Insurers Call for Additional Reforms for Florida Consumers

A new Florida law enacted during a 2007 January special session provides immediate savings for homeowners by shifting potential payments for hurricane losses from the homeowners receiving the current policy benefits to future policyholders, motorists and business owners, according to the Property Casualty Insurers Association of America.

PCI unveiled the results of a study on the potential economic impact of property insurance reforms enacted during the special session on taxpayers, consumers and the state’s economic stability.

The report, prepared by Milliman Inc. and commissioned by PCI, further noted that Florida’s new law provides the greatest benefit to households in Florida’s highest risk coastal areas, while potentially increasing household premiums in less-risky areas.

“The Florida Legislature, under enormous pressure from voters, acted aggressively during both the January special session and the recently completed regular legislative session to provide insurance rate relief to consumers hardest hit by price increases as a result of record-breaking hurricane losses in 2004 and 2005 and predictions for even more frequent and severe storms in the future,” said William Stander, PCI’s assistant vice president and regional manager.

Stander added that while the Milliman Report finds that the new law should lower insurance prices for some consumers, all Floridians need to understand that this is accomplished by transferring much of the cost of paying for future hurricane losses to individuals and businesses in lower-risk areas across the state.

Nancy Watkins, principal and consulting actuary for Milliman and co-author of Milliman’s Analysis of Florida’s January 2007 Special Session Legislative Reforms on Property Insurance, said the legislation could result in unintended consequences that may eventually be harmful to consumers and the state.

“The new law may drive away some private insurance companies that would otherwise want to conduct business in Florida,” Watkins said.
“Along with the reduction in Citizens’ rates, the result may be more policies shifted into Citizens. Further, lowering insurance costs in the areas most vulnerable to hurricanes might encourage additional development in those areas. In combination, these consequences may increase the risk of larger losses – and policyholder assessments to cover them – in the future.”

The Milliman study ran several scenarios for the 2007 hurricane season, ranging from light to severe, and estimated the financial impact of projected losses on Citizens Property Insurance Company, Florida’s state-run insurer; the Florida Hurricane Catastrophe Fund, the state-sponsored reinsurance fund; and the associated cost or benefit to Florida policyholders.

Among the key findings:
• The Milliman study shows that recently passed Florida legislation will mean that homeowners will pay less for property insurance. Motorists and small business owners will pay more for insurance if an average to large storm hits.
• The biggest beneficiaries of the legislation will be homeowners living in southern coastal counties with estimated premium reductions for the average homeowner reaching $1,096 in Dade County and $1,587 in Monroe County under a no hurricane scenario.
• Homeowners living in non-coastal or northern counties will see only modest reductions in their premiums, with premiums down an average of $47 in Orange County, $36 in Duval County and $28 in Leon County under a no hurricane scenario.
• Motorists receive no direct benefit from the legislation, but could see a net increase in 2008 assessments that range from $45 to $182 per vehicle, depending upon location, if an average to large storm hits. Total assessments for motorists could reach 20% of the total auto premium per year under the new legislation.
• Small business owners will receive no direct benefit from the legislation, but could see an increase in assessments ranging from $171 to $402 per year if an average to large storm hits.
• The approximately 30% of Florida households who rent will not see any direct benefit from the January 2007 Special Session legislation, but could see their auto insurance costs rise if a storm hits. Similarly, those homeowners who do not carry homeowners insurance will not see any direct benefit from the legislation but could see their auto insurance costs rise if a storm hits.
• Under the new law, Citizens will suffer a deficit of $3.7 billion and the FHCF will suffer a deficit of $22.3 billion if a 1-in-25 year hurricane hits Florida.
• To pay for claims resulting from a large storm Citizens and the FHCF will likely have to raise capital in bond markets. The amount of total capital needed after a storm could be very large – as much as $26 billion from a 1-in-25 year storm to $69 billion from a 1-in-250 year event. To put these potential bond issues in perspective, the largest single municipal bond offering from 1947 – 2005 was a $10 billion offering by the State of Illinois in 2003.
• A bond offering as large as the one that would be required to finance a loss may take time to arrange and could negatively affect how quickly financial obligations can be paid. Large bond offerings may also have to be guaranteed by the State of Florida, which could negatively impact the state’s credit rating and/or require a higher interest rate for repayment.
• By reducing premiums in high-risk areas such as Dade and Monroe Counties, future development in storm prone regions is made cheaper by the legislation.
• Increased development of high-risk areas will raise losses from future storms, which will in turn increase future assessments and rates for all areas.
• To pay off losses from a large storm, consumers would be required to pay approximately 10% assessments and surcharges for up to 7 years in the case of the FHCF and approximately another 10 percent for 8 years in the case of Citizens. Given the combination of assessments and surcharges from Citizens and the FHCF, consumers could be facing additional charges of about 20 percent of their policy premium for a number of years.
• If large storms hit in consecutive years, policyholders could face multiple additional charges on their policies and could see these charges exceed 20 percent and/or last for even more years than the seven to eight years projected by the Milliman report.

Stander concluded, “The bottom line is that consumers, insurers and public policymakers have a long way to go to reach our shared goal of making people safer, buildings stronger, and the insurance market stable and reliable over the long term. We want to work with legislators in a less politically-charged environment to carefully consider a variety of options to establish a system that will deliver increased competition, greater consumer choice and long-term market stability for Floridians in all parts of the state.”

PCI offered a variety of suggestions for consideration by state and federal lawmakers, including:
• Enhancing the My Safe Florida Home Program to provide more effective economic incentives for consumers to retrofit existing homes that reduce losses from future storms.
• Implementing stricter land use policies to place reasonable limitations on development in high-risk areas.
• Promoting greater transparency in insurance transactions by making additional information on discounts, coverages and premium break-downs readily available to consumers.
• Strengthening the financial position of the FHCF through the purchase of additional reinsurance.
• Providing insurers incentives to write more policies by allowing companies to offer consumers a wider variety of coverage limits and deductibles and reducing government control of rates.
• Allowing individual insurers to accumulate funds to pay for disaster losses on a tax free basis.
• Establishing a federal liquidity facility to provide a financial backstop to state catastrophe funds.

Source: Property Casualty Insurers Association of America