House Insurance Committee Meeting Report–March 24

On Monday, March 24, 2008, the House Insurance Committee held its second meeting for the purpose of gathering testimony from officials representing the Citizens’ Property Insurance Corporation, Inc. (“Citizens”) and the Florida Office of Insurance Regulation (“OIR”). To view the meeting action packet, click here.

According to the Committee members, the nature of the hearings was to expose Florida’s grim financial situation regarding the potential need for policy assessments in the event of a major storm. The officials from Citizens who testified were CFO Sharon Binnun and Executive Vice President Susanne Murphy. Testifying officials from OIR included General Counsel Steve Parton, Deputy Insurance Commissioner Belinda Miller, and Actuary Robert Lee. All were placed under oath by Chairman Don Brown (R- Defuniak Springs), which is unusual for legislative committee meetings.

Following testimony from Citizens officials and from Steve Parton regarding title insurance, Ms. Miller and Mr. Lee were questioned by the Committee for approximately three hours. Legislators providing the majority of the questions included Chairman Brown, Representative Dennis Ross (R- Lakeland), Representative Alan Hays (R- Umatilla), Representative Bryan Nelson (R- Apopka) and Representative Carl Domino (R- Juno Beach).

The Committee gathered testimony that a large residual market is generally not a healthy market and noted that Citizens is the largest residual market participant in the world.

Chairman Brown spent a significant amount of time inquiring about the OIR’s procedures for approving insurance company rate filings. The Committee discussed and expressed concerns regarding an assessment reduction provision that was offered by Citizens, but not approved by the OIR. The OIR officials noted that they must follow actuarial principles as well as statutory directives, and that the statutes supercede actuarial principles.

Citizens previously-requested 43 percent rate increase had been found by the OIR to be actuarily unsound. Rather, a 25.3 percent increase was suggested by the OIR.

Chairman Brown focused on the Insurance Commissioner’s role in reviewing filings and his deference to his staff. The OIR officials stated that the Commissioner generally follows staff direction regarding rate filings. They also stated that affordability is not discussed, but policyholder considerations are taken into account. Generally, the Commissioner discusses rate filings internally with actuaries, attorneys, and others.

Representative Ross reviewed the three principles of ratemaking:

Rates cannot be:

1) inadequate
2) overly excessive
3) unfairly discriminatory

The OIR officials noted that all three elements are equally important, but Representative Ross suggested that inadequate rates are more problematic than excessive rates.

The Committee also discussed the need to update the OIR’s profit and contingency factor, inasmuch as it has not been addressed since 2004. The OIR officials agreed that the factor needs to be updated, but they have not undertaken the necessary rulemaking procedures at this time.

The Committee further discussed the residual market, noting that OIR seems to be focusing on policy considerations rather than actuarially-sound rates. They were also concerned about the OIR’s practice of capping rates in particular territories. The Committee members opined that the practice of capping rates could be viewed as setting inadequate rates. The OIR officials pointed to the transition statute to justify their practice and noted that there is no policy consideration or percentage point that would trigger a cap.

Representative Domino expressed concerns that under the current system, individuals that do not derive a benefit from Citizens or the Florida Hurricane Catastrophe Fund (“FHCF”) will be asked to subsidize potential future losses. During this discussion, Ms. Miller reviewed the practice of assigning FHCF recovery as a reinsurance mechanism although it is not treated as reinsurance. Currently, a charge for this is not reimbursable, but she noted that it could be in the future.

The Committee also discussed hurricane modeling and the role of the Florida Hurricane Loss Projection Methodology Commission. The OIR officials noted that they had issues with the use of short-term modeling in setting insurance rates. Committee members expressed concerns with the OIR qualifications to review the adequacy of a particular model.

Representative Ross concluded the meeting by reviewing the findings of the hearing. He noted that Citizens is the largest residual market participant, that ratemaking should focus on three principles (adequacy, excessiveness, and discrimination), that the science of actuaries is not exact, and that capping rates results in subsidizations.

Finally, he charged the OIR to testify about the practice of freezing rates before the Senate Banking and Insurance Committee.

 

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