Post Legislative Session Report 05/08/06

The purpose of this report is to provide the status of certain insurance-related legislative matters proposed during the regular 2006 Legislative Session (“Session”), which officially began on March 7, 2006 and ended May 5, 2006. A copy of the final draft of each of these bills is attached.

Below is a summary of significant insurance-related legislation:

: Senate Bill (SB) 1980 passed in the final moments of the 2006 Legislative Session. This bill contains sweeping property insurance reforms, including provisions relating to Citizens Property Insurance Corporation (CPIC), the Florida Hurricane Catastrophe Fund (FHCF), mitigation incentives, and various provisions providing incentives for insures to continue writing business in Florida. The bill also appropriates $715 million to CPIC to off-set deficits.

Specifically, the bill contains a provision allowing limited apportionment companies to purchase reinsurance from the Florida Hurricane Catastrophe Fund up to $10 million at 50 percent rate-on-line for one year, as long as those companies maintain at least 30% of their surplus at risk. The bill also includes limited apportionment companies in CPIC’s assessment base. The bill also contains a 25 percent rapid-cash build-up factor.

An incentive program that provides funding to insurers in the form of surplus notes worth up to $25 million is contained in the bill, as long as the insurer invests an equal amount of capital in the company. The State Board of Administration has the discretion to approve issuance of the surplus notes to an insurer. If an insurer applies for this program after July 1, 2006, the insurer will be limited to a surplus note valued at one-half of the new capital invested in the company.

The bill creates a $250 million mitigation incentive program to encourage homeowners to retrofit their homes. $7.5 million of these funds are specifically designated to go to mobile homes. The program provides a matching grant of up to $5,000 for homes valued at less than $500,000, and provides additional funds for low-income homeowners.

The bill also makes additional changes relating to insurers’ rate approval. Specifically, the bill places the burden on the Office of Insurance Regulation (OIR) to prove that a rate is excessive on a dwelling valued at $1 million or more, and allows “flex-rating” of 5% statewide and 10% per territory for insurers. “Flex rating” may only be used once in a 12 – month period. The bill also requires that the public hurricane model be submitted to the Florida Commission on Hurricane Loss Methodology, but allows OIR to continue using the public model until such time is it deemed inaccurate or unreliable. The bill also allows a presiding officer in a rate hearing to determine if OIR and the consumer advocate were provided with access to the assumptions and factors used in a hurricane model, and allows the presiding officer to make determinations of admissibility of these factors.

The bill also changes the structure and assessment features of CPIC, modifies the basis for CPIC’s rates, and allocates $715 million to CPIC to offset deficits. The bill requires a gradual implementation of establishing rates adequate to cover a 100 – year probable maximum loss for CPIC’s insureds in the High-Risk Account, and requires policies in the Personal Lines Account to be sufficient to cover the purchase of re-insurance and a 100- year probable maximum loss. The bill requires that the public hurricane model be the CPIC benchmark for its rates. Additionally, if OIR determines that no competition exists in a particular county, CPIC is not bound to the “top 20” requirement currently in law.

In regard to CPIC assessments, the bill requires policy holders of non-homestead property be assessed up to 10 percent of premiums if a deficit occurs in any CPIC account. The bill allows all policyholders to be assessed up to 10 percent if the non-homestead assessment is not enough to cure the CPIC deficit. The bill also requires CPIC to keep data on its non-homestead properties for future review by OIR and the Florida Legislature.

In order to encourage depopulation of CPIC, the bill implements a 10-day waiting period for applications submitted to CPIC. If an authorized insurer offers to insure the property, the insured will no longer be eligible for coverage in CPIC. A particularly contentious issue involves a requirement in the bill that insurers writing an all other perils policy on a wind-only policy in CPIC adjust claims resulting from a hurricane, and requires CPIC to report the feasibility of insurers adjusting these claims to the Legislature. Also, although the bill maintains the take-out bonus program at $100 per policy, the bill requires an insurer to keep a policy subject to a take-out bonus for a five year period.

The bill also requires CPIC to implement certain oversight procedures, including requiring the Senate to confirm CPIC’s executive director and requiring CPIC to hire an internal auditor. Additionally, CPIC must competitively bid all contracts over $100,000, and CPIC must also gain board approval for any contracts over $100,000. The bill also prohibits CPIC from hiring outside lobbyists, and prohibits certain CPIC employees from accepting gifts. All CPIC executives will be subject to background checks and prohibits senior managers that were former CPIC employees from representing any entity before CPIC for a period of two years.

Additionally, the bill increases the Florida Insurance Guaranty Association’s assessment authority, specifies that an insurer may issue a check directly to a policyholder for items covered by the policy that are not subject to a security interest by a lien holder, and requires that an insurer issue a direct check to a policyholder for living expenses. The bill also requires the Financial Services Commission to develop standard rules to implement in response to hurricanes, while allowing the Insurance Commissioner to issue emergency rules as well. If an order by the Insurance Commissioner conflicts with the standard rules, the Financial Services Commission must approve it unanimously. Other significant provisions of the bill include prohibiting public adjusters from participating in repairing property he adjusted, provides for studies of the insurability of free-standing structures and for a standard by which a homeowner may evaluate a home’s ability to withstand hurricane winds. The bill also contains provisions relating to the resolution of sinkhole claims, which is discussed in more detail below.

�