Florida House Insurance Committee Meeting Summary

The House Insurance Committee (“Committee”) met in Tallahassee, Florida on January 24, 2008 and heard a presentation from members of the Florida Commission on Hurricane Loss Projection Methodology (“Commission”) as well as testimony from private modeling companies.

To view the Action Packet from this meeting, click here.

To view the Committee Packet from this meeting, click here.

As an aside, Committee Chairman Don Brown noted that Representative Scott Randolph is a new member of the Committee. 

After brief introductory remarks by Chairman Brown, the Commission members (Dr. Randy Dumm, Marty Simmons, Charles Watson, and Mark Johnson) presented information to the Committee regarding the history, form and functions of the Commission, as well as the methods it uses to evaluate catastrophe models.

Commission members emphasized a few key points:

The professional team has full, unfettered access to the models when it does its on-site evaluations of the models, however, the team does execute non-disclosure agreements for trade secret information.

The world of catastrophe modeling is ever-evolving, but the modelers are constantly updating their programs and currently are using the best science available. Both reinsurers and insurers use catastrophe modeling, but because reinsurers are unregulated, only insurers conducting business in Florida have to use models approved by the Commission. 

During the presentations, Committee members engaged in a series of questioning directed to the Commission members.  Representative Carl Domino questioned whether models factor the increase costs of goods due to demand surge immediately following a disaster. 

The Commission members noted that models must have a “standard” of demand surge in their model.  He also asked if models consider whether insurance companies recover prior losses.  Representative Brown noted that insurance companies, as established in Florida law, cannot recover past losses through future rates, however, they may use prior losses to predict future losses.

Representative Dennis Ross asked about any benefit that private modelers receive in the Commission review process.  The Commission members stated that it provides the models with a rigorous review.  However, the Florida Office of Insurance Regulation (“OIR”) makes the final determination on the use of specific models. 

The Commission representatives also reviewed modeling predictions and the use of reserves to handle catastrophic losses, noting that with reserves, insurance companies must carry reinsurance, which significantly impacts rates. Both Commission members and witnesses from private modeling companies commented that reinsurers will add some type of risk-load factor to the loss cost output of the models, presumably to get a reasonable rate of return on their investment. 

Representative Audrey Gibson asked about the effect of global warming on hurricane models.  The Commission members noted that global warming is not factored in the models used and approved by the Commission.  They also explained that reinsurers factor climate change information into the model results, while insurers cannot factor in climate change because the Commission hasn’t yet reviewed a catastrophe model with takes into account climate change factors. 

After comparing long-term models to short-term models in discussion, the Commission members stated that they expect companies to be able to produce a short-term model that can meet the Commission standards.  However they have not accepted a model using short-term methodologies to date.  During this discussion, Representative Brown commented that during the Senate’s Select Committee on Property Insurance Accountability meeting held on January 23, 2008, there were comments that short-term models have been disapproved, which is untrue.  The Commission members noted that they do not approve or disapprove models, but rather, the OIR does. Instead, the Commission simply determines whether the models meet the Commission standards.

There were also discussions about the Florida Public Model.  It was noted that the Public Model has met the Commission standards, but it is not a very good model.  After expressing several initial concerns, the Commission accepted the public model after the third review.

 

The above information is intended to be a brief summary of the activities and discussions that took place during the Committee meeting.  If you have any questions or comments, please feel free to contact this office.

 

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