United States: Florida Legislature Passes Massive Property Insurance Bill

The Florida Legislature passed a far-reaching property insurance bill (CS/CS/SB 1980) in the final hour of the final day of its 2006 Regular Session. Passage of the compromise bill, which the Florida Insurance Council labeled "The Good, The Bad and The Ugly," averted the need for a special legislative session to tackle Florida’s pressing property insurance issues. While much of this year's legislative attention was focused on Florida’s insurer of last resort, Citizens Property Insurance Company (Citizens), the bill addressed numerous other property insurance issues, as well. Governor Jeb Bush is expected to sign the legislation into law later this month. The following is a brief summary of some of the bill’s major provisions.

Citizens Bailout: The bill appropriates $715 million from the state’s General Revenue to reduce the Citizens deficit. When recouping assessments, insurers must notify policyholders of the amount by which their surcharge was reduced due to the bailout. The appropriation will substantially reduce the deficit assessments which will be paid by all Florida policyholders. In addition, the assessments will be amortized over the next 10 years.

Citizens Coverage Restrictions: Effective March 1, 2007, non-homestead property is eligible for coverage in Citizens only after being rejected by at least one admitted insurer and at least three surplus lines insurers. Effective July 1, 2008, properties with combined dwelling and content replacement cost of $1 million or more may be insured only in the Citizens wind-only ("high risk") account, and only after being rejected by at least one admitted insurer and at least three surplus lines insurers. Effective July 1, 2007, insurers writing ex-wind coverage must provide adjusting services to Citizens for wind losses.

Citizens Rates: Rates in the personal lines account (full homeowners policies) must be sufficient to cover the 100- year probable maximum loss (PML). The same requirement will be phased-in for the high-risk (windstorm-only) account, with the 2007 benchmark being the 70-year PML, and the benchmark for 2008 being the 85-year PML. The requirement that Citizens rates not be competitive with the voluntary market does not apply in any area where the Office of Insurance Regulation (OIR) finds that no admitted insurer is offering coverage.

Citizens Assessments: Future deficit assessments on Citizens' policyholders will be limited to no more than two assessments of 10 percent each. If the assessments on Citizens' policyholders are insufficient to fund the deficit, a statewide assessment can be levied on all Florida policyholders.

Citizens Take-out Bonuses: Effective January 1, 2008, bonuses for taking business out of Citizens will be limited to $100 per policy. Bonuses will apply only if the policy is written by the new insurer for five years, but the insurer will qualify for a prorated bonus if the policy is canceled or nonrenewed before the end of the five-year period.

Florida Hurricane Catastrophe Fund: The bill requires Cat Fund premiums to include a risk load equal to 25 percent of the actuarially indicated rate. Additionally, for the 2006 contract year only, the new law will allow limited apportionment companies to buy up to $10 million of additional coverage from the Cat Fund, with a retention equal to 30 percent of the insurer’s surplus, at a 50 percent rate on line.

Mitigation: The legislation will create a $250 million program to provide homeowners with free wind resistance inspections and certifications and provide matching grants of up to $10,000 to homeowners for retrofits. The program is also supposed to enhance public awareness of mitigation techniques.

Insurance Capital Build-Up Incentive Program: The bill will create a $250 million program to provide for the issuance of surplus note loans to new and existing insurers which have at least matching contributions of private capital. Individual loans cannot exceed $25 million or 20 percent of the total available loan pool.

Emergency Powers of Insurance Commissioner: After the Governor has declared a state of emergency, the Insurance Commissioner may issue "general orders" applicable to all entities subject to the Insurance Code. The general orders expire after 120 days, and may be renewed for an additional 120 days.

Ratemaking: To the extent an insurer has exposed its capital to the risk of hurricane loss in lieu of procuring reinsurance, the insurer is entitled to a reasonable rate of return commensurate with the risk. Beginning July 1, 2007, in any area the Florida OIR determines to be competitive, a property insurer may increase rates by up to 10 percent in any rating territory (subject to a five percent statewide cap) without being subject to disapproval as excessive or unfairly discriminatory. As to residential properties with dwelling replacement cost of $1 million or more, the burden is on the regulator to prove the rate is excessive. The public hurricane loss model must be submitted to the Florida Commission on Hurricane Loss Projection Methodology for review, but the regulator may continue to use the public model until it is disapproved. The regulator will specify the discounts or credits insurers may use to reflect mitigation.

Replacement cost coverage: Insurers may limit coverage to the lesser of policy limits, cost to replace, or cost to repair.

Emergency playbook: The Financial Services Commission (Governor and Cabinet) must adopt permanent rules governing the following requirements applicable to insurers in a state of emergency: claims reporting, grace periods for payment of premiums and performance of other duties by insureds, and postponement of cancellations and nonrenewals. Existing codified rules may be superseded by emergency rules adopted by unanimous vote of the commission.

This sweeping legislation addresses numerous other areas of interest, including sinkhole evaluation and dispute resolution and Florida Insurance Guaranty Association (FIGA) bonding authority and assessments. It may take weeks or even months for insurance industry observers to fully digest the entire legislation. Legislators and industry representatives who had supported more thoroughgoing reforms were disappointed in the final product. Their concern was that the 2006 legislation did not address the fundamental issues that have made Florida’s residential property insurance market increasingly dysfunctional. However, after a decade of legislation that industry representatives felt paid more attention to the desires of consumers than the needs of the marketplace, even the supporters of more aggressive reforms are beginning to acknowledge that the 2006 legislation may help restore a market-oriented balance. Whether it is sufficient to help restore Florida's troubled property insurance market may depend largely on whether nature is kind or unkind to the Sunshine State in the 2006 and 2007 hurricane seasons.

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