United States: Florida Legislative Leaders Propose Major Property Insurance Changes

On February 13, 2006, three weeks before the start of the 2006 Florida legislative session, leaders of the state House of Representatives announced a proposal, PCB IN 06-01 ("the bill")¹, that restructures the residual market, provides additional revenue for the Florida Hurricane Catastrophe Fund ("Cat Fund"), creates incentives for hurricane-related retrofits of homes, and adds regulatory reforms.

Florida’s property insurance market has been in a state of turmoil ever since Hurricane Andrew struck the state in 1992. Legislative attempts to maintain insurance availability and affordability have included expansion of the residual market, creation of a catastrophe fund, and a series of changes to the Insurance Code affecting rates, coverages, and claims handling.² The problem has escalated recently, as a result of the unprecedented 2004 and 2005 hurricane seasons.

Residential property insurers sustained more than $24 billion in losses from the eight hurricanes that affected Florida in 2004 and 2005.³ The residual market, known as Citizens Property Insurance Corp. ("Citizens"), ended 2005 with more than 810,000 policies in force, representing a total insured value of $210.6 billion.⁴ Citizens, which writes full homeowners’ policies in most of Florida and windstorm-only policies in specified coastal areas, sustained losses sufficient to create a $515.5 million deficit from the 2004 storms and a $1.4 billion deficit from the 2005 storms.⁵ Citizens has levied an assessment on all Florida property insurers to cover the 2004 deficit, and it is likely to levy another assessment to cover the 2005 deficit. The Cat Fund, which provides a form of reinsurance to residential property insurers, sustained losses of $3.7 billion from the 2004 season and estimates its 2005 losses to be $3.1 billion, with the result that the fund will have a zero balance or a small deficit at the start of its 2006 contract year.⁶ This combination of losses, deficits, and assessments has increased the pressure on elected officials to attempt once again to fix a troubled property insurance market.

PCB IN 06-01 proposes the first major restructuring of Citizens since it was formed in 2002. Currently, Citizens’ business is divided into three accounts: a personal lines account that writes homeowners’ and similar coverages, a commercial lines account that writes commercial residential coverage, and a high-risk account that writes wind-only policies in coastal areas and is currently responsible for half of Citizens’ policies and two-thirds of its exposure. A deficit in any of the three accounts may trigger the levying of an assessment on all Florida property insurers, which the insurers may pass through to policyholders.⁷

The bill adds a fourth, non-subsidized, account covering non-homestead property (i.e., property that is not the permanent residence of its owner) and limits the existing accounts to homestead property. Under the bill, deficits in the homestead accounts are to be defrayed through assessments on all property insurers, as under current law, but insurers are to be held harmless from assessments to cover deficits in the non-homestead account. When a deficit arises in the non-homestead account, policies in the account are subject to an immediate assessment of up to 100% of premium and a subsequent 100% assessment upon renewal.

In an effort to prevent deficits, PCB IN 06-01 defines rate adequacy for Citizens in terms of Citizens’ probable maximum loss. For the homestead accounts, rates are inadequate if they are not sufficient to generate the funding (through cash flow, investment earnings, Cat Fund coverage, and private reinsurance) to cover the 50-year probable maximum loss. For the nonhomestead account, rates are inadequate if they are not sufficient to cover the 250-year probable maximum loss.

The bill also makes single family residences valued at $1 million or more ineligible for Citizens coverage.

The bill makes several other changes to Citizens, including a requirement that, when Citizens provides windstorm coverage for a property, the insurer covering the property for other perils must provide all policy servicing and claims functions on behalf of Citizens.

PCB IN 06-01 makes several changes to Florida’s rate regulation process for property insurance. The bill creates "flex band" rating for personal lines residential coverage. Under this approach, a filed rate may not be found to be excessive if it represents no more than a 10% statewide average change from the then-current lawful rate and no more than a 25% change in any one rating territory. The power of the Florida Office of Insurance Regulation to disapprove a rate for inadequacy or for use of unfairly discriminatory factors is retained.

The use of hurricane loss projection models has been controversial in Florida, and nationally, for some time. In 1995, Florida created the Florida Commission on Hurricane Loss Projection Methodology⁸ to evaluate hurricane models, and in 2005, an amendment to the methodology commission law required insurers that use models to disclose to regulators the assumptions and factors used in developing the models.⁹ PCB IN 06-01 limits the use of this information and specifically provides that the Office of Insurance Regulation and the Consumer Advocate may not pose any questions that duplicate or compromise the conclusions of the methodology commission relating to the accuracy or reliability of a particular hurricane model.

The bill addresses rate regulation for properties valued at $1 million or more that have been rendered ineligible for Citizens’ coverage. As to these properties, the bill provides circumstances in which the rating law will not apply.

The bill revises Cat Fund ratemaking standards. Current law requires the Cat Fund to charge the "actuarially indicated" premium,¹⁰ which, in practice, has reflected the anticipated annualized payout from the fund. Under the bill, the "actuarially indicated" premium will consist of the anticipated annualized payout from the fund, plus an "appropriate" risk load determined by the fund’s governing board. The risk load is required to equal or exceed 25% of the anticipated annualized payout.

PCB IN 06-01 creates a $100 million endowment, to be known as the Florida Hurricane Loss Prevention Endowment. At least 80% of the endowment’s earnings are to be used to fund interest-free loans to homeowners that could be used only to make the home more hurricane-resistant. The remainder of the endowment’s earnings may be used for matching-fund grants to local governments and nonprofit organizations.

The bill provides a property tax exemption for hurricane-related improvements to homestead property. The assessed valuation of a property could not be increased as a result of the addition of storm shutters, impact-resistant glazing, hurricane clips or straps, or emergency generators.¹¹

The bill also repeals a provision that exempted parts of the Florida Panhandle from the wind-resistance standards of the Florida Building Code.

While the House proposal is the most sweeping property insurance legislation currently before Florida lawmakers, other bills have been filed to address aspects of the property insurance crisis. The other proposals include joint resolutions proposing an amendment to the Florida Constitution to limit the legislature’s ability to appropriate Cat Fund money,¹² proposals to allow the use of sales tax revenues to fund future Citizens’ deficits,¹³ proposals to limit the applicability of the requirement that Citizens’ rates equal or exceed voluntary market rates,¹⁴ and a proposal to require an insurer to offer in Florida any type of policy that it offers in any other jurisdiction.¹⁵

In 2006, as in many of the years since Hurricane Andrew, property insurance issues will be at the forefront of Florida legislative activity. It remains to be seen whether the House of Representatives will embrace the approach espoused by House leadership, and whether the Senate and the executive branch will embrace proposals that are similar to, or as wide-ranging as, the House plan embodied in PCB IN 06-01.

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