Summation of Insurance-Related Bills Speeding Through Fla. Legislature

With Spring meetings of the Florida Legislature coming to an end in Tallahassee in May, the Florida Insurance Council has summarized insurance-related bills now being considered in the House and Senate. Sam Miller, FIC’s executive vice president, has applauded Florida legislators for taking such fast action on a number of bills, they include:

Main House package

The main House package HB 7225, was approved by the Insurance Committee in early March and will go before the House Fiscal Council, perhaps next week. There is a companion bill, HB 7227, creating the trust fund for mitigation loans.

This bill revises provisions of law relating to property and casualty insurance. It has provisions regarding hurricane coverage; reimbursement contract criteria, reimbursement premium requirements, and revenue bond emergency assessment requirements.

It creates the Florida Hurricane Damage Prevention Endowment; provides requirements of Department of Community Affairs in providing financial incentives for residential hurricane damage prevention activities; provides an interest-free loan program; creates an advisory council; requires the Department of Community Affairs to establish a wind certification and hurricane mitigation inspection program; specifies inspection requirements; provides qualification requirements for inspection providers; provides powers of the Commissioner of Insurance Regulation during a state of emergency; and authorizes the commissioner to issue specified orders in a state of emergency. It prohibits the use of specified hurricane loss projection models; and revises provisions relating to the Citizens Property Insurance Corp.

The main Senate package is SC/SB 1980. It was approved by the Banking and Insurance Committee April 7. It may head for a Senate budget committee next week.

High-valued homes removed from Citizens

House bill: Effective Jan. 1, 2007, a personal lines residential structure with a dwelling replacement cost of $1 million or more or condominium unit with combined dwelling and content replacement cost of $1 million or more, would not be eligible for coverage in the Citizens High Risk Account.

Senate bill: $1 million-plus structures would become ineligible for the HRA on July 1, 2011. Effective Jan. 1, 2007, these structures would be subject to a 25 percent surcharge.

The HRA provides only coverage for hurricanes and not all other perils. Citizens estimates that some 6,000 homes are insured in the HRA, mainly in southeast Florida, and one structure is valued at $25.5 million. $1 million-plus homes have never been covered in the Citizens, all-perils, Personal Lines Account, which writes all over Florida and in areas west of I-95 along the Dade, Broward and Palm Beach County, I-95 Corridor. It is likely there are numerous cases of a high-valued home east of I-95 getting subsidized coverage from Citizens, with similar property west of the interstate carrying more expensive insurance from the surplus lines market.

FIC supports the provision that removes $1 million-plus homes from Citizens and sends them to the surplus lines market. FIC further supports the provision that allows private market carriers to write high-valued homes at unregulated rates.

Homestead/Non-homestead distinction

Both bills attempt to focus subsidized insurance coverage in Citizens on primary residences. The House bill requires three rejections from admitted carriers and three rejections from surplus lines companies before a seasonal or vacation home would be eligible for Citizens coverage. Coverage on these homes from the regular insurance market could be at unregulated rates if a regular insurer were willing to undertake the risk, as it would be under current law for coverage from the surplus lines industry, which has expressed interest in taking over seasonal and high-valued homes in the HRA.

The House package creates a fourth account in Citizens for seasonal property that does qualify for coverage and moves to guarantee higher rates in that account. Rates would be based on losses in a 250-year hurricane season, not a 100-year season, as is the case in Citizens’ other accounts. In addition, if there were deficits in this new seasonal dwelling account, assessments would be limited to policyholders in this new account. Assessments could be up to 100 percent of the premium. The transfer to homestead and non-homestead accounts would begin by Oct. 1, 2006.

The Senate package takes a different approach to reducing the subsidy paid by homeowners on vacation homes. It creates a 25 percent premium surcharge for non-homestead property and, in the event of a deficit and statewide assessments, an additional 25 percent surcharge on seasonal or vacation property owned by non-Florida residents.

Both bills have a broad definition of homestead property, broader than qualifying for a property tax homestead exemption. They are intended to designate as homestead property all primary residences, including rental units, condominium units and mobile homes.

FIC supports the provision that differentiates homesteaded property from non-homesteaded property.

Florida Hurricane Catastrophe Fund

Both bills mandate a rapid cash buildup factor in Cat Fund premiums. This would be a surcharge in addition to the premium calculated for insurers each year under a formula administered by the State Board of Administration.

The SBA Trustees (Governor Jeb Bush, Chief Financial Officer Tom Gallagher and Attorney General Charlie Crist), on their own, approved a 25 percent rapid cash buildup surcharge earlier this month as part of the 2006 premium. It will generate an additional $200 million for a total Cat Fund premium of $1 billion. The goal is to rebuild Cat Fund cash reserves to a significant level more quickly, reducing the amount of money the fund might have to borrow through bonding.

The Senate Banking and Insurance Committee has been considering plans to reduce the deductible paid by carriers before Cat Fund payments begin. Without legislative change, the primary retention for 2006 would be $5.3 billion, with insurers paying their proportionate share of that amount as a deductible for the two largest storms. The so-called drop-down retention, after the two biggest hurricanes, if there are three or more, would be $1.7 billion, with each insurer paying its proportionate share of that.

Chairman Rudy Garcia, R-Hialeah, has responded to concerns from the Office of Insurance Regulation that private reinsurance from London, Bermuda and other markets to help small Florida insurers meet their Cat Fund retention has become unaffordable and, for some carriers, unavailable at any price.

Garcia has been considering two proposals allowing carriers to reduce their retention, one allowing “limited apportionment companies” (companies with $25 million in surplus or less) to purchase Cat Fund coverage kicking in at a company retention level as low as $1.5 million and another plan allowing all carriers the option of buying down their proportionate share of the current $5.3 billion retention to their share of a $3 billion retention.

No retention-lowering plan is in the Senate package now, but the issue is apparently still being deliberated. It was not addressed by the House Insurance Committee.

While it is not in the major hurricane insurance packages, insurance committees in both chambers have passed proposed constitutional amendments requiring a three-fourth’s majority vote if more than $10 million a year is appropriated by the Legislature from the Cat Fund for spending for mitigation or other purposes in the state budget.

FIC supports rapid build-up of depleted reserves in the Cat-Fund.

Sales tax revenues to Citizens and the Cat Fund are not addressed in the big hurricane packages, but the House Insurance Committee and Senate Banking and Insurance Committee have passed bills (HB 551, SB 1012) providing that windfall sales tax revenues go to Citizens, the Florida Hurricane Catastrophe Fund and hurricane loss mitigation programs. The latest action was April 5 with approval by Banking and Insurance of SB 1012 by Sen. Steve Geller, D-Hallandale.

Geller’s bill on sales tax revenues provides that under certain circumstances, windfall sales tax revenues produced by hurricane recovery construction would be distributed under this formula, 40 percent to Citizens to help offset a deficit; 40 percent to the Cat Fund for rapid cash buildup; and 20 percent to hurricane loss mitigation programs. If there were no deficit in Citizens, 80 percent would go to the Cat Fund and 20 percent to mitigation.

The bill is prospective only, like a similar bill passed by House Insurance, and would not offset the looming $1.7 billion deficit and assessment facing Citizens from the 2005 hurricane season or allow the Cat Fund to begin to rebuild its depleted cash reserves. Senate Banking and Insurance Chairman Garcia was asked if sales tax revenues might not be used to address Citizens and Cat Fund woes from the 2005 hurricane season. This is a matter still under discussion and no final decision has been made, the Hialeah Republican said.

Governor Bush reiterated recently he might support sales tax revenues to offset the 2005 Citizens deficit and statewide assessments if it were accompanied by serious long-term reforms to the property insurance system.

FIC supports the using surplus revenues to finance the deficits of Citizens and build-up of the Cat-Fund. Our companies are split on whether or not to lower the retention

Reduction of Citizens High Risk Account territories

Under legislation creating Citizens Property Insurance Corporation several years ago, a so-called “choke-down” provision takes effect next year. The Citizens board will be required to reduce territories in the wind-only High Risk Account to achieve a 25 percent reduction in the PML and reduce boundaries again several years later to achieve a combined 50 percent reduction in the PML.

The House bill delays the original deadline from 2007 to 2013 and delays the second deadline until 2017. The Senate bill provides for a delay in next year’s deadline until 2009.

FIC supports the delay in the choke-down provision.

Mitigation

Both bills require the Department of Community Affairs to create programs to provide low interest loans to homeowners to “harden” or retrofit their homes. Funding for the loans would be appropriated in the 2006/2007 state budget.

The Senate plan requires DCA to provide wind certification and hurricane mitigation inspections to homeowners or potential buyers at no cost. DCA would adopt a hurricane loss mitigation grading system for residential structures to be used for home inspection reports that would be available to homeowners for disclosure to purchasers. It would also provide information to homeowners to guide decisions on retrofitting.

Stronger building code

This is another related issue. The Senate and House are considering bills (CS/SB 1336, HB 1187) repealing the Panhandle exemption from true implementation of the windborne debris regions in ASCE 7-98, adopted as part of Florida’s Uniform Statewide Building Code. The effect of the repeal would be to require storm shutters or impact-resistant glass on new construction in Franklin through Escambia counties wherever recommended by the American Society of Civil Engineers, probably an average of five miles from the coast. The current “Panhandle carve-out” limits shutter requirements to one mile from the coast in these counties, regardless of the ASCE recommendations.

FIC fully supports strengthening the building code. It, together with mitigation programs to help retrofit older homes is essential in lessening the negative impact of storms in Florida.

Rating law

The House package includes flex rating for residential insurance, but with bands of 5 percent statewide and no more than 10 percent in a single rating territory. Carriers could raise or lower residential insurance rates within these bands without the approval of the Office of Insurance Regulation. The original House legislation established bands of 10 percent statewide and 25 percent in a single rating territory. OIR agreed to the 5 percent and 10 percent limits, plus a requirement that it review insurer records every three years to ensure that the increases were justified. There is no flex-rating plan in the Senate bill.

The House plan provides for automatic approval of private insurer rates for business in Citizens’ High Risk Account if they are lower than the Citizens rates approved by OIR. This is not in the Senate bill.

The House package also allows regular market insurers to compete with the surplus lines industry and cover, at unregulated rates, $1 million-plus dwellings and seasonal property no longer eligible for Citizens. The Senate bill would apparently allow unregulated rates by regular insurers once $1 million-plus property is no longer eligible for Citizens.

The Senate plan also requires OIR to develop an expedited review procedure for filings to recover increased reinsurance costs.

FIC supports this provision. The flexibility is an important tool to help attract new capital to the Florida insurance market.

Emergency rule “Playbook”

Both bills have language based on a concept developed by FIC to require the Cabinet to adopt, through the regular rule-making process, standards for emergency rules to be imposed following a hurricane.

Both bills authorize Office of Insurance Regulation Commissioner Kevin McCarty to issue emergency rules following a hurricane, rather than limiting the authority to the Financial Services Commission. The bills also establish an important template for the emergency rules. From the Senate Banking and Insurance Committee staff summary: The legislation “requires the Financial Services Commission to adopt rules standardizing requirements that may be applied to insurers after a hurricane, addressing claims reporting requirements, grace periods for payment of premiums and temporary postponement of cancellations and non-renewals.”

OIR has expressed concern with language that is in the House bill at least, and possibly the Senate bill, that says emergency rules could not conflict with the standards in the permanent rules.

FIC supports this provision which will provide well-conceived standards to be developed before an emergency rather than reacting during an emergency.

Hurricane models

Both bills require OIR to submit the public hurricane loss projection model developed by Florida International University to the state modeling commission for certification. An amendment was added by Senate Banking and Insurance saying OIR could continue to use the model until it was certified. The impact of this is not clear.

The House bill limits OIR’s ability to question hurricane loss models that have been certified by the modeling commission. This is apparently not in the Senate bill.

FIC supports submitting the public hurricane modeling to the same scrutiny of the state modeling commission as private models.

Mobile homes

Addressing the troubled insurance market for mobile homes, the House bill limits Citizens coverage on mobile homes and manufactured housing constructed prior to 1994 to actual cash value coverage and not replacement cost coverage. It creates a Task Force on Hurricane Mitigation and Hurricane Insurance for Mobile Homes and Manufactured Homes to be appointed by the governor, chief financial officer, House speaker, Senate president and others and make recommendations by Jan. 1, 2007.

The task force is charged with making “recommendations to the Legislative and executive branches of this state’s government relating to the creation and maintenance of insurance capacity in the private sector and public sector which is sufficient to ensure that all mobile and manufactured home owners*are able to obtain appropriate insurance coverage for hurricane losses, and relating to the effectiveness of hurricane mitigation measures for mobile or manufactured homes.” (It is not clear if these provisions are in the Senate bill as well.)

The Senate package includes an amendment by Sen. J.D. Alexander, R-Lake Wales, establishing a 25 percent surcharge on mobile homes going into Citizens after a certain time period. This is not in the House bill.

Both bills restrict, to some extent, mobile homes that could be counted as primary residences to avoid higher rates or surcharges.

FIC supports this provision.

Sinkholes

Sen. Mike Fasano, R-New Port Richey, and Rep. John Legg, R-Port Richey, are developing key sinkhole bills (CS/SB 286, CS/HB 217) supported by FIC. This is an important issue to Citizens because sinkhole litigation problems have turned Citizens Personal Lines Account into a leading writer in Tampa Bay, especially in Pasco and Hernando counties. This has increased Citizens overall wind exposure in the region dramatically and probably unnecessarily. The sinkhole legislation was passed by Senate Banking and Insurance as part of the big hurricane insurance package and also as a separate bill. It is riding as a separate bill in the House.

The Fasano/Legg package allows insurers to offer sinkhole deductibles of 1, 2, 5 and 10 percent of dwelling limits; allows insurers to pay a contractor directly for sinkhole repairs; and requires insurers to report sinkhole claims to the county clerk.

One of the most significant provisions in the package creates a mediation program operated by “neutral evaluators” appointed by the Department of Financial Services that can be requested by either the insurer or policyholder. If the evaluator finds basis for denial of a sinkhole claim and the policyholder goes to court anyway, the insurer would not be liable for attorneys’ fees, even if they prevailed. The insurer would be required to pay the claim.

An amendment to eliminate this new mediation system, which is considered the heart of the bill, was offered in Banking and Insurance by Sen. Walter “Skip” Campbell, D-Tamarac, a prominent trial attorney, and defeated on a 5-4 vote.

FIC supports this provision. Miller said he is encouraged that this provision will allow insurers to return to the Tampa Bay market.

Topics Florida Catastrophe Carriers Legislation Profit Loss Excess Surplus Property Hurricane Homeowners Market Manufacturing