FHCF Proposes Elimination of Changes to Coverage Elections Made After March 1

 

The Florida Hurricane Catastrophe Fund (the “FHCF”) is currently engaged in rulemaking to adopt the 2016-2017 Reimbursement Contract, which is incorporated by reference in Rule 19-8.010, Florida Administrative Code.  One of the proposed amendments would eliminate a participating insurer’s ability to change its coverage election following the initial reimbursement percentage election made by March 1 of the contract year.

On September 15, 2015, the FHCF conducted a workshop regarding proposed changes to the Reimbursement Contract that would be made effective for next year.  A redlined draft of the proposed changes, dated September 4, 2015, was discussed at the workshop (a copy of which is attached).

Noticeably absent from this draft of the Reimbursement Contract is the “Optional Amendment To Change Prior Elections Made In The Reimbursement Contract Or The Addenda To The Reimbursement Contract” (the “Optional Amendment”) that has been incorporated into the Reimbursement Contract for the past few years.

The Optional Amendment has allowed participating insurers to change their reimbursement percentage elections after March 1 provided such changes were made on or before June 1.  The proposed elimination of the Optional Amendment would require participating insurers to be locked into the elections made by March 1, which could be prior to the time those insurers have their private reinsurance fully placed for the 2016 storm season and before it is known whether or to what extent the FHCF will be purchasing reinsurance.

At the rule workshop, the FHCF indicated that 26 companies had changed their reimbursement percentage elections just prior to the June 1 deadline for the 2015-2016 contract year.  The FHCF indicated that the flexibility provided to companies to change their reimbursement percentage elections was put into place in connection with the Temporary Increase in Coverage Limit (TICL), which is no longer applicable.  It appears that the FHCF is concerned about its ability to effectively ascertain its covered exposures for purposes of finalizing its own placement of reinsurance for the 2016 storm season, and allowing insurers to change their coverage options right up until the beginning of the contract year on June 1 will no longer be acceptable to the FHCF.

It is important to note that Article XVIII(1) of the Reimbursement Contract has provided and would continue to provide in relevant part as follows:  “The Company shall not be permitted to change its reimbursement percentage during the Contract Year. The Company shall be permitted to change its reimbursement percentage at the beginning of a new Contract Year, but may not reduce its reimbursement percentage if a Covered Event required the issuance of revenue bonds, until the bonds are no longer outstanding.”

The above-quoted provision of the Reimbursement Contract appears to be intended to implement the language of Section 215.555(4)(b)2., Florida Statutes, which provides in relevant part as follows:  “The insurer must elect one of the percentage coverage levels specified in this paragraph and may, upon renewal of a reimbursement contract, elect a lower percentage coverage level if no revenue bonds issued under subsection (6) after a covered event are outstanding, or elect a higher percentage coverage level, regardless of whether or not revenue bonds are outstanding.”

Apparently, the FHCF is taking the position that the Optional Amendment has been within the discretion of the FHCF and that it is now going to require insurers to be bound by the reimbursement percentage elections made when they execute Reimbursement Contracts by March 1. This decision could substantially affect each participating insurer’s ability to optimize the structure of its reinsurance program in advance of the 2016 storm season.

The proposed changes to the 2016-2017 Reimbursement Contract have not yet been noticed as a proposed rule.  Once the FHCF issues a Notice of Proposed Rule for the changes to Rule 19-8.010, Florida Administrative Code, the public will have 21 days to request a hearing on the proposed rule.

Insurers and other interested parties should consider whether the proposed rule may require the FHCF to prepare a Statement of Estimated Regulatory Costs (a “SERC”) pursuant to Section 120.541, Florida Statutes, which could result in the rule requiring ratification by the Florida Legislature.

A SERC would be required “if the proposed rule is likely to directly or indirectly increase regulatory costs in excess of $200,000 in the aggregate within 1 year after the implementation of the rule . . . .”  A SERC is required to include, among other things:  “An economic analysis showing whether the rule directly or indirectly:  1. Is likely to have an adverse impact on economic growth, private sector job creation or employment, or private sector investment in excess of $1 million in the aggregate within 5 years after the implementation of the rule;  2. Is likely to have an adverse impact on business competitiveness, including the ability of persons doing business in the state to compete with persons doing business in other states or domestic markets, productivity, or innovation in excess of $1 million in the aggregate within 5 years after the implementation of the rule; or  3. Is likely to increase regulatory costs, including any transactional costs, in excess of $1 million in the aggregate within 5 years after the implementation of the rule.”

If the adverse impact or regulatory costs of the rule exceed any of the criteria mentioned above, then the rule must be submitted for Legislative ratification, even if it is adopted by the State Board of Administration, which administers the FHCF. At this point it is not known whether the FHCF intends to prepare a SERC for the proposed rule.

If an insurer or other interested party intends to assert that a SERC is required for the proposed rule, then a public hearing should be timely requested within 21 days after the Notice of Proposed Rule is published in the Florida Administrative Register.  In addition, the insurer or other interested party should be prepared to offer quantitative and qualitative evidence in support of the need for a SERC at the public hearing.  This same request and information could be provided at any time to the FHCF in advance of publication of the Notice of Proposed Rule.

Colodny Fass will continue to monitor the proposed amendments to the 2016-2017 Reimbursement Contract and provide updates regarding the same.  If you have any questions, please do not hesitate to contact Wes Strickland at (850) 241-1263 or wstrickland@colodnyfass.com.

 

 

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