Florida Property Insurance: Elections Bring a Sea of Change

13 March 2007 Publication
Authors: Thomas J. Maida

FOCUS on the Insurance Industry

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.

Rate Rollback
During the conference committee deliberations on HB 1A, frequent reference was made to the fact that the actual premium savings to consumers would vary depending on their location and their insurer; legislative negotiators recognized that each insurer will realize a different level of savings when the new, optional Cat Fund coverage replaces private reinsurance. As an example, a document released by the House majority whip’s office on the day of the final vote on HB 1A showed expected average savings of seven percent on the total premium (19 percent on the windstorm portion of the premium) for State Farm policyholders and expected average savings of 21.8 percent (43.1 percent on the windstorm portion) for policyholders of other insurers.

As enacted, HB 1A calls for the insurance regulator to calculate a “presumed factor” that all insurers must apply to their rates to reflect the Cat Fund changes, regardless of whether or not they actually purchase the optional Cat Fund coverage and regardless of how the cost of the new Cat Fund coverage compares to what the insurer would have paid for the reinsurance the new Cat Fund coverage replaces.

Citizens Property Insurance Corp.
Citizens Property Insurance Corp. is Florida’s property insurer of last resort. It was formed in 2002 by the merger of two state-created insurers, one of which had written windstorm-only coverage in certain high-risk areas starting in the early 1970s, and the other of which was formed in the wake of Hurricane Andrew to provide residential property insurance coverage throughout the state. Citizens and its predecessors had been subject to strict eligibility requirements that limited eligibility to property owners who were not able to procure coverage from licensed insurance companies at any price. Citizens was also subject to ratemaking standards that required it to charge noncompetitive rates pegged to the highest rates in the market.

The thrust of HB 1A was to move toward lower rates for Citizens and to establish it as a competitor with the private sector, rather than an insurer of last resort. In addition, all property and casualty premiums except for workers’ compensation and medical malpractice will now be subject to Citizens’ deficit assessments; prior law applied assessments only to personal lines and commercial property premiums.

More specifically:

Citizens’ rates will be set by the Office of Insurance Regulation without any avenue of appeal from the regulator’s decision. Citizens’ rates must be actuarially sound, but will no longer be subject to other statutory rate standards, including the requirements that rates be non-competitive, that rates be at least as high as the highest rates of leading voluntary market insurers on a county-by-county basis, and that rates be based on specified probable maximum losses.

Eligibility standards related to Citizens’ status as an insurer of last resort have been rescinded, except that an applicant for new Citizens coverage will be ineligible if he receives an offer of coverage from a private sector company at a rate no higher than 125 percent of the Citizens rate. Citizens will also be able to write full homeowners’ policies in areas where it now writes windstorm-only policies. These changes will enable Citizens to compete for business currently in the private sector.

Regulatory Changes
HB 1A substantially increases the regulatory burden on insurers. Among other things, the new law:

  • Suspends through year-end 2008 an insurer’s ability to use arbitration as an alternative to an administrative challenge of the regulator’s action on a rate filing
  • Requires an insurer to refund excess profits, based on a 10-year average of actual profits vs. profit levels in approved rate filings
  • Requires the CEO or CFO of a property insurer and the chief actuary to swear under oath to the truthfulness of material information in a rate filing
  • Requires property insurers to pay or deny a claim within 90 days after receiving notice of the claim
  • Increases the notice period for property insurance nonrenewals and cancellations, and requires that if the nonrenewal or cancellation is to take effect between June 1 and November 30, the notice must be sent by the earlier of June 1 or 100 days prior to the effective date of the nonrenewal or cancellation
  • Requires an insurer that writes private passenger auto in Florida and residential property insurance in any other state to also write residential property insurance in Florida. This requirement will take effect on January 1, 2008
  • Increases the minimum surplus required to form a new property insurer to $50 million if the new insurer is a subsidiary of another insurer

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.

Emergency Rule
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:

  • Linkage of auto and property writings. The linkage language in HB 1A takes effect in 2008, and many observers view it as a mere placeholder. During the special session, the governor circulated language that would have set a required ratio of auto writings to property writings for auto insurers who write any property coverage anywhere. This issue, which he referred to as “cherry picking,” was a centerpiece of the governor’s 2006 campaign.
  • Moratorium on nonrenewals. The Governor has advocated a four-year moratorium on residential property nonrenewals, with extremely limited exceptions. The House had proposed a complete moratorium on nonrenewals taking effect during the hurricane season. It is reasonable to expect some further action on nonrenewals.
  • Subsidiary companies. Another key campaign issue for the governor was his proposal to prohibit insurers from creating or maintaining Florida-only subsidiaries. As with “cherry picking,” the public and many in the media believe that this practice drains profits from Florida and results in higher rates.
  • Ratemaking. Further action on ratemaking is possible if elected officials or the public are dissatisfied with the size or pace of the rate reductions mandated by HB 1A.

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.