House Insurance Committee Meeting Report–March 14

The Florida House of Representative’s Insurance Committee (“Committee”) held a six-and-a-half-hour meeting on March 14, 2008 to analyze several aspects of the Florida insurance market, most notably Citizens Property Insurance Corporation (“Citizens”). 

To view the meeting packet, click here.

Representative Don Brown (R- Defuniak Springs), Committee Chairman, provided opening remarks, noting that the purpose of the meeting was to identify the market’s root problems.  He stated that the Legislature has been focusing incorrectly on symptoms rather than the core issue.  He also identified certain relevant statistics, specifically: 49.5 percent of the nation’s wind risk is in Florida; six out of the 10 most costly hurricanes have occurred in Florida; Florida leads the nation in coastal residential wind exposure (approximately $2 trillion); and 79.3 percent of Florida’s total wind exposure is coastal.  Representative Brown concluded his opening remarks by reviewing the sources of Citizens’ ability to pay claims: premiums, investment income, surplus from prior years, private reinsurance, Florida Hurricane Catastrophe Fund (“FHCF”) reimbursements, and assessments (regular, policyholder surcharges, and emergency).
           
Citizens representatives testified under oath regarding Citizens’ exposure, its claims paying ability, and the risk of assessments from each of its accounts.  The testimony from Citizens comprised approximately five and a half hours of the meeting.  After testifying that Citizens underwrites 21 percent of all Florida homeowner’s insurance policies, Citizens’ Chief Financial Officer, Sharon Binnun, testified that Citizens had approximately $10.5 billion in claims-paying capacity. 

She also discussed Citizens depopulation trends in its personal lines and commercial lines accounts.  Citizens projects depopulating 300,000 personal lines accounts and 55,000 commercial lines accounts in 2008.  However, there has been no depopulation in Citizens’ high-risk account.  She further noted that Citizens is considering purchasing private reinsurance for the first time. 

The Committee members engaged in a lengthy question-and-answer period regarding Citizens’ claims paying ability, likelihood of assessments in the event of a major storm, the state of the financial market, and other general related matters.  

CFO Binnun and John Forney, Citizens’ financial advisor, made a concerted effort to emphasize Citizens’ reliance on the FHCF ability to pay.  Mr. Forney noted that the ability of the FHCF to reimburse Citizens would dramatically reduce the need for potential assessments.  Committee members were very skeptical of the ability of the FHCF to issue the needed bonds (up to approximately $23 billion) if a major storm strikes Florida. 

Mr. Forney acknowledged that the current state of the financial markets could drastically affect the FHCF’s ability to issue bonds after a large event.  At best, the FHCF would have to stagger the bond issuance.  For example, the FHCF could authorize two $8 billion bond issuances if $16 billion were needed.  The testimony also included remarks that Citizens and the FHCF would require assessments if there was not an ability to issue sufficient bonds.  The Committee members characterized this scenario as a “tax” on Florida citizens.

Testimony continued with discussions regarding Citizens’ requested rate increase in 2005.  Citizens requested a 44 percent increase to its high-risk account and the Florida Office of Insurance Regulation (“OIR”) subsequently approved a 25.9 percent increase.  However, due to rate rollbacks and freezes passed by the Legislature in recent years, the 25.9 increase has not been implemented. 

Citizens’ representatives acknowledged that its rates have been inadequate for “quite some time.”  The Committee noted that in this market, there is no incentive for policyholders to leave Citizens for private insurers. 

Representatives from Monroe County (Florida Keys) testified that Citizens’ 2005 rates were not actuarially sound because they were too high.  They noted the strong building codes that are required in Monroe County as evidence for their position.  They also stated that the biggest risk in their area is flood, not wind. 

The Committee members also discussed their concerns that inland policyholders subsidize an unfair portion of coastal properties. 

Finally, Representative Dennis Ross (R- Lakeland) concluded the Citizens’ portion of the meeting by stating that the Committee has taken testimony under oath that is evidence and fact.  A fact unveiled in this testimony is that Citizens’ rates have been, and are “woefully inadequate.”

The remaining hour of the meeting was dedicated to testimony from representatives of the FHCF, Florida Insurance Guarantee Association (“FIGA”), Department of Financial Services (“DFS”), and Dr. David Letson, an economist. 

Jack Nicholson, Senior FHCF Officer, provided testimony before the Committee.  Since many areas of the FHCF were covered during Citizens’ testimony, his presentation was very brief.  Of note, he acknowledged that the ability of the FHCF to issue bonds could be a major problem and the markets are unpredictable at the present time. 

Following Dr. Nicholson’s testimony, FIGA representatives briefly explained their role in the insurance market.  Their primary purpose is to pay covered claims against insolvent insurance companies.  It was noted that these companies are another source of potential assessments.  Next, Martha Arrington, DFS consumer services representative, provided testimony about service requests received by the DFS from Citizens and other insurers.  She stated that the industry average for consumer complaints about their insurance company is .1 percent.  Citizens’ complaint percentage is .14, but is moving towards the industry average.  Finally, Dr. Letson reviewed the economics of a study he performed based on a 1-in-33 year event striking Florida.  He noted that it would result in loss of jobs and revenues.  He concluded by stating that mitigating property is critical to economic stability and survival in the State.     

Chairman Brown concluded the meeting and stated that another similar meeting will be convened, as early as the week of March 17-21.  At that meeting, the OIR will be called to testify under oath. 

 

Should you have any questions, please feel free to contact this office. 

 

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