Storm brewing over Florida property insurance legislation

Mar 24, 2008

South Florida Sun-Sentinel--Mar. 23, 2008
By Aaron Deslatte Julie Patel


A year after making sweeping property insurance changes, Florida legislators are divided between maintaining a consumer-friendly face or allowing homeowner premiums to start inching up.

This week the Senate will consider a slate of policies aimed at holding insurers accountable, and at the same time, they’ll consider an idea supported by House Speaker Marco Rubio to shrink the state’s footprint in the reinsurance business. The move would lessen the blow most policy holders would absorb in assessments after a major storm. The downside: Rates could go up by about 3 percent statewide and probably more in South Florida.

With financial markets riding out a Category 5 lack of confidence, support is building in the Legislature for ideas to lower the state’s exposure in future hurricanes.

The policies gaining steam in the House and Senate reflect a clash of philosophies, says Florida Association of Insurance Agents president Jeff Grady. It’s providing immediate rate relief or saving money later. "The Senate package is more punitive," Grady said. "We’ll see who prevails."

The Senate Banking and Insurance Committee will unveil measures Tuesday to keep pressure on insurers to lower rates.

If lawmakers don’t act, several key pieces of last year’s insurance reform are set to lapse on Jan. 1.

But those ideas have gotten an icy reception in the House, where more conservative GOP leaders are desperate to unshackle the private property insurance market.

"The Senate tried to come up with pro-consumer bills," said Senate Democratic Leader Steve Geller of Cooper City, who co-chaired the select committee. "But there’s such a difference in opinion between the House and Senate, we may end up with no legislation."

The Senate package will include proposals to impose criminal penalties on insurers and raise the fines from $20,000 a day to $100,000 a day for violating state insurance rules.

Insurers would have to file a rate adjustment to lower premiums overall when they shed riskier policies.

Senate leaders also want to abolish the law that let insurers impose automatic rate hikes. The Legislature suspended the so-called "use and file" law last year, along with an arbitration board that heard insurer challenges to rate denials. Both come back in 2009, though, if the Legislature doesn’t act. And homeowner insurance rates would likely start going up.

The net effect of last year’s legislative changes is an average 15 percent reduction in homeowner premiums statewide.

But House Republicans are desperate to shrink the size of state-run Citizens Property Insurance Corp. and shed the risk government took on in a rush to reduce premiums last year.

One such reform was a freeze on Citizens’ rates due to expire at the end of the year. The Senate wants to extend the rate freeze for the 1.3 million homeowners covered by the state’s biggest property insurer.

Without it, homeowners covered by the "insurer of last resort" could have absorbed a 29 percent increase last year — and possibly as much as a 44 percent spike as the company became a magnet for riskier homeowners jettisoned from private insurers following the 2004 and 2005 hurricane seasons.

House Republicans argue the freeze has fueled a kind of insurance shell game, where rates are kept artificially low until the next big hurricane hits. Then, Citizens won’t have enough reserves to pay claims, will have to issue bonds, and tack more assessments on home and automobile premiums that could take decades to pay off.

Florida Chief Financial Officer Alex Sink, who oversees Citizens as a member of the state Cabinet, said it’s time for Citizens’ premiums to start climbing so the company can build more of a cash surplus before the next storm.

"It’s not fair to the 70 percent of Floridians who are not in Citizens," she said. "When they can’t cover their claims, guess who does? All of us."

On Tuesday, the Senate banking and insurance panel also will consider a proposal to offset Citizens’ annual deficits in part by beefing up its revenue. A bill pitched by Sen. Jeff Atwater, co-chairman of the select committee, would bar Citizens from providing wind-only coverage, which is considered the riskiest. Insurance industry representatives are fighting the idea.

The House is pushing plans to give financial incentives to companies willing to take over policies of Citizens customers.

Citizens is only part of the problem.

The Florida Hurricane Catastrophe Fund, which helps private insurers pay claims after major storms, was expanded from $16 billion to $28 billion last year as a way to offer cheaper coverage to insurers and then reduce homeowner premiums.

But Citizens and the catastrophe fund combined would be forced to sell $27 billion in bonds to pay storm claims if a Katrina-sized hurricane hit a major population center in Florida.

"I think both sides have concluded they can’t fund what they did," said Gerald Wester, a lobbyist for insurers and the American Insurance Association.

Last summer, the state tried to sell $7 billion in bonds to raise cash for the hurricane fund, only to be rebuffed by investors. The state wound up selling half that much in bonds at a higher interest rate that costs taxpayers $20 million more a year.

Given the credit crunch, that higher interest rate would be considered "a bargain" today, said Florida Hurricane Catastrophe Fund senior officer Jack Nicholson. He said if the state tried to get that rate now, he doubts "if it could happen at all."

John Forney, an investment adviser for Raymond James who works with both funds, has said no state has ever tried to find buyers for the size of bond offering Florida would have to undertake.

"You’re talking about trying to access the markets for an unprecedented amount of money in what we all agree would be uncertain, stressed conditions in the economy," he recently told lawmakers.

Up for review

The Senate Banking and Insurance Committee this week will discuss measures that would:

Make permanent provisions from a law last year that allows the state to block rate boosts and bar insurers from using arbitrators if they disagree.

Prohibit insurers from buying more reinsurance, or backup coverage, than they need, which can drive up homeowner premiums.

Require insurers to use risk-prediction methods that are approved by the state when calculating rates.

Allow the state to establish guidelines for what’s excessive profit margins for insurers.

Impose a moratoriumon insurers dropping policies after a hurricane.

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A rundown of what the Senate’s insurance panel will review. 2D