August 14, 2007
From the Florida Insurance Council

Q & A  Regarding Presumed Factor Residential Filings Following the January Special Session on Hurricane Insurance.

QUESTION:  Why are the insurance reforms not working?

We do not believe the reforms are working because they are based on artificial rate reductions that leave Florida taxpayers vulnerable to steep tax increases on the many to help the few. Insurance Commissioner Kevin McCarty, himself, told the Florida Cabinet recently (July 31, 2007) that without the reforms enacted this year, the 1.3 million Citizens Property Insurance Corporation’s policyholders would be paying 81.5 percent more for their property insurance.

That’s a significant savings for Citizens policyholders, but certainly not fair for the four million private company policyholders who were set up by the Legislature as the financial backstop for this shell game.  When Citizens lacks the money to pay claims, as it will, the rest of Florida’s taxpayers will be heavily taxed to make up for woefully inadequate, and artificially low premium it is charging.

Florida’s insurers want to join lawmakers in a less politically charged atmosphere and rethink  the reform efforts so that together we can created meaningful change that benefits everyone.

QUESTION:  Why is the savings from the expanded Cat Fund not higher than promised?

Memories are short.  But back in the spring, when the Office of Insurance Regulation was calculating the “presumed factor” Commissioner McCarty said that the AVERAGE savings from the presumed factor would be about 24 percent. Private insurance companies cautioned about making huge promises,  but Commissioner McCarty and his hand-picked advisor, Bob Hunter, cautioned repeatedly….that the 24 percent savings they promised would be achieved on the hurricane portion (or wind portion) of the premium, NOT the entire premium. 

The wind portion, on average, makes up about 50-60 percent of a policyholder’s whole premium.

Fast forward to July 31, 2007—Commissioner McCarty criticized companies because he claimed the savings were not high enough.  According to Commissioner McCarty, the average presumed factor savings came in at about 12.2 percent.  Yet, the Commissioner’s office confirms that he computed the 12.2 percentage average savings on the whole premium, not just on the wind portion of the premium—contradicting his own statement of March 1.

When the 12.2 percent figure is applied to the wind portion as the Commissioner said last spring  it should be…the savings achieved as a result of the legislative changes are actually in line with his 24 percent promise.

Do the math.  Calculate 24 percent of the wind portion (50% of whole premium) and the result is  12 percent of the overall premium.

Note, also that the impact of the reforms passed earlier this year apply to premiums that come up for renewal after June 1 of this year.  Most people have not reached renewal dates as yet, and therefore we have not seen the majority of the impact of the reforms on premiums.

If a homeowner’s renewal date was between June 1, 2007 and today, they have already received a  new rate. But most have not as yet.  All rate changes always kick in when policies are renewed.

QUESTION:  Why are promises of reductions in the range of 24 and 25 percent not happening?

Again, as explained, when applied to the wind portion of a policyholders’ premium, the savings achieved as a result of the legislative reforms, are in line with what Commissioner and Bob Hunter promised on March 1, 2007 when they announced the presumed factor.

It is important to note, however, that too many politicians made unrealistic promises they should  never have made and now they are looking for scapegoats.  Politicians are trying to make the insurance industry the scapegoat for their own empty and irresponsible promises.

QUESTION:  Legislative Leaders have indicated they may call insurance executives before Legislative Committees to appear under oath.  Is this troublesome for the industry?

The insurance industry has and will continue to abide by the letter of the law.  The insurance industry is the most regulated industry in the state of Florida.  Every rate filing an insurance company makes, and every rate hearing at which industry representatives makes appearances—is done under oath. 

Calling for duplicative hearings before legislative committees and having insurance company executives appear under oath is political grandstanding…it’s another way that some politicians are trying to make the insurance industry the scapegoat for their own empty, unrealistic and irresponsible political promises.

QUESTION:  Insurers told us that the reason premiums rose so quickly is because the cost of reinsurance shot up dramatically after the 2004 and 2005 seasons.  The Legislature solved that problem by providing companies with a much cheaper reinsurance product.  Why then, do premiums continue to rise?

Reinsurance costs did spike after the 2004 and 2005 seasons, and that spike caused premiums to rise as companies were forced to pass those costs along to consumers.  Most companies have utilized the expanded Florida cat fund to buy a large chunk of their reinsurance, however, the cat fund is unable to provide all the reinsurance companies need—and, in fact, are mandated by mortgage lenders and rating agencies to buy—to ensure policyholders that they will have funds necessary to pay claims when disaster strikes. Therefore, companies still must purchase a large amount of reinsurance on the global reinsurance market. 

QUESTION:  Isn’t buying reinsurance to cover a 1-in-100 year season or 1-in-200 year season excessive?
   
Buying adequate levels of reinsurance is not only fiscally responsible, the state of Florida, up till this year, mandated that companies have at least 1-in-100 year reinsurance coverage.  In fact, some of the most stable companies have historically purchased reinsurance at levels in the range of 1-in-200 or higher.  That is how companies were able to pay out some $36 billion in claims over the two back-to-back seasons of 2004 and 2005 and remain in business.

Furthermore, until 2006, when reinsurance was temporarily in short supply, the average for Florida insurers was 1-in-150, and the most solvent insurers tried to be able to cover a 1-in-250 year (0.4% probability) hurricane season.

Today, in order to artificially lower premiums, the Office of Insurance regulation has reduced  the required level of reinsurance this year to a 1-in-65 year residential hurricane event which is a single hurricane or a single season producing roughly $35.7 billion in losses.  The problem with that is that a major storm like Andrew, if measured in today’s dollars, would have been a $50 billion storm. It would be irresponsible for companies to be financially unprepared for that possibility.

  
Furthermore, it would be disingenuous to policyholders to have too little reinsurance to cover th eir claims should a major storm strike.

It strikes us as odd that OIR would criticize companies for trying to be highly solvent, when that should be the main function of OIR—to be sure companies have the wherewithal to pay all of its claims when disaster strikes.
 
Question:  Aren’t insurance companies stoking unrealistic fears about extremely rare events?

You decide.

Studies by independent scientists—Chris Landsea of NOAA and Roger Pielke of the University of Colorado—have determined that a rerun of the 1926 Category 4 Miami hurricane, based on current  population patterns and building costs, would create damage of at least $130 billion, and a rerun if Andrew would today produce more than $50 billion worth of damage.

To put this in perspective, even after January’s legislation, the Cat Fund’s $28 billion only  covers a total loss of $37 billion. Category 4 and 5 hurricanes are not rare events in Florida— we’ve seen at least 8 in the last 100  years. According to the latest historical data from the National Hurricane Center, Hurricanes of category 4 or 5 made landfall in Florida in 1919, 1926, 1928, 1935, 1947,  1960, 1992, and 2004.

Question:  Aren’t most insurance companies now trying to increase rates instead of cutting them?

Almost every insurance company reduced (the hurricane or wind portion of homeowner’s policies) rates by a statewide average of 24 percent effective June 1, as mandated by the legislature and insurance regulators.  As described earlier, this equates to about 12 percent of the overall premium.

The January legislation required this action “in order to provide rate relief to policyholders as soon as practicable.” The legislation also required a later rate filing (the “true-up” filing) to  reflect the actual cost reductions resulting from the legislation.

Most of today’s rate filings still reflect a reduction from the rates in effect before January’s legislation, even if they represent an increase from the legislatively-mandated rollback.

Question:  Why have rates have not gone down.

Rates have gone down.  Every insurance company rolled back rates effective June 1 as required by the new law. Consumers will see these lower rates when they renew their insurance policies. Many consumers who think they are getting a “rate increase” are actually paying more for coverage either because their coverage has increased to match increases in their property value or because their premiums are subject to assessments to support the Hurricane Catastrophe Fund, Citizens Property Insurance Corp. deficits, or Florida Insurance Guaranty Association deficits.


Question:  Didn’t the January legislation cap insurers’ liabilities.

Not at all.  Every insurance company still has to pay every valid claim in full. The January legislation allowed companies to buy more protection from the state Catastrophe Fund at reduced prices, but even with the addition of the new layer of Cat Fund protection, the fund still maxes  out at about a 1-in-65 year event (roughly, what would occur if South Dade had a repeat of Hurricane Andrew today).