Monday December 9, 2013
The days of 2013 have flown by…
Seems like only yesterday that we were ending the 2013 legislative session, compiling our recap for our newsletter readers and thinking about a few lazy, hazy, crazy days of summer ahead. Here we are at the END of 2013, preparing for the upcoming session and all there is to do. We hope you will continue to join us as we work for the good for our great state of Florida. With that in mind, here is a brief recap of recent events for your reading pleasure.
FSU Study Offers Alternatives for Right-Sizing Florida’s CAT Fund
Monday 12/2/13- Included within the Legislature’s 2013 General Appropriations Act was proviso language requiring Florida State University’s Catastrophic Storm Management Center (Center) to produce a report on alternative methods for managing the size of the Florida Hurricane Catastrophe Fund (FHCF). This week, the Center provided its report to the President of the Senate, Speaker of the House, Governor Rick Scott and other Cabinet Officers. Dr. Lori lee Medders, Director of the FSU Center, makes it clear that she does not endorse any one of the four alternatives identified in the report to the current law requiring the Legislature to set limits and other key terms prescribing the size of the CAT Fund. NOTE: The report does not reference Citizens Property Insurance Corporation and many public policymakers feel that the FHCF and Citizens are “joined at the hip.” In fact, Sen. Tom Lee has opined in Senate Committee hearings that the Cat Fund can assist the state with Citizens’ growth challenges. Legislation is currently filed with other proposals to follow that may address this line of thinking. The Center’s report provides four methods for managing the FHCF’s size:
•The status quo (wherein capacity is set by legislation): This method may continue to work in a sense, especially in the continued absence of a major hurricane. But, the status quo may not be satisfactory for dealing with insurer risk. At least four approaches for managing the FHCF size are discussed: 1) an independent panel of experts, 2) the State Board of Administration Trustee oversight, 3)a formulaic approach, and; 4) preserving subsequent season capacity.
•Independent Panel of Experts: This approach would legislatively require a separate, politically “independent” body to determine the size of the FHCF’s capacity by an appointed, nonpartisan commission (similar to the Public Service Commission). Given the likely perception of political influence, the statute could spell out a methodology to be used by the panel of experts, and their approach could be to spread capacity over time to accomplish the FHCF’s purpose of maintaining capacity in the marketplace.
•State Board of Administration (SBA) Trustee oversight: Since the SBA Trustees already are responsible for administering the FHCF, the members are familiar with the FHCF’s purpose, operations, and financing challenges. This approach places control in the executive branch where there is more administrative and technical expertise rather than the legislative branch whose function is to decide questions of public policy. The SBA Trustees are familiar with the administration of the FHCF, and managing the FHCF’s size is consistent with other administrative matters under their control, such as ratemaking, pre-event and post-event financing, investing, and the claims-paying estimation process. Additionally, each individual SBA Trustee serves the interests of the entire state rather than any particular regional or local constituency.
•Formulaic Determination to manage the FHCF Size: A formulaic approach could systematically take into account private reinsurance capacity and the FHCF’s estimated claims-paying capacity. Such an approach might, for example, set the overall coverage limit using the private reinsurance price quotation averages timed with the FHCF’s coverage deadline. The formula could tie the FHCF estimated claims-paying capacity to the initial and subsequent season financial needs. In actuality, this idea is the basis for the cat fund as it exists today, i.e., using some measures of reinsurance, debt market, and/or other financial market capacity estimates to determine FHCF needs. The FHCF size also needs to be set far enough in advance to allow insurers time to negotiate private reinsurance purchases structured around known and reliable level of FHCF coverage.
•Preserving Subsequent Season Capacity: This method appears to preserve subsequent season capacity and balance it more appropriately with initial season capacity using a two year claims paying estimate. Currently, there is $24.845 billion of two year capacity with the initial season capacity at $17 billion or 68.4% of the two year capacity estimate. An option is a redefinition of initial season capacity as no more than a lower percentage of two year FHCF capacity, with a transition to this lower ceiling over time as needed. This approach provides for subsequent season capacity when the estimated capacity in the initial season is less than the statutory cap. The estimated claims-paying capacity is more likely to be aligned with actual claims-paying capacity when there is less reliance on bonding.
•Final Observations: The “size” of the FHCF is its maximum potential obligation, currently set by statute at up to $17 billion. Other parameters impact the “shape” of FHCF coverage at a given size, but size itself is essentially determined by a cap for initial and subsequent season coverage. At the heart of the size issue is this charge: Be large enough to act as a stabilizing force to offset or mitigate private reinsurance volatility, but not so large as to jeopardize funding capabilities, risk insurer solvency and increase assessment potential. As a final note, the question of whether the FHCF’s actual claims-paying capacity would be sufficient to cover the full extent of hurricane reimbursements that participating insurance companies expect (and plan) to receive from the FHCF is important. Most people, even those familiar with the insurance industry, under-appreciate the fact that the estimated gross loss to insurers in a severe scenario, such as a “one in 100 year storm”, varies based on the hurricane loss model used, the books of business and the projected storm path. An event that is a one in 100 year event for Citizens Property Insurance Corporation might not be a one in 100 year event for a company with a different spread of risk. Additionally, a 100 year (or 1% annual probability) meteorological event will have disparate impact on a company based on where the event makes landfall. Furthermore, the probability of a severe impact grows with the time horizon – the 1% annual probability implies a one-in-four probability over the 30 years of a typical home mortgage or long-term debt instrument. It is prudent to stress test the overall FHCF capacity against not only a one in 100 year storm, but also against several hypothetical storms that make landfall in different localities and have differing severities, and against multi-season erosion of its capacity. Since so many small Florida insurers rely on FHCF coverage, such an analysis seems a good use of FHCF data and resources.
We will keep you posted on how our Executive and Legislative Branch leaders react to the report and any subsequent attempts to legislatively adopt one or more of the alternative methodologies.
OIR Enters Order Adopting Underwriting Profit & Contingency Factors
Monday 12/2/13- The Florida Office of Insurance Regulation has entered an Order officially adopting the 2013 Underwriting Profit and Contingency Factors which are determined pursuant to Rule Chapter 69O-170.003, Florida Administrative Code.
Citizens CEO Gilway Welcomes End Of Hurricane Season, Touts Improvements
Wednesday 11/27/13- In a public announcement Citizens President and CEO Barry Gilway welcomed the recent end of the 2013 Atlantic Hurricane Season and said that the state’s insurer of last resort has been busy taking advantage of the good fortune brought by no recent land falling hurricanes in Florida. Gilway noted that Citizens’ overall exposure has dropped 33 percent in the past 15 months, while its policy count has fallen 28 percent over the past year. When the recent hurricane season closed, Citizens had nearly $6.8 billion in reserves and is presently in the best financial shape ever. More importantly for Floridians, the risk of assessments – the “hurricane tax” – has been cut by more than half since 2011. He also noted that depopulation efforts took 312,550 policies off Citizens’ books in 2013, helping reduce Citizens from a high of nearly 1.5 million policies in late 2012 to 1.1 million this November. By early 2014, Gilway expects Citizens’ policy count to drop below 1 million for the first time since mid-2006. Meanwhile, an eight-year hiatus from major storm activity has allowed Florida’s domestic insurance market to grow and mature, providing homeowners with more choices from financially stable, private-market companies. According to Citizens’ chief executive, the hurricane lull also has helped Citizens to make great strides toward achieving sound rates that properly reflect the true risks incurred for its policies. In 2013, about 26 percent of Citizens homeowner’s policies were actuarially sound. That percentage is expected to double to 52 percent in 2014. Despite these successes, we know that Florida’s lucky streak cannot last forever. It is, therefore, critical that we continue our work to return Citizens to its role as Florida’s insurer of last resort, said Gilway. On January 2, Citizens will launch the Property Insurance Clearinghouse, which will attempt to match homeowners seeking new Citizens policies with qualified, private-market companies willing to offer comparable coverage at competitive rates. By helping homeowners find coverage in the voluntary market, Gilway believes the clearinghouse will reduce the number of new and renewal policies coming into Citizens, decreasing assessment risks for all Floridians. As the Clearinghouse ramps up in early 2014, homeowners will have access to an expanding list of private-market companies, with at least 18 carriers participating by the time the clearinghouse is in full swing.
Appellate Court Denies Motion for Rehearing In PIP Reform Litigation
Monday 11/25/13- Florida’s First District Court of Appeals (DCA) in Tallahassee has denied a motion by the plaintiffs for a rehearing in the protracted litigation over the constitutionality of Florida’s 2012 PIP reforms. As we reported in our last newsletter, the motion for rehearing came after a three-judge panel of the Court ruled that the lawsuit and resulting injunction failed based upon procedural grounds and the previous injunction entered by Leon County Circuit Judge Terry Lewis was lifted. You’ll recall that the First DCA previously concluded that a group of chiropractors, massage therapists and acupuncturists, including a fictional “Jane Doe” purporting to represent all injured Florida citizens, lacked standing to bring an access-to-courts challenge when they challenged the implementation of HB 119 (2012 Regular Session). During the November 5th meeting of the Senate Banking & Insurance Committee draft legislation to ditch Florida’s current PIP system and in its place require mandatory BI coverage coupled with $10K coverage for medical payments was a major topic of discussion. Word is that the recent DCA decision denying the plaintiffs’ motion for rehearing is already tempering legislative interest in overhauling the state’s auto insurance laws during the upcoming regular session and that perhaps more time should be given to allow the 2012 reforms to work. We will continue to closely monitor this extremely important issue and quickly report updates as they occur.
OIR Announces $3.3 Million Life Claim Settlement Agreement with Midland
Monday 11/25/13 – Insurance Commissioner Kevin McCarty has announced that a multi-state $3.3 million life claim settlement agreement has been reached with two companies (Midland National Life Insurance Company and North American Company for Life and Health Insurance) which are collectively referred to as “Midland.” The agreement with Midland and other similar insurers focuses primarily on the asymmetrical use of the Social Security Administration’s Death Master File (DMF) to cease making annuity payments, but not to search for beneficiaries of a life insurance policy who may be due benefits. Midland has agreed to implement business reforms correcting this practice and to make a multi-million dollar payment, which will be disbursed among the participating states. Florida’s allocation of the $3.3 million payment is expected to be more than $282,761.
The multi-state examination was conducted by Florida, California, Illinois (managing lead state), Iowa, New Hampshire, North Dakota, and Pennsylvania. Along with these states, the agreement includes the Florida Department of Financial Services (DFS), the Florida Office of the Attorney General (AG), and the Florida Office of Insurance Regulation (Office) and requires Midland to:
•Compare all company records against the DMF Update File every month and against the complete DMF file at least annually.
•Provide quarterly reports to the lead states about the implementation and execution of the requirements of the Agreement for 36 months following its conclusion.
•A follow-up examination to determine compliance 39 months following the conclusion of this Agreement.
OIR Releases Secondary Life Insurance Market Report
Monday 12/2/13- The Florida Office of Insurance Regulation (OIR) has released its report on the Secondary Life Insurance Market in Florida. The OIR was directed by the Florida Legislature to, “Review Florida law and regulations to determine whether there are adequate protections for purchasers of life insurance policies in the secondary life insurance market to ensure that this market continues to exist for Florida seniors. The Office of Insurance Regulation shall issue a report on the findings to the legislature by December 1, 2013.” The Office’s report ultimately concludes that based on the evidence and testimony it received there “appear to be adequate protections for purchasers of life insurance policies in the secondary life insurance market.” The Office further concluded that although it identified issues that may merit further investigation administratively, it has no recommendations for legislative action at this time. OIR General Counsel Belinda Miller played a vital role in directing the OIR’s assessment of the secondary life insurance market and its preparation of the report to legislative leaders. She also chaired the life insurance secondary market public hearing which the Office held on October 25th. Of significant interest during the hearing was testimony provided by Tom Welsh representing Fortress Investment Group. Welsh presented five significant legislative recommendations on behalf of Fortress and supported by the Institutional Longevity Markets Association (ILMA). The recommendations were as follows:
•Provide that the consumer’s intent at the time the policy was issued is not relevant to an analysis of insurable interest;
•Prohibit challenges on the basis of insurable interest after the two-year contestability period;
•Require the issuance of notices of validity to potential investors;
•When a policy is rescinded, require the insurer to make a total refund of premium; and
•Require prior approval from state insurance departments for discretionary, increase in cost rate increases.
The OIR stated in its report that, “The five legislative changes proposed by Fortress, and supported by ILMA, appear to be proposed in order to address the actions of a small handful of insurance companies. The courts are addressing these issues based on the fact-specific circumstances of each case, and there is a significant concern that enacting these legislative changes may have the unintended consequence of encouraging STOLI and fraud. Fortress had proposed, among other major proposals, limiting challenges based on insurable interest to the two-year contestability period; and when a policy is rescinded, require the insurer to make a total refund of premium. “The treatment of life insurance solely as a commodity from inception is at odds with the purpose of life insurance and may have negative ramifications for the industry, to the detriment of Florida consumers, life insurance companies, and the legitimate viatical settlement industry. The Fortress proposals were strongly opposed by the Florida Insurance Council, the American Council of Life Insurance and the National Association of Insurance & Financial Advisers-Florida during the October 25th public hearing held by the Office. We will closely monitor the Legislature’s reaction to the OIR report and keep you posted on possible attempts by Fortress and STOLI groups to move legislation during the upcoming regular session.
Compliance Reminder: Routinely Requiring Powers of Attorney Prohibited
This is to remind our readers and their appointed producers (agents) that requiring, as a condition to the purchase or continuation of an insurance policy that an applicant or insured execute a power of attorney in favor of an insurance agent or agency is prohibited by the Insurance Unfair Trade Practices Act. The prohibition goes further by making it unlawful to present to an applicant or insured, as a routine business practice, a form that authorizes the insurance agent or agency to sign the applicant’s or insured’s name on any insurance-related document or application for the purchase of motor vehicle services as described in Section 624.124, Florida Statutes. The only exception to the prohibition against routinely obtaining a signed form or power of attorney authorizing an agent to sign an applicant’s or insured’s name to an insurance-related document is in the case of premium financed business and the power of attorney or form must limit the agent’s authority to requesting the cancellation of coverage for non-payment of premium. To be valid under the Insurance Code, a power of attorney must be a separate writing in a separate document, must be executed with the full knowledge and consent of the applicant or insured who grants the power of attorney, must be in the best interest of the insured or applicant, and a copy of the power of attorney must be provided to the applicant or insured at the time of the transaction. Any agent/producer found to be requiring powers of attorney in violation of this statute faces six months suspension of licensure for each individual instance. To learn more about this prohibition, read Section 626.9541(1)(y), Florida Statutes. We hope you find this compliance reminder useful and be sure to let us know if you have any questions regarding the Florida Insurance Code.
Workers’ Compensation Special Disability Trust Fund, Estimation of Liabilities
The Florida Division of Workers’ Compensation has submitted its Special Disability Trust Fund, Estimation of Liabilities as of June 30, 2013. The report was published according to Section 440.49(9)(e), Florida Statutes, on October 1, 2013, and is available on the Division’s website on the Division of Workers’ Compensation Report screen:
Those of you who work within the workers’ compensation marketplace understand the original purpose for the establishment of the Fund; however, just to refresh our memories: The Fund was established to facilitate the return of injured workers to the workplace by reducing any employers’ insurance premium for reemploying an injured worker, to decrease litigation between carriers on apportionment issues, and to protect employers from excess liability for compensation and medical expense when an injury to a physically disabled worker merges with, aggravates, or accelerates her or his preexisting permanent physical impairment to cause either a greater disability or permanent impairment, or an increase in expenditures for temporary compensation or medical benefits than would have resulted from the injury alone. The Division of Workers’ Compensation, within the Department of Financial Services, has specific duties under Chapter 440, Florida Statutes, in administering the Fund, including informing all employers of the existence and function of the fund. While the Fund has specific effective dates of coverage for injuries, (does not apply to any case in which the accident causing the subsequent injury or death or the disablement or death from a subsequent occupational disease occurred prior to July 1, 1955, or on or after January 1, 1998), the Fund will continue to reimburse employers or carriers for subsequent injuries occurring prior to January 1, 1998, and report the liabilities that exist for those injuries noted above.
A Crazy, Busy Week next Week
My very efficient team member who has the task of keeping my calendar (bless her heart), has informed me that next week is crazy busy. Of course, we feel that way about every week at LMA, just some give us a little breather once in a while. Even with the holidays upon us, we keep working for you every chance we get and even while doing all the multi-tasking required to prepare for all the festivities that we love. So, for those of you who live here in Tallahassee; don’t be surprised when you see me with a shopping cart in one hand and of course, my cell phone in the other. I love it!!
Best to all – Lisa Miller