House Insurance Committee Hears Risk Reduction Proposal

On Friday, February 8, 2007, the House Insurance Committee (“Committee”) held a workshop on a proposal and legislation developed by the Florida Department of Financial Services (“DFS”) regarding a reduction of risk in the Florida Hurricane Catastrophe Fund (“FHCF”) by approximately $3 billion.

To view the Committee packet, click here.

Michael Carlson, DFS Director of Legislative Affairs, provided an overview of the proposed legislation. Several Committee members expressed concerns with the proposal because it is not a true “fix” and, according to Committee members, does not go far enough to foster increased competition.

The basic substance of the DFS proposal is to:

• Reduce the Temporary Increase in Coverage Limits (“TICL”) FHCF layer of risk exposure from $12 billion to $9 billion
• Increase co-insurance from 10 percent to 30 percent
• Reorganize the FHCF under the Florida Cabinet

During the meeting, the Committee members discussed other policy ideas regarding Florida’s property insurance market. Representative Don Brown, Committee Chairman, was concerned with the potential issues because the State has been unable to secure sufficient debt financing to cover its current risk exposure. He noted that recently, the FHCF was unable to secure a requested $7 billion worth of bonds (it could secure $3.5 billion, but with higher-than-expected interest rates). It also was noted as a benchmark that the largest bond issuance in the nation is approximately $11 billion.

The Committee also discussed the prudence of extending the TICL layer of coverage in the FHCF, which is set to expire in 2009. During this discussion, it was noted that the private insurance market may not be able to otherwise purchase this coverage. Therefore, the Legislature may want to consider slowly phasing out the extra layer of FHCF coverage.

During Mr. Carlson’s presentation, it was noted that a major hurricane could cost Florida taxpayers roughly $11,000 to $18,000 annually per insurance policy over thirty years in assessments by the FHCF. This figure does not include potential assessments by Citizens Property Insurance Corporation (“Citizens”) or the Florida Insurance Guarantee Association.

The Committee members requested information on these costs if the assessments were only upon the policies that assumed these risks. Currently, the assessments are statewide and even include assessments on automobile policies.

Next, several business associations discussed the proposal. The Florida Chamber, Associated Industries of Florida, Florida United Business Association, American Insurance Association, Florida Retail Federation and the Association of Insurance Agents spoke favorably about the proposal. Most supported reducing or completely eliminated assessment exposure, especially on commercial properties. Others suggested that the state will always play a role in Florida’s insurance market and the Legislature must find a balance to deal with the risk.

Representative Scott Randolph brought a different perspective to the discussion. He stated that Floridians must pay for storms, whether that cost is on the “front end” through premiums or the “back end” through assessments. He noted that because of the increased FHCF coverage, he is seeing significant savings on his homeowner’s policy. He also spoke in support of a proposal that would limit assessments to those who receive the benefit of the FHCF.

As an aside, Chairman Brown noted that Citizens has collected over $2 billion in surplus and should return those excess “profits” to the Florida taxpayers.

The Committee also discussed company ratings. Some members were concerned that many of the highly-rated companies are withdrawing from the market, thereby leaving lower-rated companies to shoulder more of the risk. Representative Alan Hayes asked about Citizens’ rating. Citizens is not rated.

Chairman Brown called on Ben Watson from the State Board of Administration, Division of Bond Finance to further discuss the bond market. Mr. Watson noted that Florida is in a period of “unprecedented inability to secure financing and uncertainty in the credit market.” Representative Bryan Nelson briefly discussed House Bill 565, a bill that he recently filed, which would distribute funds from the Florida Retirement System to the FHCF.

Chairman Brown provided concluding remarks stating that, “Florida leaders have been running their mouths before engaging their brains.”

As the Committee considers proposals for the 2008 Session, Chairman Brown requested that the members keep in mind the magnitude of potential future assessments, that credit has a consequence and is currently unreliable, and that the FHCF assessments are just.

Several Democratic members of the Committee expressed a need for greater leadership in the Committee leadership to address the real issues faced by Florida in the property insurance arena. Chairman Brown welcomed their input.

Finally, Representative Alan Hayes briefly discussed House Bill 269, which would create the Citizens Mission Review Task Force. This Task Force would be charged with developing policies to return Citizens to its former status as the “insurer of last resort” and foster increased private competition. He also expressed concerns with the Florida Office of Insurance Regulation, particularly that it may have been artificially suppressing insurance rates.

The above is a brief overview of the discussions that took place during the Committee workshop. Should you have questions or comments, please feel free to contact this office.

 

To unsubscribe from this newsletter, please send an email to ccochran@cftlaw.com.