Reviewing Florida’s Reinspection Program

As everyone dealing with the Florida residential and commercial residential windstorm insurance market is aware, an increased level of underwriting scrutiny is presently being focused on the validity and appropriateness of windstorm mitigation credits. This is understandable, as the aggregate value of these credits now registers in the billions of dollars annually.

When they are accurate and warranted, windstorm mitigation credits reward homeowners who have demonstrably addressed the risks that windstorms can pose to their lives and property. Most of us in the industry believe that rewarding this behavior contributes to a healthier and more stable property insurance market in Florida.

However, when they are inaccurate or unwarranted, these same windstorm mitigation credits produce a raft of undesirable consequences. They reward policyholders who have not hardened their homes, updated their roofs, or protected all their openings, giving them the same discounts on their premiums as those who have. While not intended for such a purpose, they also may impart a false sense of security to policyholders, leading them to conclude that they are safer than they actually are. Finally, such situations can cause havoc with the “secondary characteristics” data that are an increasingly important tool for intelligent management decisions at the carrier and reinsurance levels. As carriers attempt to appropriately manage risk, obtain reinsurance and understand their probable maximum loss, inaccurate mitigation credit data can poison the process.

In short, these unwarranted mitigation credits undermine the very incentives they were designed to promote, among other unwanted side effects.

What Is Being Done?
In my September 2009 article, I argued that there were several tangible steps regulators and carriers could take to ensure the accuracy of their windstorm mitigation credits. I am pleased to report that many improvements have been made in the intervening period. On the regulatory side, these included improvements to the relevant statute (S627.711) to ensure that those committing fraud could be held clearly accountable for their actions.

At the Office of Insurance Regulation (OIR), positive changes to the Uniform Mitigation Verification Inspection Form OIR-B1-1802 were made. Among other items, these changes prohibited delegation of the inspection to an anonymous inspector and required clear photographs to substantiate each warranted mitigation credit.

On the carrier side, I recommended the promotion of reputable inspection vendors, referral for prosecution of those committing fraud, and a program of targeted reinspections of existing and new business to ensure that mitigation credits are warranted when they are applied.

With many carriers at that time obtaining initial data confirming both the problem’s existence and how it could be fixed, reinspection programs began in earnest. These programs have ensured that quality of existing data has improved and that new data entering the system is superior to what was being received in the past.

What Have We Learned?
If we were in the first inning of the correction ballgame 2 years ago, we are now probably entering the fourth inning. In the more than 2 years that have passed since these programs began, thousands of homes have been reinspected by no fewer than 20 carriers at their own expense. Don Meyler Inspections, in programs conducted for 15 carriers, has completed more than 50,000 of these inspections.

While results can vary significantly from carrier to carrier, in all cases the new inspections provided a valuable, detailed photographic look inside the attic and of other key construction features of the home. These reinspections are sometimes combined with additional gathering of supplementary underwriting data to significantly enhance the carrier’s knowledge of what is on its books. From this data, several general observations can be made.

As far as the windstorm mitigation credits are concerned, they can be reasonably broken into three roughly equal groups. In our experience—which is broadly consistent with other publicly available information—approximately one-third of the reinspections performed come back clean; that is, without a meaningful difference in warranted mitigation credits.

Another third of the inspection results tend to show some sort of difference in credits, but are generally not dramatic in nature. These changes can be attributed to a variety of factors, such as a lack of proper documentation for a roof or a shutter system, a small (and correctable) number of unprotected openings that may have been overlooked previously, or the result of changes made to the mitigation verification inspection forms over the years. These types of changes could result in the addition of a valid credit or the removal of an unwarranted credit, or a combination of several changes. It is within this group that the reinspection process is most likely to result in homeowners taking steps to properly harden their homes, thereby achieving a warranted credit where an unwarranted credit had been previously given. In these cases, the policyholder ends up maintaining a credit though proper remediation, and the carrier now has proof that the home is truly protected to the standard listed on the inspection form—a satisfying outcome all around.

It is in the final third of the reinspections where the heavy clean-up work is being done. These inspections uncover multiple credits that were unwarranted, sometimes as many as five or six on a single home. In many of these cases, the accurate inspection result is so different from the original that it is impossible, from our perspective, to ascertain whether or not the original inspection was ever physically conducted. It is in these cases that we are reminded of the importance of obtaining accurate data, allowing the true picture of the structure’s mitigation features to be observed prior to the policy renewal process.

Another lesson learned is that customer service can make a big difference in determining whether there will be any negative side effects to a particular reinspection program. Significant resources are required at the carrier or the inspection company level to make every effort to patiently explain to each policyholder or agent both the need for these inspections and the inspection results themselves. This is essential if the carrier wishes to correct the problems while simultaneously minimizing any marketing disruptions and preserving agency relationships cultivated over many years.

It is paramount that the policyholder and agent be satisfied to the greatest possible extent that each step of the reinspection process is fair and transparent. This is especially true when the end result of the process may be the removal of one or more unwarranted credits that may have been in place for many years. An excellent, accurate reinspection report can be undermined by poor communication or customer service, and this can lead to unnecessary and often avoidable conflict.

From our perspective, a careful approach also includes: 1) using only properly trained and actively licensed and insured general contractors, architects, or professional engineers to physically perform each inspection; 2) requiring that the result of each full windstorm inspection pass through a rigorous quality control process and include a Uniform Mitigation Verification Inspection Form OIR-B1-1802 that, along with the supporting captions and photographs, can be shared with the agent and policyholder alike; 3) conducting reinspections pursuant to the policy renewal process (or during the first 90 days in the case of new business), and never mid-stream; 4) utilizing vendors who possess centralized scheduling, quality control and customer service departments, as opposed to relying on the individual inspectors to provide all of these service components themselves, and 5) ensuring that all parties understand that the company producing the inspection would conduct exactly the same windstorm mitigation inspection process whether the inspection happened to be paid for by the policyholder or by the carrier. We believe history has shown that carriers following these guidelines will be the most successful at navigating the pitfalls that can arise as these inspections are conducted.

What’s Next?
The carriers that have survived the past 6 years in Florida have not had to deal with a major hurricane since Wilma. They have, however, faced an extraordinary array of headwinds in nearly every facet of their business, including the insurance premium rate freeze, the sporadic availability and affordability of reinsurance, an unprecedented volume of Wilma claims 4 and 5 years after the storm, the recent sinkhole phenomenon, and, of course, unwarranted windstorm mitigation credits. It will indeed be unfortunate if the last of this daunting list of challenges is not addressed by each carrier prior to the next major storm.

While it will likely take several more years to completely clean up the shortcomings of past years and the erroneous data remaining on carriers’ books, we believe the windstorm mitigation inspection business is now moving in the right direction, and toward greater accuracy and more accountability.

Find this article here:  http://www.propertycasualty360.com/2011/09/01/reviewing-floridas-reinspection-program?page=3