Property and Casualty Insurance Reform Committee Meeting 9/09/06

The Property and Casualty Insurance Reform Committee met on Thursday, September 7, 2006, to continue discussions with regard to the current instability in Florida’s insurance market. The Committee heard from industry executives as well as Insurance Commissioner Kevin McCarty and Jack Nicholson, PhD., Senior Officer of the Florida Hurricane Catastrophe Fund (CAT Fund).

The Committee continued its discussion from its last meeting addressing the issue of hurricane mitigation and credits. It was recognized that there are problems with insureds understanding the impact mitigation may have upon insurance premiums, the diversity of the impact from company to company, and the possible need to standardize mitigation forms to be completed by the insureds at the point of sale. Against some industry opposition, the Committee considered recommending the standardization of the discounts available upon certain mitigation efforts by insureds or, at least, providing a range of mitigation discounts that would apply.

The Committee also considered whether it would be advisable to permit insureds to buy down the amount of the deductible that would apply in the event of a loss based upon certain mitigation efforts. In essence, rather than give the insured a credit, the insured would have a lower deductible in the event of a loss.

The Committee discussed the adoption of a standardized rating system that would provide for certain credits based upon qualified inspections that would confirm the overall strength of the structure to withstand hurricane force winds. This would replace or supplement the use of mitigation credits on an “ad hoc” basis. The industry representatives indicated that they would favor such a system depending on the definitions in the rating scores and appropriate actuarial justification for the rating scores.

The continuation of state funding to match homeowners’ mitigation expense up to a certain limit was reviewed. The Legislature allocated $250 million to provide matching contributions to homeowners for mitigation expense incurred to retrofit homes. To date, approximately 32,000 applications have been filed and home inspections are now being done. A key issue is whether these mitigation efforts will be considered favorably by the reinsurers and accounted for by the modelers in developing probable maximum loss analyses. Several within the industry indicated that the reinsurers are looking to see what mitigation efforts are being undertaken and they would treat such efforts favorably, depending upon the modeling outcomes applicable to any particular portfolio. The Committee views this as a key in that efforts and allocations must be directed to assure that the reinsurance costs and ultimately the insured’s premiums will be reduced.

The Committee appears to be favorably disposed to recommend: (i) the standardization of mitigation forms that would be used for policyholders to receive mitigation credit; (ii) the standardization of the mitigation credits that would apply or at least the mandating of a range within which credits must apply for retrofitting of homes; (iii) the allocation of additional funding for the state’s matching mitigation program; (iv) the establishment of a private, non-profit fund for private donations to the mitigation program; and (v) the overall promotion of a verifiable, actuarially sound mitigation program that will ultimately result in lower premiums.

The Committee discussed the exemption in a portion of the Florida panhandle from the requirements of the Building Code. This limits the wind-borne debris regions in portions of the Florida panhandle to only one mile from the coast. It appears that the Commission will recommend full compliance with the Building Code throughout all of the state and the repeal of the panhandle exemption. They may also recommend that there be no exceptions to the Code requirements.

The Committee heard from Mr. Nicholson of the CAT Fund. He indicated that the CAT Fund rates are 4 to 5 times lower than the private market. He suggested that if the CAT Fund is expanded, it must be done into areas where the private market is not available or has failed. This would be at or below the layer of reinsurance coverage currently available through the CAT Fund. The CAT Fund’s aggregate industry-wide retention is expected to be about $6 billion in 2007 with an aggregate limit of approximately $16 billion. The Committee discussed and seemed favorably disposed to recommend the maintenance of the current retention and limit for the CAT Fund, but temporarily allow insurers, if they choose, to purchase coverage from the CAT Fund with a lower retention at “near market prices.” Companies would have the option to purchase this lower retention coverage, but would not be required to do so. Pricing would be below market prices, but close. This “near market pricing” would have to be at a level that is not so low so as to price others out of the market. This pricing mechanism may be justified since the CAT Fund has cost and tax advantages not enjoyed by the private reinsurance market. However, there would be additional exposure to assessments. Some Committee members emphasized the need to assure that this initiative, in combination with other initiatives, must be properly budgeted in order to assure they do not impair the state’s financial stability.

The Committee also briefly discussed allocating additional money into the Build-Up Incentive Program which would provide more money to insurers that contribute additional capital into the Florida market. Further, the Committee considered if there would be any advantages to changing the commencement date of the CAT Fund’s coverage year. There appears to be little sentiment or justification for doing so.

Commissioner McCarty reported to the Committee that the Office of Insurance Regulation (OIR) is reviewing several options to increase reinsurance capacity in the Florida market, such as “side cars,” “special purpose vehicles,” protected cells, and the liberalization of Florida’s captive insurer laws. In addition, Commissioner McCarty indicated that he and his staff are continuing efforts to advocate for the establishment of a National Catastrophe Program. Finally, he stated that OIR is reviewing, both locally and at the NAIC level, the collateralization requirements and credit for reinsurance rules currently applicable and considering methods to modernize these rules in a way to increase the flow of capital into the state.

The Commission considered the crisis in the commercial property insurance market which has severely impacted the availability and affordability of insurance in this segment of the market. Reinsurance for this segment is different from an underwriting point of view and the risks are too diverse for the CAT Fund. Mitigation is also more costly and very difficult. There is a concentrated risk for commercial buildings and there is some thought that reinsurers do not have enough data in order to properly rate the risks. As a result, it has been much more difficult to obtain standard quota share reinsurance and facultative reinsurance is often the only option.

OIR indicated that it considered various options and decided to reactivate the Property and Casualty Joint Underwriting Association (PCJUA). The PCJUA should begin to underwrite policies soon and it was suggested by OIR that the Committee should review the results of the PCJUA’s performance before deciding on a course of action. The Committee did not indicate how it will proceed with regard to this problem.

The next Committee meeting is scheduled for September 21, 2006 at Florida International University in Miami. We will provide a report on this meeting. In the meantime, if you have any questions or comments, please feel free to contact this office.

Regards,

Rich Fidei