In the decade and a half since Hurricane Andrew, the Florida property insurance market has been in a state of almost constant crisis. Legislative and regulatory efforts to address the crisis have focused primarily on five areas: creating incentives to draw new insurance capital to the state; creating a state fund to provide a stable and inexpensive supply of catastrophic reinsurance for residential property insurers; creating a property insurer of last resort to assure availability of residential coverage throughout the state; providing increased regulatory control over property insurance rates, coverages, and claims practices; and providing incentives for more hurricane-resistant construction.
Legislation enacted in 2006 concentrated on efforts to reduce the potential for assessments on property insurance premiums by bolstering the financial soundness of the residual market and efforts to increase the commitment of private capital to Florida.1
However, within a matter of months after enactment of the 2006 legislation, affordability of property insurance became the dominant issue in the campaigns for governor and other statewide offices, and in many legislative campaigns. Premiums had increased dramatically for many homeowners because of the volatile mix of rapidly rising property values and rate increases attributable to the sharply higher reinsurance costs that followed the 2004 and 2005 hurricane seasons. Floridians elected a self-described populist governor and a Florida Legislature that made property insurance rate relief its top priority.
The Legislature moved quickly after the new governor was sworn in. The presiding officers called a special session for January 16 – 22 to address property insurance rates and related issues. The result of the special session was HB 1A, a 167-page bill2 that shifted the state’s emphasis away from rebuilding a competitive private market and toward rate relief for property owners. The Governor signed the act on January 25, and it took effect immediately. Five days later, the Governor and Cabinet, sitting as the Financial Services Commission, adopted an emergency rule3 freezing personal lines residential rates and prohibiting nonrenewals and cancellations. Further actions are expected during the 60-day regular session of the Legislature, which begins on March 6.
HB 1A should have its greatest impact on the Florida property insurance marketplace because of major changes in four areas: the Florida Hurricane Catastrophe Fund, rate rollbacks, the residual market, and the regulatory process.
Florida Hurricane Catastrophe Fund (“Cat Fund”)
The Cat Fund was established in 1993 to provide a layer of reinsurance coverage for all Florida residential property insurers. As constituted prior to the new law, the fund provided up to $16 billion in coverage for residential losses above an aggregate industry retention of $6 billion. All residential property insurers must participate in the fund. Companies pay premiums to the fund based on their exposures; Cat Fund premiums are generally considered to be roughly 20 percent to 30 percent of the price that the insurer would otherwise pay for comparable privately procured reinsurance.
The fund is exempt from federal taxation and has the power to issue tax-free bonds. In the event of a deficit, the fund issues bonds and levies assessments on all Florida property and casualty premiums except for workers’ compensation premiums to provide a revenue stream to pay off the bonds. Assessments are capped at 6 percent with respect to a deficit attributable to a single contract year and 10 percent with respect to all deficits combined.
HB 1A adds several new layers of Cat Fund coverage, as follows:
1. Certain small insurers will be able to purchase up to $10 million of coverage with retention equal to 30 percent of the insurer’s surplus, with pricing set at 50 percent. This authorization applies only to the 2007 contract year.
2. Optional coverage below the standard Cat Fund retention: The standard Cat Fund retention for the 2007 contract year will be the insurer’s share of $6 billion. An insurer will have the option of lowering its retention to its share of $3 billion, $4 billion, or $5 billion, with pricing set at 85 percent for the $3 billion option, 80 percent for the $4 billion option, and 75 percent for the $5 billion option. These optional coverages will be available for the 2007, 2008, and 2009 contract years.
3. Optional coverage in excess of the standard Cat Fund cap: An insurer will have the option of purchasing additional coverage in excess of the maximum standard Cat Fund payout, up to the insurer’s share of an additional $12 billion (or the insurer’s share of an additional $16 billion if the additional coverage is authorized).4 The pricing for these additional layers of coverage will be based on the average annual loss for the layers. Current Cat Fund estimates are that the $12-billion layer will be priced at a rate on line of 2.32 percent and the additional $4 billion layer if authorized will be priced at a rate on line of 1.6 percent. As with the optional lower retention coverage, these optional coverages will be available for the 2007, 2008, and 2009 contract years.
Self-Insurance, Deductibles, and Coverage Waivers
The new law contains several options for self-insurance. Local governments, hospitals, condominiums, and corporations not for profit will be able to form self-insurance funds for property insurance coverage. In the case of public hospitals, the selfinsurance fund may also have bonding authority.
Individual property owners will be able to assume more of a loss through higher deductibles and through coverage waivers. Prior law capped residential property deductibles at 10 percent of the insured value; the new law has repealed this cap. However, with respect to properties insured for $500,000 or less, the insured may assume a deductible in excess of 10 percent only with a personally written waiver and with the consent of the lienholder.
A property owner may also reject windstorm coverage entirely. As with the high deductibles, the rejection of windstorm coverage is available only with the property owner’s personally written waiver and the consent of the lienholder. A property owner may also reject coverage for personal property.
On January 30, the Governor and Cabinet, sitting as the Financial Services Commission, adopted Emergency Rule 69OER07-1 for the stated purpose of preventing certain insurer actions prior to the effective date of rolled-back rates. Emergency rules remain in effect for 90 days.
The emergency rule requires that rates for residential property coverage must remain at the rates that were in effect on January 25 until the insurer makes, and the regulator approves, a rate filing reflecting the presumed factor (see “Rate Rollback,” above). The emergency rule also prohibits any nonrenewal or cancellation5 of a personal lines residential property policy until the insurer makes a rate filing reflecting the presumed factor. Although this portion of the rule refers only to the making of the rolled-back filing, and not to its approval, it should be assumed that the prohibition, like the rate freeze language, applies until the rolled-back rate is approved.
Potential Issues for the Regular Legislative Session
The 60-day regular legislative session began on March 6. Property insurance is likely to remain a dominant issue. These are some of the issues that may attract further legislative attention:
No one can predict with certainty the future of Florida’s property insurance market. Further legislative action later this year is likely. Insurers and reinsurers will evaluate state government’s response to the property insurance situation, and each will adjust its business plan according to its view of the future. Of course Mother Nature will have her say, as well. A few unexpectedly quiet hurricane seasons could help stabilize private insurance markets. A single catastrophic windstorm could lay waste to the best-laid plans of the Governor and Legislature. And Florida’s governmental leaders will ride out the 2007 hurricane season with one eye glued to the Weather Channel and the other eye fixed on CNBC, hoping they’ve made good choices for Florida’s ailing property insurance market.
1 See “Florida Legislature Passes Massive Property Insurance Bill,” FOCUS on the Insurance Industry, Summer 2006.
2 HB 1A as enacted is available online at http://www.flsenate.gov/data/session/2007A/House/bills/billtext/pdf/h0001A03er.pdf .
3 Emergency Rule 69OER07-1.
4 The extra $4 billion in coverage may be offered only if authorized by the State Board of Administration (governor, Chief Financial Officer, and attorney general) and approved by the Legislative Budget Commission (a joint legislative committee).
5 Except for cancellations based on fraud, material misrepresentation, or nonpayment of premium.
This article is a part of the FOCUS on the Insurance Industry Spring 2007 Newsletter.