Florida Commission on Hurricane Loss Projection Methodology Reviews State’s Statutory Windstorm Mitigation Credit System
Aug 15, 2009
As result of House Bill 1495 becoming law on June 1, 2009, the Florida Commission on Hurricane Loss Projection Methodology (“Commission”) is required to review discounts, credits, other rate differentials and reductions in deductibles relating to windstorm mitigation. These findings must then be presented in a report to Florida’s Executive and Legislative leadership by February 1, 2010.
To generate this report, the Commission’s Windstorm Mitigation Committee planned a series of public hearings to gain a better understanding of the current process for granting wind mitigation credits, the first of which was held on August 12, 2009 as part of a three-day meeting that began the prior day. To view the meeting agenda, click here.
During the August 12 hearing, testimony was given on the implementation of Florida’s statutory windstorm mitigation insurance discount and credit system and suggestions for improvement were offered.
Commissioner Jack Nicholson opened the discussion by stating that the goal of these meetings is to gain an understanding of insurance ratemaking and the concept behind wind mitigation credits, specifically:
- Issues with the rules and procedures governing insurance ratemaking
- The foundation of the science and data supporting the calculation of wind mitigation credits
- Issues with how insurance companies and regulators implement discounts. Does the system promote fraud? Are there other incentives that influence a homeowner’s decision to implement mitigation measures? Is there an adequate system of checks and balances?
Various speakers reviewed Florida’s statutes and rules governing wind mitigation credits. According to Florida law, insurers must provide insurance rates that are not excessive, inadequate or unfairly discriminatory. Insurers also must offer policyholder discounts and credits for mitigated properties. Wind mitigation measures include fixtures or construction techniques that enhance damage resistance or provide damage protection, including:
- Roof strength, including roof shape and covering;
- Roof-to-wall connections that are installed with hurricane clips/straps, including nails, clips, or single and double wraps;
- Wall-to-floor-to-foundation strength;
- Window, door and skylight protections, such as hurricane shutters or impact-resistant windows and garage doors.
Insurers are required to inform personal lines residential property insurance applicants and policyholders of the availability and range of premium discounts for wind mitigation upon policy issuance and renewal.
In order to qualify for a wind mitigation discount, policyholders must complete a Uniform Mitigation Verification Inspection Form (OIR-B1-1802), which must be certified by an engineer, architect or qualified mitigation specialist.
The Form elicits information about six general features (roof covering, roof attachments, roof-to-wall connections, roof shape, secondary water resistance and shutters) and provides the consumer with an estimated premium discount as a percentage of their premium payment and annual dollar amount by which their premium will be reduced.
During the last few years, over 400,000 consumers received free wind mitigation inspections through the My Safe Florida Home Program (“MSFH Program”). The product of these inspections provided consumers with a report providing mitigation recommendations, as well as cost estimates for the suggested improvements, potential insurance discounts and a standardized hurricane resistance rating.
Due to budgetary constraints, funding for the MSFH Program was cut during the 2009 Legislative Session and thus, the Program expired on June 30, 2009.
Wind Resistance Studies
In 2002 the Florida Department of Community Affairs directed a study entitled “Development of Loss Relativities for Wind Resistive Features of Residential Structures.” This study explained that loss mitigation devices, such as hurricane shutters, provide more wind damage resistance than had previously been indicated.
In 2008, the Florida Office of Insurance Regulation (“OIR”) commissioned an updated study to evaluate windstorm loss relativities for construction features, including analysis of damage and loss data from the 2004 and 2005 hurricane seasons.
Wind Mitigation Discount System Issues
Speakers indentified the following issues with implementing the current wind mitigation discount system:
- Wind mitigation credits are required to be offered for all property insurance policies, including contents-only policies such as renters’ insurance. Since they do not cover the structure that has been hardened, there is an issue with a fair discount calculation for these policies.
- Insurers questioned whether it would be more appropriate to only offer discounts to policyholders who have submitted the mitigation form based on their property’s specific features, or if an average discount should be applied to all policyholders, especially for those with homes built under Florida’s 2001 and later building codes, because these stricter codes incorporate many mitigation features.
- Insurers are not able to apply surcharges to policyholders who have not used mitigation measures, so there is less motivation for those policyholders to harden their homes.
- Some insurance companies have filed insurance rates providing offsets for wind mitigation discounts; some have not. Insurers expressed concern during the meeting that, under the current system, they are not receiving the accurate information needed to charge adequate discounted rates and therefore, may have to raise their base rates.
- If an insurer conducts wind mitigation inspections for its policyholders, it should be allowed to include this expense into its rates.
- Fifty-eight to seventy-eight percent of all mitigation reports provided to insurers have errors of some nature. These errors are due to fraud, inspector inexperience, or data entry.
- It is questionable whether mitigation measures really reduce insurance risk and ultimately, damage.
- Hurricanes are not the only cause of property insurance losses. Homeowners’ insurance claims also are filed for non-catastrophe losses, which are not affected by windstorm mitigation measures.
- Wind inspection fraud. Citizens Property Insurance Corporation (“Citizens”) recently introduced a pilot mitigation verification program to combat this issue.
- Since the wind mitigation credit system was implemented, insurance companies have been more likely to non-renew policies applicable to unmitigated structures
Commissioners inquired about the way insurers calculated rate discounts before the wind mitigation credit system was mandated. Insurers testified that information was used such as a home’s location and the topography of the surrounding land to calculate any discounts, without considering the home’s individual mitigation measures. Under this system, discounts on factors such as building code standards were not provided. Today, the wind mitigation credit process has created additional data points that insurance companies now use to more accurately measure a home’s actual risk.
Before the wind mitigation credit system mandate, the rates of homes built under stricter code standards and homes that had additional mitigation measures subsidized the rates of older, non-mitigated homes. There was no way for a company to differentiate among homes based on those features.
The subsidization factor still exists because insurers still lack information. For example, wind mitigation reports do not list the number of stories per structure, although most insurance companies do not differentiate between single and multi-story properties.
Suggestions to Improve the Current Wind Mitigation Discount System
Speakers offered the following suggestions for improving the current wind mitigation discount system:
- Incorporate data from additional studies on the effect of wind-resistant building features
- Examine policies for discounts by coverage type (A, B, or C), as well as for contents-only policies versus policies that cover building structures
- Provide statutory clarification on the definition of “wind damage”
- To avoid unfair discrimination and inadequate rating, amend insurers’ base policy rates and measure how those rates are affected by mitigation discounts
- Provide a statutory definition of “optional insurance deductibles”
- Reinstate funding of the MSFH Program
- Make windstorm mitigation inspections mandatory. Some statistics reflect that only 24 percent of Floridians have hardened their homes against hurricanes
- Encourage more homeowners to have their homes inspected and mitigated by either lowering the cost of mitigation efforts or increasing the base rate of insurance policies for homes that are not storm-hardened
- Ensure that wind mitigation measures are equitable in view of underlying insurance rates
- Enable homeowners to prorate the cost of mitigation over a long time period
- Add mitigation measure checkboxes to the bottom of each homeowners’ insurance declarations page to provide a grading scale on the policyholder’s mitigation efforts; show the percentage of mitigation efforts that are receiving credits and how much money those credits are worth
- Clarify for consumers how premiums are calculated
- Require windstorm mitigation inspectors to submit their homeowners inspection reports electronically so that the information may be viewed by the consumer, insurer and the OIR
The meeting was then adjourned.
The next Commission Windstorm Mitigation Committee hearing to fulfill the HB 1495 mandate is scheduled for Thursday, September 17, 2009.
Should you have any questions or comments, please contact Colodny Fass.
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