Florida Cabinet September 16, 2008 Meeting Report; Reinsurance Collateral Rule Adopted

The Florida Cabinet held a regularly scheduled meeting on September 16, 2008, during which it considered several insurance and financial-related items. Of particular importance, proposed Rule 690-144.007 Credit for Reinsurance was approved. To view the complete meeting agenda, click here.

Below is a review of the insurance-related agenda items and a summary of the corresponding discussions and actions that took place during the meeting.

Attorney General McCollum recognized Bruce Douglas, former Chairman of Citizens’ Property Insurance Corporation. The Governor and CFO also gave their commendations of Mr. Douglas and his service.

CFO Sink spoke briefly about the current Lehman Brothers financial crisis, noting that the Florida Treasury held $139.5 million par value bonds in Lehman Brothers Holding, Inc. as of Friday, September 12, 2008. Of this amount, $104.1 million was senior debt and $35.4 million was subordinated debt, which the State of Florida has agreed to write down. Florida’s total exposure represents less than six percent of State Treasury investments, which total $24 billion. The Treasury is proceeding with an orderly liquidation of the subordinated debt during September, 2008.

The CFO stated that ” . . . as one of three Trustees for the State Board of Administration (“SBA”), I have asked General Milligan, the Interim Executive Director of the SBA, to provide analysis during (the September 16) Cabinet meeting of any potential impact the financial markets may have on (State) retirees’ pension fund and other SBA-managed funds.”

Attorney General McCollum noted that Florida’s finances are not compromised, and that the federal government has procedures in place to secure funds in many banks. He expressed his view that people should not rush to withdraw their bank balances.

Ben Watkins from the Division of Bond Finance noted that the recent Wall Street events are a further development stemming from the credit crisis, and that less capital and bond buyers currently exist. However, he is confident his department can access sufficient capital at reasonable rates.

Office of Insurance Regulation

The Cabinet, meeting as the Florida Financial Services Commission (“FSC”) considered several items presented by Florida Insurance Commissioner Kevin McCarty.

Commissioner McCarty reported that the Florida Office of Insurance Regulation (“OIR”) is currently reviewing financial filings of Florida insurance companies to determine their respective Lehman Brothers exposure.

Item 1: Proposed Rule 69O-203.210; Forms Incorporated By Reference; Discount Medical Plan Organization (“DMPO”) Annual Report was approved without objection or discussion. Pursuant to Florida Law, within three months after the end of the fiscal year, each DMPO must file an annual report with the OIR. These reports must be on forms prescribed by the FSC. The proposed Rule adopts the annual report form.

Item 2: Proposed Rule 69O-149.205, .206, .207 Standard Risk Rates was approved without discussion or objection.

The Rule requires health insurers to provide a conversion policy to an insured whose insurance under a “group” policy has been terminated and is then turned converted to “individual” policy. The OIR is required by Florida Law to conduct an annual survey of the individual market (as contrasted with the group market) to determine standard risk rates for health insurers offering individual coverage via conversion policies. The maximum a health insurer can charge for a conversion policy is 200 percent of the standard risk rate. This Rule implements the results of the survey.

Item 3: Proposed Rule 69O-144.007 Credit for Reinsurance was approved.

Under Florida law, if a primary insurer buys reinsurance from an entity that is authorized or accredited in Florida, the primary insurer receives favorable accounting credit because those authorized or accredited reinsurers do not have to post any collateral. However, an unauthorized or unaccredited reinsurer must post collateral for the full amount of the risk transferred in order for the insurer to receive the same favorable accounting credit. During the 2007 Regular Legislative Session, that law was amended to give Florida’s Insurance Commissioner the authority to establish lower collateral requirements for foreign reinsurers that are highly rated (by A.M. Best or Moody’s, for example) and financially sound.

Therefore, this Rule implements this statutory change by establishing a procedure for a reinsurer to become eligible to receive the benefit of this new law, and for a primary insurer to receive credit when it purchases reinsurance from an eligible reinsurer. This Rule is expected to allow for greater competition in the reinsurance marketplace and increase the amount of new capital that can be devoted to insure losses in Florida.

Attorney General McCollum asked if the application of this Rule will result in lower reinsurance premiums. Commissioner McCarty noted that lower premiums would be marginal, and that the Rule sends a positive message to international reinsurers such as Lloyd’s of London that Florida is actively promoting competition in the reinsurance market.

Commissioner McCarty noted that New York was the first state to pass this type of Rule, with Florida following, and Texas shortly to follow. Commissioner McCarty added that the National Association of Insurance Commissioners (“NAIC”) is expected to complete a national version of the Rule by the end of 2008.

Calling the Rule “an enormous financial benefit to foreign reinsurers,” CFO Sink expressed concern over statements made to her from foreign reinsurers that they will likely not pass along the resultant savings benefits from the new Rule to Florida policyholders.

Attorney General McCollum suggested that Florida should tighten regulation and encourage transparency in the reinsurance market. Commissioner McCarty testified that the goal of the OIR is to work towards greater transparency.

To view the OIR press release on the adoption of the Credit for Reinsurance Rule, click here.

To view the full text of the adopted Rule, click here.

Item 4: Proposed Rule 69O-164.040; Determining Reserve Liabilities for Pre-need Life Insurance was approved for publication without discussion.

This proposed Rule conforms Florida with NAIC guidelines relating to ensuring adequate insurer reserves and liability for Preneed Life Insurance policies. By conforming Florida’s Administrative Code to NAIC standards, this Rule is expected to conform Florida’s policy with that of other states, as well as reduce the “frictional” costs of doing business in Florida.

Item 5: Proposed Rule 69O-204.010, .020, .030, .040, .050 Viatical Settlement Providers was approved for publication.

These proposed Rules implement related sections of Florida Law by defining two phrases: “control or effective control” and “secondary market.” The Rules also prescribe two industry reporting forms, prevent a viatical settlement provider from collecting double fees, and require the provider to document compliance with anti-fraud plans.

The CFO inquired about the vulnerability of senior citizens relating to these Rules, as well as to Stranger-Owned Life Insurance.

Commissioner McCarty noted that stranger-owned/initiated settlements should be distinguished from traditional viatical settlements. He referenced a recent workshop on stranger-owned settlements that elicited disconcerting testimony, such as “free insurance” being offered through these types of settlements. He also noted that legislative proposals and recommendations are forthcoming.

Item 6: Proposed Amendment to Rule 69O-138.005; Exams by Non-Employees was approved for publication without discussion.

In 2007, the Legislature changed Florida laws relating to insurance license compliance regulations, specifically removing an insurance company’s role in negotiating examination contracts with outside vendors. The 2007 Legislature also established specific criteria for the selection of a vendor/contractor to protect against potential conflicts of interest between examiners and insurance companies. Another subsection of the law also requires that the rates charged by outside vendors/contractors must be consistent with rates charged in the industry. This Rule implements this subsection by establishing criteria for the specialists, an application process, and the manner by which vendors/contractors are compensated.

State Board of Administration

SBA Interim Executive Director General Bob Milligan presented the SBA agenda, prefacing his remarks by noting that the SBA has a large diversity in its investment portfolio and that the recent events should not significantly impact the financial stability of the SBA’s holdings (including the Local Government Investment Pool (“LGIP”) and the Florida Pension Plan). General Milligan noted that the LGIP has no investments with Lehman Brothers and a very small amount invested with Merrill Lynch.

The meeting concluded following a brief discussion about Senate Bill 2310 by Senator Jeremy Ring that passed during the 2008 Regular Session. The new law encourages SBA investment in Florida companies, which is expected to boost the State’s economy.

Should you have any comments or questions, please feel free to contact Colodny Fass.

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