Property and Casualty JUA Board of Governors Meeting 9/06/06

The Board of Governors of the Property and Casualty Joint Underwriting Association (JUA) held a meeting today, September 6, 2006, to address the remaining issues that are subject to negotiation with ICAT Specialty Insurance Company (ICAT) for ICAT to act as a servicing carrier for the JUA and to discuss a few other operational issues.

Initially, Dan Sumner, Executive Director of the JUA, announced that the JUA’s web page on the Office of Insurance Regulation’s (OIR) website now has a list of frequently asked questions and answers for consumers and agents. In addition, personnel from the Division of Workers’ Compensation of the Department of Financial Services will handle incoming calls for the JUA’s telephone hotline which should be established within the next couple days. In the future, this responsibility shall be assumed by personnel from either or both ICAT and/or the Florida Market Assistance Plan.

The substantial portion of the meeting involved discussion of the various agreements and related documents that have been negotiated and prepared for the ICAT program. These documents include the JUA/ICAT Master Agreement and the following attachments: JUA Emergency Rule; Policy Forms; Program Management Agreement; Claims Administration Agreement; Underwriting Guidelines; Servicing Standards; Claims Administration Standards; and Agent Agreement.

The Board had a lengthy discussion about the minimum fees set forth in the Master Agreement payable to ICAT which would apply regardless of policy or premium production. The original ICAT proposal was that the JUA would pay ICAT a 10% policy administration fee and 1% claims administration stand-by fee based on premium volume. In addition, the JUA would be responsible for certain per policy and per claim charges applicable to the business produced and claims adjusted. There would be an offset provision applicable to the claims adjustment stand by fee.

This fee arrangement would be subject to a $100,000 per month minimum fee payable for a six month period. The amount owed to ICAT either based on the minimum fee or commission volume and per policy and per claims charges would be reconciled on a monthly basis. As a result, the minimum fee would be owed for any month in which sufficient regular fees are not produced, even though significant excess volume may have been produced in prior or subsequent months.

During prior negotiations, ICAT proposed another formula for the payment of the minimum fee providing that the Agreement would continue through October 1, 2007, with a minimum fee payable in the amount of $50,000 per month. ICAT further proposed a reconciliation of the minimum fee with the fees actually earned on a quarter-annual basis. ICAT agreed to waive the fee it would otherwise receive for September, 2006. Also, ICAT proposed that it would have the right to cancel the Agreement if the JUA entered an agreement with another insurer to act as a servicing carrier and that any fee schedule applicable to the new servicing carrier would also apply to ICAT, if it results in a greater fee than the current ICAT arrangement.

Also, during these prior negotiations, the JUA staff proposed a fee structure based on a sliding scale tied to premium volume. As the premium volume increases, the percentage of premium payable to ICAT would decrease. This suggestion was rejected by ICAT.

Representatives from ICAT indicated that the minimum fee was necessary to assure that it would recoup its out-of-pocket expenses in connection with the program. They also indicated that the per policy and per claim fees added to the premium volume commissions were standard and that, as a whole, this fee structure is lower than they receive in the private market. Further, they indicated that the minimum fee would assure that their interests are aligned with the JUA which is to take those steps to be an insurer of last resort and to assure that as many policies as possible are placed in the private market.

The Board discussed the fact that at this point with no history and no reliable way of knowing how many policies the JUA will issue, there is no way to determine whether the minimum fee will be an issue or whether the JUA’s premium volume will be sufficient to eclipse the minimum.

The Board discussed a variety of other issues related to the fees, including: (i) ICAT’s possible right to the minimum fee even if they prematurely terminate the Agreement or the Agreement becomes obsolete as a result of action taken by the Legislature; (ii) provision for the reconciliation on an annual basis, rather than on a monthly or quarterly basis, of the fees actually earned by ICAT as compared to minimum fees payable under the Agreement; and, (iii) whether the ICAT fees should be increased if a new servicing carrier is able to negotiate a better deal with the JUA.

Tom Streukens from OIR indicated that they were concerned about the minimum fee obligation especially on a monthly reconciliation basis and preferred a sliding scale formula as previously proposed.

The Board passed several Motions to address different issues related to the ICAT Master Agreement.

A Motion was passed by the Board to accept an Agreement with ICAT as related to the minimum fee issue if the minimum fee is capped at $600,000 based on a reconciliation period that extends to the expiration of the Agreement or to the one year anniversary of the Agreement, whichever occurs first. It was explained that, in essence, the Agreement should provide that the parties will review the fees actually paid to ICAT on an annual basis or the date the Agreement is terminated, if sooner, and compare that to the minimum $600,000 fee. The JUA will owe ICAT the greater of these two figures.

The Board also passed a Motion that it would accept the Agreement with ICAT if: (i) it includes provision that all interest on premium received shall be payable to the JUA; and (ii) the provision in the current draft that ICAT will receive the benefit of any better fee structure that the JUA may negotiate with another servicing carrier is deleted.

Another Motion was passed that the Agreement would be accepted if it provides that any minimum fee payable to ICAT would be prorated based on the length of the Agreement if it is prematurely terminated by ICAT or it becomes impossible to perform (such as because of Legislative changes to the JUA statute) within 180 days after the Agreement commences.

Belinda Miller from OIR indicated that OIR was agreeable with the provisions in the Master Agreement that provided for OIR approval of the program and some of its components so long as it is understood that this would not limit any regulatory authority OIR would have over any other components of the program.

It was clarified that the ICAT arrangement would be non-exclusive and that the JUA could enter arrangements with other carriers for wind or multi-peril programs.

After discussion of various issues related to the Master Agreement, the Board passed a Motion to authorize the Chairman of the Board and Executive Director to negotiate, draft and execute a final Master Agreement with ICAT incorporating the changes proposed by the Board.

It is expected that revisions to the Master Agreement and its exhibits will be exchanged by JUA counsel and ICAT over the next two days and negotiations should be concluded within that time frame. ICAT indicated they want to review all of the proposed changes and withhold comment on whether they are agreeable to the changes. A final decision should be made over the next couple days.

Some modifications to certain Master Agreement exhibits were discussed by the Board.

In the policy forms, language will be added to clarify that ICAT is not a risk bearer and not responsible for claims. Also, language will be added to provide that new properties owned by an insured will not be automatically insured under the policy and will be subject to the JUA qualification guidelines.

As to the Claims Administration Agreement, the Board directed counsel to draft and negotiate language applicable to a certain carry over credit to be applied on a 12 month rolling basis against the amount of the stand by fees payable to ICAT. The final provision in this regard will be reviewed by ICAT along with the other issues raised.

As to the Underwriting Guidelines, an issue was raised as to whether certain exceptions should apply to the standard rule that no insured with multiple properties cumulatively valued over $1 million would be eligible for JUA coverage. It was submitted that some insureds may have one property that is insured by Citizens, but may need coverage for another property that is not eligible for Citizens coverage. The Board has instructed counsel to draft language that will provide that certain exceptions can be submitted to the Risk Underwriting Committee to insure one property even though another property owned by the insured is covered by another residual market.

A Motion was passed by the Board to remove language from the Underwriting Guidelines that would have otherwise delegated some authority to adjust rates for certain risks. The Board’s rationale was that the filed rates should apply.

On another matter unrelated to the ICAT documents, the Board and OIR discussed that there is currently no reliable information as to the premium volume produced by commercial property and casualty carriers with regard to commercial nonresidential coverage. In order to obtain more accurate information on premium volume, the Board passed a Motion to request that OIR issue a data call to commercial property and casualty carriers regarding their premium volume for commercial nonresidential coverage. OIR indicated that they are already working on the issuance of a data call and hopes to send one out soon.

The next meeting of the Board is scheduled for September 28, 2006 at 10:00 am at the Hyatt Regency located at the Orlando Airport. All Board Members have been requested to attend this meeting in person.

We expect to receive confirmation as to the results of the negotiations on the final issues applicable to the ICAT Agreement within the next couple days. We will keep you updated on significant developments with regard to the JUA. In the meantime, if you have any questions, please feel free to contact this office.

Regards,

Fred E. Karlinsky