United States: Florida Legislature To Consider A Broad Range Of Responses To A Worsening Property Insurance Crisis

Last Updated: March 19 2009
Article by Leonard E. Schulte

The Florida Legislature is poised to consider a wide variety of property insurance legislation during its regular legislative session, which convened on March 3, 2009. Proposals before the Legislature reflect divergent philosophies and approaches, ranging from a dramatic increase in the regulatory power of the Florida Office of Insurance Regulation (OIR), to an increased role for market-driven decisions, to a state takeover of all residential hurricane risk.


The global financial meltdown and several Florida-specific circumstances have made legislative action to address Florida's ongoing property insurance crisis a virtual certainty during the 60-day regular legislative session that began on March 3, 2009. Factors that will drive legislative action include:

  • Shortfalls in the Florida Hurricane Catastrophe Fund (FHCF). The FHCF's ability to honor its promise to provide up to $29 billion in hurricane reinsurance for Florida residential property insurers depends on its ability to access credit markets. Because of current credit market constraints, the FHCF currently anticipates that its total resources for the 2009 hurricane season would be limited to $10.6 billion, leaving a potential shortfall of $18.4 billion. Insurers are required to participate in the $17 billion "basic" layer of FHCF coverage. While participation in the additional temporary increase in coverage limits (TICL) layer of FHCF coverage is optional, insurers' rate filings may not include reinsurance costs that duplicate FHCF coverages.1
  • Reactions of rating agencies to the FHCF shortfall. Both A. M. Best Co. and Demotech, Inc., have announced that the FHCF shortfall could impact their ratings of Florida property insurers.2
  • The withdrawal of major insurers from the Florida property insurance market. State Farm Florida Insurance Co., which writes approximately 1.2 million property insurance policies in the state, announced a two-year plan to withdraw from the Florida market on January 27, 2009. The OIR issued an order conditionally approving the withdrawal on February 13, 2009. Encompass Floridian Insurance Co. and Encompass Floridian Indemnity Co., two members of the Allstate Insurance Group, have recently announced their intent to withdraw from the homeowners' multiperil and inland marine markets in Florida.
  • Citizens Property Insurance Corporation (CPIC) rate issues. CPIC, the state-created property insurer of last resort, is the largest writer of property insurance in Florida and one of the top 10 homeowners' insurers in the nation by market share. Legislative action in 2007 froze CPIC's rates at 2005 levels. Current law requires that CPIC make an "actuarially sound" rate filing to take effect on January 1, 2010, and annually thereafter.3 A statutorily created task force recently recommended that CPIC's rates could achieve actuarial soundness over time if they were increased by 10 percent a year for each of the next three years.4 CPIC's financial resources are limited to the premiums it charges its policyholders and debt backed by assessments on all property and casualty insurance premiums in Florida other than workers' compensation and medical malpractice premiums.

Proposal: State Takeover of the Hurricane Risk

The people of Florida are already responsible for a substantial portion of the state's potential hurricane losses through the FHCF and CPIC. Two bills, HB 1157 and SB 2384,5 have been filed that would make the state the insurer for residential hurricane losses.

Creation of the program. The legislation would establish the Florida Hurricane Protection Program (FHPP) within the FHCF. The FHPP would function as a direct insurer of residential properties for hurricane losses. Its policies would be administered by the licensed insurers that provide personal lines and commercial lines of residential coverage for non-hurricane perils. The program would be administered by the State Board of Administration (SBA), which consists of the governor, the state chief financial officer, and the state attorney general.

The bills include legislative findings stating that:

  • The regulatory, financial, and insurance mechanisms employed since Hurricane Andrew have failed to meet Florida's goals of available, affordable, residential property insurance
  • The failure burdens the state's economy; that the inability of the FHCF to meet its obligations to insurers threatens insurer solvency
  • CPIC remains unacceptably large despite depopulation efforts
  • The state's failure to resolve the hurricane insurance problem may mean that hurricanes are an uninsurable peril within the traditional insurance system
  • FHPP serves a compelling state interest in maintaining a property insurance market and is necessary to abate a significant threat to the state's economy

Plan of operation and coverages. The SBA would adopt a plan of operation for FHPP. In general, the plan would specify forms for contracts between participating insurers and FHPP, underwriting standards, mitigation discounts, standards for cancellations and nonrenewals, recordkeeping requirements, and coverage requirements and limitations.

The program would issue a policy providing hurricane coverage to each personal lines residential risk and each commercial lines residential risk covered by any insurer holding a certificate of authority to write property insurance (participating insurer), except that it will not be required to issue a policy to a risk that does not meet FHPP underwriting standards.

The coverage provided under FHPP policies will include structure, contents, additional living expenses, emergency debris removal, and temporary repairs, subject to certain specified limitations and requirements, including the following:

  • Policies would include a deductible equal to two percent of the structure's (Coverage A) insured value, but FHPP also would make five-percent and 10-percent deductibles available.
  • The structure coverage (Coverage A) limit for the FHPP policy would be the same as the Coverage A limit of the underlying property insurance policy. However, for properties valued at more than $2 million, structure coverage would be limited to $2 million, and other coverages would have limits consistent with the $2 million structure limit.
  • No coverage would be provided for swimming pool enclosures, patio enclosures, patio covers, or awnings. No coverage would be provided for fences, outbuildings, or other detached structures, but the policyholder would be able to buy replacement cost coverage for outbuildings or other permanently affixed detached structures, up to an insured value of $100,000, for an appropriate premium.
  • Properties would be eligible for coverage under the program only if they maintain a National Flood Insurance Program flood policy or similar flood insurance coverage, if such coverage is available.

Participating insurers. The plan of operation would provide a schedule of fees to be paid by FHPP for administrative costs and expenses incurred by participating insurers, including policy servicing and loss adjustment expenses, and would provide fees to be paid to participating insurers for acquisition costs, without affecting the insurer's ability to determine the commission or other compensation to be paid to agents. The plan also would provide for reimbursement of actual costs not covered by the fee schedule.

Each insurer holding a certificate of authority to write residential property insurance (including CPIC) would enter into a contract with FHPP under which FHPP would agree to provide hurricane coverage to each residential insured for which the participating insurer provides a policy covering other perils, and under which the participating insurer agrees to administer the FHPP in compliance with standards and requirements established by FHPP. The requirement to provide a FHPP policy would not apply with respect to ineligible properties or properties for which the owner has exercised the option to exclude hurricane coverage.

The contract would require the participating insurer to collect premiums and apply the deductibles, discounts, credits, surcharges, and limits established by FHPP. The participating insurer also would be required to provide application processing, premium processing, claims processing, and adjusting services. The participating insurer would provide claims payments to FHPP insureds, drawn on an account established and funded by FHPP. The contract between the FHPP and the insurer also would establish that the participating insurer has a fiduciary duty to fairly adjust claims and allocate losses between the non-hurricane perils covered by the participating insurer and the hurricane peril covered by FHPP. An audit process would verify compliance.

A participating insurer could make supplementary coverage available to its insureds, but a participating insurer could not make available to its residential property insureds any coverage that is the same as or similar to coverage provided by FHPP.

Rates. Each year, the SBA would submit a rate plan for FHPP policies to the OIR, after receiving recommendations from an independent consultant. Rates would be required to be as close as possible to actuarially indicated rates, taking into account the need for affordability and the cost of reinsurance. The legislation would establishes a floor for FHPP rates by requiring that the rates generate revenue at least equal to the statewide average annual insured hurricane loss plus expenses. Each year, the SBA will adopt a rate plan and submit it to the OIR for review and approval. The rate plan would remain in effect until a subsequent plan is adopted.

Reinsurance. The FHPP would be required to have the resources to cover all losses and expenses attributable to a one-in-100 year seasonal probable maximum loss (PML), relying on a combination of cash, debt, appropriated state funds or federal funding, if any, and reinsurance. The FHPP would calculate its projected fund balance and the maximum amount of funding it could be expected to obtain through bonding and other debt and through federal funding, taking into account both the amount of revenue that can be generated from assessments and the actual capacity of the credit markets to absorb FHPP's debt. The FHPP would then subtract the results of these calculations from its one-in-100 year PML to determine its minimum reinsurance needs, and it would be required to procure at least that amount of reinsurance. The FHPP also would have the option of procuring reinsurance to reduce its assessment potential or to transfer a portion of its risk in excess of the one-in-100 year PML.

Bonding. In general, the FHPP would be able to rely on debt in the same manner as currently provided in the FHCF law. The FHPP also would be able to rely on emergency assessments under the same process as is currently provided for the FHCF, but with different restrictions on the types of insurance premiums subject to assessment and different caps on the assessments.

Beginning June 1, 2011, when the SBA determines that other resources are insufficient to fund the FHCF's revenue bonds, debt service, and other obligations, the SBA would be able to order the levy of emergency assessments on all personal lines and commercial property insurance policies. Assessments, which could continue until the debt is retired, would be capped at 10 percent of premium with respect to an FHCF deficit incurred in any year, and there would be no cap on the total amount of assessments that may be levied to address multiple years' deficits. (Current law applies FHCF emergency assessments to all property and casualty insurance premiums except for workers' compensation and medical malpractice, and caps assessments at six percent with respect to any one year's deficit and 10 percent with respect to multiple years' deficits.)

Transition. The legislation provides a one-year transition period, beginning March 1, 2010, during which a participating insurer would continue to provide hurricane coverage to a policyholder until the renewal date of the policy, at which time the hurricane coverage would be replaced with a FHPP policy. During the transition period, a participating insurer would continue to be eligible for an FHCF reimbursement contract to the extent that it still has policies in force that are eligible for FHCF coverage. After the transition year, the FHCF would no longer issue reimbursement contracts to insurers. Renewal notices would be required to include a statement, in a form specified by the SBA, to the effect that as of the renewal date, hurricane coverage will be provided under a FHPP policy and the participating insurer will continue to insure the property for other perils.

The bills express legislative intent that, after the FHPP has sufficient experience with residential hurricane coverage, the program be expanded to nonresidential properties valued at $2 million or less, contingent on evidence that the expansion is feasible and needed. The SBA would provide a report to the Legislature no later than December 31, 2012, analyzing the feasibility of and need for such an expansion of the program.

The bills also contain provisions limiting coverage under the TICL layer of the FHCF and limiting sinkhole coverage in specified counties.

Proposal: Increased Regulatory Power

Legislation enacted in 20086 included several provisions affecting the insurance regulatory process that were supported by insurers, including provisions for transparency in the rate review process and provisions that increased the powers of administrative law judges (ALJ) in reviewing OIR decisions on rates. In an apparent response to the 2008 legislation, SB 1820 dramatically changes the balance of power between the regulator and insurers. The bill also includes several provisions that are not limited to property insurers. Some of the more significant provisions of the bill are as follows:

Trade secrets. SB 1820 includes new language relating to "abuse of trade secret protection." A person who submits information marked as a trade secret to the insurance regulator could be liable for fines, attorney's fees, and costs if a court or administrative tribunal determines that the information is not a trade secret. The new provision does not explicitly require that the incorrect designation be knowing or intentional.

Property insurance nonrenewals. The bill would prohibit an insurer from nonrenewing more than two percent of its residential property insurance policies in any calendar year.

Administrative proceedings related to rate filings. SB 1820 would repeal a statutory provision enacted in 20087relating to administrative review of OIR actions on rate filings. The 2008 provision allowed the ALJ to issue a recommended order that modifies the rate filing, rather than merely approving or rejecting the rate filing. It also specified that certain findings of an ALJ (whether factors in a rate filing are consistent with reasonable actuarial judgment, whether the underwriting profit and contingency factor is reasonable or excessive, and whether the cost of reinsurance is reasonable or excessive) are findings of fact. The 2008 statute also required an appellate court to set aside a final order of OIR when the regulator substituted its findings of fact for the ALJ's findings of fact.

Ratemaking. The bill would restrict a residential property insurer's acquisition expenses and general expenses to 20 percent of premium. It also would restrict a residential property insurer's reinsurance costs by providing that annual expected recoveries must be at least 20 percent of the reinsurance premium, in the case of a transaction with an unaffiliated company, or 40 percent of the reinsurance premium, in the case of an affiliated company. The bill also would require that a rate filing for property insurance include a statement under oath from the insurer's chief executive officer (CEO) or chief financial officer (CFO) and from the insurer's chief actuary that the filing complies with all applicable laws and rules.

Attorney-client privilege. The 2008 legislation limited OIR's ability to rely on attorney-client privilege by applying the principles of Florida's public records and open meetings laws. These principles, in effect, allow government agencies to rely on attorney-client confidentiality only with respect to communications directly related to civil or criminal proceedings or adversarial administrative proceedings. SB 1820 limits this provision to circumstances when the principle can be applied "without providing the insurers an unfair advantage," and when an insurer agrees to waive its attorney-client and work product privileges.

Florida Commission on Hurricane Loss Projection Methodology. Currently, hurricane loss projection models used in rate filings are subject to review by the Florida Commission on Hurricane Loss Projection Methodology. The commission is a panel of experts, including several government officials serving in an ex-officio voting capacity and several state university faculty members from specified disciplines. SB 1820 would replace these designated officials with five members appointed by the governor and four members appointed by the state chief financial officer, subject only to the requirement that a member "not be a person who may profit personally or professionally from the work product of the commission."

Motor vehicle insurance. The bill provides that a motor vehicle insurance rate filing seeking a rate increase must be made on a prior approval basis.

Citizens Property Insurance Corp. The bill prohibits CPIC from issuing a new windstorm-only policy after July 1, 2009. Currently, CPIC issues approximately 400,000 windstorm-only policies in a designated high-risk area, and policyholders obtain coverage excluding windstorm either from CPIC or from other insurers.

Residual market assessment recoupment. The bill includes detailed rate filing requirements for insurers' recoupment of assessments levied to cover residual market deficits.

Proposal: Nonassessable, Non-rate-regulated Policies

Another proposal, HB 1171 and SB 2036, takes a different approach, allowing consumers to choose between regulated rates and potential assessment liabilities on the one hand, and unregulated rates and freedom from assessment liability on the other. Under these bills, insurers would be able to offer residential policies that are not subject to assessment by the FHCF or CPIC. These nonassessable policies would not be subject to rate regulation for excessiveness, but the OIR would still have the power to reject a rate that was inadequate.

Proposal: "Glide Path" to a Smaller Catastrophe Fund and Higher CPIC Rates

As noted above, the FHCF's commitments appear to exceed its resources, and a state task force has recognized that the currently frozen CPIC rates are not actuarially sound. Many legislators, however, recognize that an immediate replacement of CPIC coverage with private reinsurance and an immediate shift to actuarially sound rates for CPIC would result in a "sticker shock" for many consumers that might be politically unacceptable. One approach under consideration would create a glide path to bring FHCF coverage closer to its ability to pay and CPIC rates closer to actuarial soundness over a period of years.

Under current law, the FHCF's $12 billion TICL layer will not be available after May 31, 2010. HB 1495 continues the TICL layer and provides for its phase-out over a six-year period. Currently, an insurer's TICL coverage is equal to 90 percent of covered losses (except for a very small number of insurers that select a 45-percent coverage level for both their basic FHCF coverage and their TICL coverage). Under the bill, the TICL would cover 75 percent of losses in the 2010 – 2011 contract year, 65 percent in 2011 – 2012, 55 percent in 2012 – 2013, 45 percent in 2013 – 2014, 30 percent in 2014 – 2015 (eliminating the 45-percent option), and 15 percent in 2015 – 2016, which would be the last year in which TICL would be available. Another proposal, HB 437, would reduce the TICL coverage level to 70 percent for the 2009 – 2010 coverage year and allow TICL to expire after that time.

HB 1495 addresses the problem of rate inadequacy in CPIC by requiring CPIC to implement a statewide average rate increase that does not exceed 10 percent each year (and does not exceed 15 percent in any rating territory or result in a premium increase of more than 20 percent for any policyholder) until its rates are actuarially sound. The bill also specifies that an actuarially sound rate is one that generates sufficient revenue to cover expected losses, plus a capital charge of 15 percent.

Proposal: Continue the CPIC Rate Freeze

SB 862 and HB 1273 provide an alternative to the glide path for CPIC rates. Under these bills, the requirement that CPIC implement actuarially sound rates would be delayed by one year, to January 1, 2011, and the current rate freeze would remain in place until that time.


1 FHCF staff testimony before the Florida Senate Ways and Means Committee, February 9, 2009.

2 See "Global Credit Crisis Threatens Florida Catastrophe Fund" in Insurance Industry Developments for Winter 2008, available online at http://www.foley.com/publications/pub_detail.aspx?pubid=5494.

3 See § 627.351(6)(m), Florida Statutes.

4 Citizens Property Insurance Corporation Mission Review Task Force Final Report, January 30, 2009, available online at https://www.citizensfla.com/about/mrtf.cfm?show=pdf&link=/shared/mrtf/ComprehensiveFinalReport.pdf .

5 These bills, and the other bills referred to in this report, are available online from the Web sites of the Florida House of Representatives, www.myfloridahouse.gov, and the Florida Senate, www.flsenate.gov.

6 Chapter 2008-66, Laws of Florida.

7 § 627.0612, Florida Statutes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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