dispute related to the amount of a loss, either Citizens or the policyholder may demand an appraisal of the loss. Citizens currently uses insurance industry standard language regarding claims disputes in its policies. But, this language has been found inadequate by Citizens’ Auditor General, as it provides virtually no rules for the dispute process.
As a result of the appraisal process, Citizens (and other insurers using this language) have been required to pay damages that may not be covered by the policy form, caused by a covered peril, or supported by substantial evidence. The current language does not give insurers recourse to meaningful judicial review. Consequently, some private market insurance companies have eliminated disputed claims appraisals from their policy forms.
Citizens’ Staff recommends eliminating the disputed claims appraisal provision from its property insurance policies for the following reasons:
- Citizens Staff has more confidence in the judicial system than the appraisal process because appraisers and umpires are essentially unregulated
- Mediation, which is the Florida Legislature’s favored method of dispute resolution, will be the alternative method of choice through the elimination of appraisals
- The basis of awards based on appraisals is outside the scrutiny of both policyholders and insurers
- Elimination of appraisals would meet fair treatment and disclosure objectives suggested by the Auditor General’s Office because the courts are focused on policyholder rights and all judicial decisions are fully disclosed.
The majority of the claims expected to be litigated are commercial residential. The number of commercial residential claims remains low, even though they did increase in the first quarter of 2009. Twenty-four out of 819 claims in January 2009 were commercial residential, with 37 out of 851 in February and 20 of 885 in March.
Commercial Line Policy Changes
Citizens’ Staff recommends implementation of a 30-day waiting period for coverage on all commercial risks, as well as the revision of current appraisal requirements for commercial wind and commercial residential multi-peril risks. The 30-day waiting period would be imposed for all commercial residential and nonresidential multi-peril and wind policy applicants who have not had insurance coverage for the 45 days prior to application. This waiting period is intended to deter applicants with no prior insurance from obtaining coverage in anticipation of a specified wind event.
Applicants seeking coverage for a new purchase, applicants who have recently been non-renewed by another carrier, and any other applicant who has maintained coverage immediately prior to seeking it from Citizens would not be affected.
Personal Residential Multi-Peril Policy Changes
Citizens’ Staff recommends new plumbing, electrical, and roof age eligibility requirements for personal lines residential multi-peril policies. Since water damage is a major source of Citizens’ non-catastrophe losses, Citizens’ Staff recommends revising the list of ineligible risks to include properties with plumbing that is in poor condition, has visible leaks, or has interior supply lines that are not made from copper or PVC pipe. For properties over 50 years old, documentation noting that the plumbing is in good condition and has been updated in the last 35 years also would be required. The Committee approved the recommended plumbing requirement changes.
As previously approved by the Committee and Citizens’ Board of Governors (”Board”), Citizens recently introduced age-of-roof rules in personal lines residential wind-only policies. The rules specify that, in order to be eligible for a wind-only policy, roofs must not be damaged or have visible signs of leaks and must have at least three years of remaining useful life. Roofing material must also be replaced every 25 years (if shingle) or 50 years (if tile, slate, clay, concrete or, metal). The Committee approved introducing the age-of-roof rules for multi-peril policies. If approved by the Board, this change will be implemented in October 2009.
Contributions by Colodny, Fass, Talenfeld, Karlinsky & Abate, P.A.
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.