Florida Property and Casualty JUA Board of Governors Meeting 8/26/06

The organizational meeting of the Board of Governors (Board) of the Florida Property and Casualty Joint Underwriting Association (JUA) was held on August 25, 2006 at the Office of Insurance Regulation (OIR).

A copy of the Agenda of this meeting and a list of the Members of the Board of Governors of the JUA are attached for your reference. Also, attached is the Emergency Rule applicable to the JUA which sets forth its Plan of Operations. The Plan was adopted in order to equitably apportion among all insurers authorized to write property and casualty insurance in Florida the underwriting of persons with risks eligible who are in good faith entitled, but unable, to obtain an adequate level of insurance coverage, including excess coverage, through the voluntary market. All property and casualty insurers authorized in Florida shall participate in the Plan. However, the assessable premium is the net direct premium for commercial property insurance risks written by the insurer, excluding premium associated with commercial residential insurance policies.

Attached is a Survey of Florida businesses regarding the commercial insurance market and a summary of responses thereof that relates to the availability of coverage and rates applicable to coverage found by the surveyed businesses.

John Collins, President of Gulf Building Corporation, was elected as Chairman and Anita Setnor-Byer, President and CEO of Setnor-Byer Insurance and Risk, was elected as Vice Chairman of the Board of Governors.

OIR indicated that it has had discussions with multiple insurers regarding the possibility of them acting as servicing carriers for the JUA. To date, the only carrier that has presented to OIR a program that can be implemented by the projected start date of September 1, 2006 is ICAT Specialty Insurance Company (ICAT). ICAT made a presentation of the Program that it has developed in conjunction with OIR for a projected market start up date of September 1, 2006. ICAT is part of a holding company system principally owned by Paul Allen (co-founder of Microsoft). ICAT was formed as a Florida domestic insurer, which obtained its Certificate of Authority in May, 2006.

The JUA would be responsible for payment of all claims. Claims would be administered by ICAT’s affiliate, Boulder Claims. Policy administration would be handled by ICAT’s affiliate, ICAT Managers.

The proposed ICAT program presented to the Board included the following: The perils covered would be limited to wind and hail. Coverage would be available for the structure; business personal property; tenants improvements and betterments; business income/rental value/ extra expense; and ordinance and law coverage. Certain special exclusions would apply. Eligibility for structure coverage would be limited to $1 Million for any one named insured. 100% insurance to value is required. The coverages for business personal property and tenants improvements would be limited to values of $500,000 for any one building, and $750,000 for any named insured. Eligibility for business income loss would be limited to insureds with less than $2 Million in gross receipts/revenues in Florida. The coverage limit would be $250,000 for each covered loss and named insured.

The deductible would be 5% with options for 10% or 15% deductibles available. The deductible would apply to the sum of all insurable values at each location. Each policy would be nonrenewable and the insured would be required to search the voluntary market prior to policy expiration for replacement coverage. In this regard, a diligent search of coverage in the voluntary market is required for all policies as a condition for eligibility in the JUA. This requires good faith application to three authorized insurers, one surplus lines insurer, and a search by the Florida Market Assistance Plan (FMAP). A producer may bind coverage during the period FMAP is “shopping” the private insurance market.

The eligible territories include all areas outside the high risk areas, as defined by the Legislature. A risk would not be eligible if an insured obtains an offer of coverage: (i) from an authorized carrier at approved rates or JUA rates, whichever is higher; or (ii) from a surplus lines carrier at less than or equal to 25% more than the JUA rates. Various risks would be ineligible, as established by the Risk Underwriting Committee, which is to be established pursuant to the law. A moratorium would exist for binding or increasing coverage when a tropical storm or hurricane watch or warning has been issued for any part of the state.

All risks would be subject to on-site inspections within 60 days after coverage is bound and any inconsistencies in the application would result in cancellations or endorsements.

The JUA’s rates are to be “actuarially sound.” Applying a methodology based on estimated reinsurance costs, modeling, and estimated premium, ICAT estimates a base rate of $1.49 per $100 of coverage. Additional rating components would be applied to each risk.

ICAT has proposed an agreement with the JUA to act as the service provider and that the JUA appoint ICAT Managers and Boulder Claims as agents for servicing purposes. The fees would include a service fee of 10% of gross written premium to ICAT Managers for policy administration and 1% to Boulder Claims as a stand-by claims fee. These would be fully earned. This would be subject to a minimum of $100,000 per month, with a 180 day termination clause. Additional fees would be a policy fee of $175; and inspection fee of $100; a claim file fee of $450 (which would be offset by the stand-by fee); and an annual producer appointment fee of $125. In addition, ICAT proposed a 5% fully earned agent commission, which was endorsed as a mechanism to assure that agents would diligently shop the risk in the voluntary market. The other projected fees were 2% for Boards, Taxes and Bureaus.

Attached is the PowerPoint presentation made by ICAT at the meeting which provides further detail and clarification regarding its proposal.

Multiple issues were discussed regarding the ICAT proposal and how the Board should proceed in view of the tight time frame to initiate the program.

1) Issues related to the performance of ICAT and Boulder Claims, possible bonding from those entities to assure performance and the availability of a competent adjuster pool to handle claims in the event of a catastrophe. For their current business operations related to ICAT and other companies with whom they contract, Boulder Claims has contracts with nine adjusting companies and the availability of approximately 200 adjusters in the event of a catastrophe.

2) Business income loss coverage under the ICAT program. Tom Streukens from OIR indicated that the JUA does not have to issue business income loss coverage or it can modify the terms of the coverage that will be made available.

3) The lack of availability of reinsurance for the JUA within the reinsurance market at this time in the hurricane season.

4) Belinda Miller from OIR indicated that they talked to multiple carriers about acting as servicing carriers for the JUA and ICAT has been the only carrier to come forward at this time. OIR would like to have more insurers act as servicing carriers, but would not want to enter multiple contracts with minimum guaranteed fees. The ICAT agreement would be nonexclusive.

5) Ms Byer-Setnor suggested that roofs be covered at actual cash value rather than replacement cost. Also, she suggested that both the agent and insured attest to declinations from the voluntary market for purposes of risk eligibility. In addition, she suggested possibly increasing the deductible as the claim increases.

6) It was suggested by an audience member that the 5% agent commission was too low and that the Board should consider a higher commission.

7) With regard to the approval of ICAT as a servicing carrier, the Board recognized that at this point they do not have the applicable agreements, rates, forms or underwriting rules. On the other hand, ICAT has the platform to immediately implement its Program to help alleviate the insurance crisis in the commercial property market and the personnel and systems in place to start the Program on September 1, 2006. After deliberation, the Board unanimously passed a resolution that ICAT be considered as a service provider, subject to OIR and regulatory due diligence as to whether ICAT is able to meet its financial and operational commitments.

8) As to implementation of the Program in a short time frame, it was discussed that the Program forms, rates and rules could be submitted to OIR for their review and approval while, at the same time, the JUA Board review the particulars and decide on any revisions. At this point, the Board has a staff of one and does not have time to customize a program for a September 1st implementation. Some changes to the ICAT program could be made and accommodated by OIR and ICAT, but they could not be significant changes because of the compressed time frame. Ms Miller indicated that there is a limited assessment base and, as a result, they do not want to increase the amount of coverage available. Also, they want the JUA to have rates that are affordable, but high enough to not discourage the voluntary market. Further, the ICAT Program is for wind only since that is all they are set up to handle at this time.

9) The Board unanimously passed a resolution to formally submit the ICAT Program to OIR for their review and approval while at the same time the Board will review the particulars and submit any revisions after the Board review. Ms Setnor-Byer will work with Board staff and counsel on the particulars of the Program and report to the Board at its next meeting.

10) Dan Sumner, who is the Assistant Director of the Division or Workers Compensation, will serve as staff for the Board. He will arrange for the Board to enter temporary agreements for accounting, banking and legal services.

11) The industry representatives of the JUA are required to appoint one person to sit on the three member Risk Underwriting Committee. Other members of this Committee are to be appointed by the Chief Financial Officer and FMAP. The JUA’s industry representatives appointed Bill Speaker, who is Vice President of Florida underwriting for FCCI Insurance, or another underwriting expert from FCCI.

12) Funding options for the JUA were discussed. The JUA will need funding for administrative costs as well as for policy losses. For start up money, the JUA could borrow money or issue an assessment. The Rule permits assessments to fund start up expenses. Mr. Sumner will prepare a budget for the first 45 days of JUA operation and submit that budget to the Board at its next meeting.

13) Funding for claims was also discussed. The assessment base of the JUA in the commercial property market is estimated at approximately $1.3 Billion. OIR estimates that the population of policies that may be covered by the JUA would initially be no more that a few hundred policies. It was suggested that the JUA consider an assessment for general operation purposes as well as to fund projected claims expected over a 60 day period. Another option would be to obtain a line of credit for operational matters, but not for claims. Premium will be received by the JUA and they would have to try and project estimated premium, expenses, coverage values and model possible claim scenarios. Post-event bonding could be issued by the JUA. Mr. Sumner and Mr. Streukens indicated that they will work with ICAT and others to develop some scenarios to present to the Board at its next meeting.

14) Mr. Sumner was appointed as the Interim Executive Director of the JUA.

15) Eugenia Tyus from the Florida Automobile JUA offered space, a phone and computer on an interim basis, subject to an agreement for repayment of the costs thereof.

16) A representative from the Surplus Lines Association offered to assist the JUA with any operational issues. It was clarified that any servicing carrier has to be a participating carrier; accordingly, surplus lines carriers cannot be servicing carriers.

The next meeting of the Board will be held by telephone on Wednesday August 30, 2006 at 9:30 am. We will monitor and report on these proceedings.

If you have any questions or comments, please feel free to contact this office.

Regards,

Rich Fidei