Florida Commission on Hurricane Loss Projection Methodology Windstorm Mitigation Committee Hearing Report: September 17

The Florida Commission on Hurricane Loss Projection Methodology (“Commission”) Windstorm Mitigation Committee (“Committee”) met on September 17, 2009, the final day of a three-day Commission meeting, during which it heard testimony that will be used to prepare a mandated report on windstorm mitigation discounts to the Florida Legislature and Executive Branch.  Following is a summary of the presentations given during the nine-hour meeting:

Commission Chairman Randy Dumm opened the meeting, noting that that the Committee’s next meeting will be held on October 29, 2009.

Florida Department of Community Affairs Executive Director Rick Dixon gave a presentation on the role of Florida’s Building Code (“Code”) and its impact on hurricane risk. Historically, building codes were adopted and enforced at the local level.  Gradually, the State strengthened Code requirements, while continuing to evolve the Code primarily in response to damages from major storms.  Mr. Dixon noted that significant improvements to the Code and building strength occurred following 1993. 

Florida Hurricane Catastrophe Fund (“FHCF”) Chief Operating Officer and Commission member Jack Nicholson asked Mr. Dixon to provide data on the number of structures built to the newer codes.  Explaining that the Code plays a significant role in reducing hurricane-related damage and loss, Mr. Dixon stated that he would evaluate the statistics and provide available data. 

Florida State University’s Florida Catastrophic Storm Risk Management Center Associate Director Chuck Nyce discussed a study on post-loss subsidies. The study included assessments from Citizens Property Insurance Company (“Citizens”) and the FHCF, but not the Florida Insurance Guarantee Association (“FIGA”), which are levied as a result of insurance company insolvencies.

The post-loss subsidy analysis was based on a 1-in-100 year event using a sample household with a $300,000 new home and one automobile policy.  The event would effect a surcharge of 45 percent on Citizens policyholders, a full, regular assessment of 18 percent and an emergency assessment of 8.65 percent for one year. The FHCF assessment would be 6 percent for 23 years. 

The study found that many Florida counties should be paying more in premiums, while others should be paying less.  The net result of the study showed the subsidization of certain counties through post-loss assessments.  Mr. Nyce also discussed a pre-loss study that was done to determine pricing accuracy.  The study evaluated single-family homes in Citizens’ High-Risk Account only and found that inland properties have a higher relative premium based on risk. In summary, the premiums are not commensurate with risk. These studies are available at www.stormrisk.org.

Florida Association of Insurance Agents Executive Vice President Scott Johnson provided testimony relating to agent issues.  After his presentation, there was significant discussion regarding inspection fraud and that some agents may passively allow fraud to occur.  Mr. Johnson recommended that policies should be adopted to give a policyholder “skin in the game” regarding verification of premium reductions.  Dr. Nicholson noted that the system is “sick” and that there should be laws against tying financial incentives to wind inspections. Agents should not have business relationships with inspectors.

Applied Research Associates Chief Technical Officer Larry Twisdale continued his presentation on a loss relativity study from the previous Committee meeting. The study indicated that a well-mitigated building will reduce loss by 40-60 percent.  Mr. Twisdale stated that the credit mentality is problematic in Florida’s windstorm mitigation program.  For example, reinsurance caps mitigation credits so that they are not applied fairly.  He suggested transitioning from a credit system to a rate differential system with a coordinated effort and recommended that the insurance companies should perform the inspections and include the cost of the inspection in the premium at $25 per year.  Insurers should be allowed five years to inspect their entire book of business, with each home being inspected once every five years.

Applied Research Associates Vice President John Rollins discussed actuarial and modeling issues regarding the windstorm mitigation credit plan.

A representative from ISO gave a report on the ISO mitigation filings as outlined in House Bill 219, which passed in 2002.

Merlinos and Associates Actuary Peter Scourtis gave a presentation on risk premium and the impact of mitigation on premiums.  He illustrated the impact by using an example of non-mitigated homes compared to mitigated homes, saying that mitigation credits are not factored adequately in the reinsurance costs.  As a result, non-mitigated homes are often bad economic risks.  

Marsh Fisher of Citizens gave a follow-up report on the Citizens-related aspects of wind mitigation credits as applied to premium.

Florida Office of Insurance Regulation (“OIR”) Actuary Ken Ritzenthaler and Deputy Insurance Commissioner Belinda Miller addressed the Committee regarding the insurance company filings relating to mitigation credits.  Mr. Ritzenthaler noted that problems exist in the manner that companies rate their policies.  He also noted that problems are manifest because the system allows for credits in excess of 100 percent of the premium.  Ms. Miller noted that a problem with the mitigation discounts is that they are on top of a rating system that results in duplicative and incorrect rates.  She also noted that the OIR is in the process of adopting changes to the mitigation forms that are expected to alleviate some of the fraud issues.

Scott Koedel, President of Don Meyler Inspections, gave a presentation on the mitigation inspection process, including the use and procedure for completing the wind mitigation forms. He noted that inspection firms should be held accountable for inspectors’ work and the forms they complete. He further noted that it is very difficult to hold inspectors accountable when there are thousands of individually licensed inspectors operating independently.

Liz Reynolds, Southeast State Affairs Manager of the National Association of Mutual Insurance Companies noted that the mitigation credit process needs to be addressed, but that insurance companies support mitigation efforts.

Following the presentations, the meeting adjourned. As noted above, the next meeting is scheduled for October 29, 2009. 

 

Should you have any questions or wish to provide testimony to the Committee, please contact Colodny Fass.

This summary is not intended to be a comprehensive analysis of the issues contained herein. 

 

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