Insurance Resurrection

REVIEW SUMMARY

What. Property insurance reform legislation.

Issue. Revised bill likely to evolve further.

Impact. Rein in cost drivers such as sink hole claims.

Lawmakers are taking another crack at property insurance reform this year on the heels of last year's veto by former Gov. Charlie Crist.

But even with Crist out of the way, and a much-debated part of last year's bill removed, controversy remains.

However, the need for reform also remains.

The policy count for the state's Citizens Property Insurance Corp. rose again in 2010, after a two-year decline, to 1.03 million policies. Total policies are approaching 1.3 million and expected to exceed 1.4 million this year by one estimate.

Intended as a last-resort market, Citizens now has 18% of the state's residential market. That tops the next highest — State Farm Florida Insurance Co. — with 12%.

Policyholders are moving to Citizens from State Farm, which made a deal with state regulators to reduce its policy count and risk exposure — rather than abandon the state — in exchange for more moderate rate relief than originally sought. Others are coming from several failed insurers.

Citizens doesn't have enough liquid assets to pay the $21 billion in claims projected to result from a 1-in-100-year hurricane. Citizens' policyholders can be assessed up to 15%, and most other policyholders can be assessed up to 6% if that's not enough to cover a shortfall.

Both Citizens' and non-Citizens' policyholders can be hit with an additional 10% “emergency” assessment if Citizens still can't meet its obligations. Together, all those assessments may have to cover a $7 billion gap.

Also contributing to the problem is that many of the state's domestic insurers are still feeling financial strain even after five years without a major hurricane hitting the state.

In 2009, 60 of the 206 residential insurers in the state reported reductions in surplus, the funds available to pay claims. Underwriting losses (when claims and expenses exceed premiums) were reported by 100 companies. Recent failures include Northern Capital, Magnolia and Coral.

According to Kyle Ulrich, senior vice president for public affairs for Tallahassee-based Florida Association of Insurance Agents, the solvency problems continue. “Carriers' surplus has been reduced over the last 12 months and even over the last quarter,” Ulrich says.

Targeting cost drivers

Last year's bill targeted so-called “cost drivers” of insurance rates, such as fraud by public adjusters, an arguably gracious five-year window to re-file claims — which led to another assessment on policyholders — and current law which prevents insurers from holding back part of a claims payment until a policyholder can show that repairs are being made, and not just pocketing the cash.

One of the biggest of the cost drivers has been sinkhole claims, a major concern of property owners and insurers particularly in parts of the Gulf Coast.

Sen. Garrett Richter, R-Naples, sponsored last year's reform bill as chairman of the banking and insurance committee, the same post he holds this year. Other Gulf Coast legislators on the committee are Sen. Mike Fasano, R-New Port Richey, and Sen. President Pro-tempore Mike Bennett, R-Bradenton.

Bennett's “Consumer Choice Act” of 2009, allowing rates to be more market-driven, attract more capital and increase competition, was also vetoed by Crist. Bennett pulled a revised version of his bill last year when Crist made it clear in mid-session that he would veto it again.

“It has a lot of improvements over Senate Bill 2044,” says insurance industry consultant Lisa Miller about the new bill, Senate Bill 408. “It seems everyone is rowing in the right direction.”

Well, not quite everyone.

Draconian or historic?

Attorney Chip Merlin, president of Merlin Law Group, headquartered in Tampa, represents policyholders in claims disputes. He opposes language that allows insurers to pay actual cash value and holdback replacement cost value until there is a written contract for the repairs or replacement of items.

That provision was controversial last year, and is likely to be more so now because the new bill expands the language to include contents, not just structural repairs. The new wording allows an insurer to limit its initial payment for losses to personal property, and pay the holdback when receipts are provided by the insured.

Merlin has a blog criticizing the new bill. In it, Merlin argues, “The most 'Draconian' portions of the law have to do with changing insurance from a contract of indemnity into one of a repair reimbursement policy.”

Brian Hunter, an insurance industry attorney, counters, “ ... there is nothing Draconian about it. It is what replacement cost policies historically provided before the Legislature began to re-write the policies. To suggest this is unduly harsh, i.e., Draconian, is hyperbolic.”

Last year's bill passed overwhelmingly in the House and Senate before Crist killed it in his veto message of June 1, ironically the first day of hurricane season. Following the veto, Richter said he was “a bit frustrated and disappointed,” and laid the blame on Crist for mischaracterizing a key provision of the bill.

That bill language would have allowed property insurance companies to get an expedited rate review for cost of living index changes and reinsurance cost increases. (Expedited rate reviews are permissible for other purposes.) And it would still have required review and approval by the office of insurance regulation, but Crist chose not to see it that way.

A move to override the veto was considered, but with elections pending, legislative leaders opted to first scan the political landscape under the next governor.

Ironically, Crist's veto allows companies to revert to what's known as the “use and file” system, which began again Jan. 1. That's because the vetoed bill would have extended until 2012 the prohibition on insurance companies being able to increase rates and then file for approval later. Under “file and use,” companies file for a rate increase and can only charge new rates after state approval.

With use and file, insurers can file their rates 30 days after the rate filing was implemented. The option allows insurers to implement a new rate prior to approval, but regulators can order a refund to policyholders of that portion of the rate it finds excessive.

Gov. Rick Scott, though he hasn't commented on the new bill, is expected to be more supportive of the industry because of the potential for more jobs and capital to come into the state under a less regulatory environment that Scott advocates.

And House Speaker Dean Cannon, R-Winter Park, signaled his support in a January meeting with reporters at the annual legislative day hosted by the Associated Press. “That's an issue that should get some movement, says Cannon. “I think you'll see some of those concepts come back. ... That is something we ought to address.”

Says Ulrich, “We believe from what we've heard from the governor on the campaign trial and since he's become governor...that he's willing to tackle these issues.”

Though Crist is no longer governor, expedited rate reviews are not included in this year's bill. But that doesn't mean it won't resurface sometime over the two-month session. The first hearing on the bill was Jan. 25.

The bill still includes language that ups the capital requirements for insurers to be certified to sell their products in the state. That could limit competition somewhat, but fewer companies would be likely to fail, and policyholders benefit by a greater likelihood of claims being paid timely.

Generally, a new property insurance company must have the greater of $5 million or 10% of the insurer's liabilities in surplus to be licensed to sell property insurance in Florida. Once licensed, the company must keep $4 million or 10% of its liabilities in surplus to keep it. The company must also keep a certain premium to surplus ratio to ensure the company is not overexposed.

Under the bill, new insurers must maintain a minimum of $15 million of surplus. Existing insurers are required to increase their surplus from $4 million to $5 million by July 1, 2011, to $10 million by 2016, and to $15 million by 2021.

Says Ulrich, “It's certainly a proposal and bill that we strongly support because it really tries to address the cost drivers that are in the system right now that are putting the domestic carriers in peril.”

A sinking feeling

A December report to the Senate Banking and Insurance Committee summarized the sinkhole insurance problem: “ ... under current law, for a policyholder to have a sinkhole loss, there must be actual structural damage to her or his home, including the foundation, which is 'caused by' sinkhole activity. In practice, however, claims are often paid without a demonstration that the structural damage is directly attributable to or caused by sinkhole activity.”

All those extra claims that may not be attributable to sinkholes ending up costing all policyholders more when insurers pay the claims. Sinkhole claims increased from 2,360 in 2006 to 6,694 last year, and sinkhole costs rose from $209 million to $406 million in that time period.

Hernando County has been ground zero for sinkholes, with Pasco, Hillsborough and Pinellas counties following in number of claims. In the last five years, these four counties accounted for nearly 18,000 claims — 72.5% of claims statewide.

According to a report made to the banking and insurance committee, the $22.2 million in premiums collected for sinkhole coverage statewide was nearly doubled by the $40.5 million in sinkhole losses in just Hernando County.

One reason cited for all the claims: Policyholders have a strong incentive to file sinkhole claims because they can keep the cash. One study shows 79% of policyholders who received payments for claims, did not make repairs.