Florida is known for its unique level of hurricane exposure, with the majority of its residents making their homes in over 30 counties collectively containing more than 1,000 miles of coastline. After a decade-long and unprecedented lucky streak, the state has now been affected by three major hurricanes in three straight years. Less well-known are some quirky aspects of its political structure that directly influence not only property and flood insurance regulation, but also Florida’s one-of-a-kind government presence within the market.
The public servants who interact most frequently with U.S. insurers are state insurance commissioners. These chief regulators are usually either directly elected or appointed by the state’s governor. But Florida has a “Cabinet” system of government. There are four statewide elected officials—the governor, the chief financial officer, attorney general, and agriculture commissioner—who sit as the Financial Services Commission (FSC), which appoints or removes the commissioner of the Office of Insurance Regulation (OIR), as well as approves all administrative regulations or “rules.” Insurers operating in Florida are often advised to monitor the activities of the FSC as a whole and the viewpoints of each member.
The state also has a mandatory government-run property catastrophe reinsurance program, the Florida Hurricane Catastrophe Fund, and a body that regulates the use of catastrophe models in rate filings, the Florida Commission on the Hurricane Loss Projection Methodology.
To learn more about insurance governance and its challenges in Florida, one of the world’s riskiest catastrophe zones, read the article “Political winds in a peak hurricane state” by Milliman actuary John Rollins.
Earlier this year, the Florida Supreme Court ruled that state law limiting attorney fees in workers’ compensation insurance cases was unconstitutional. The law was found to prevent challenges to the “reasonableness” of attorney’s fees awarded in such cases. In this article, Milliman consultant Simon Wong provides a brief history of Florida’s workers’ compensation system, discussing how the court’s ruling will affect carriers and self-insured employers moving forward.
Here’s an excerpt:
The court thus found the “irrebuttable presumption,” or inability of any claimant to challenge the fee, to be unconstitutional. In striking down the fee law, the court directed the state to return to previous law “until the Legislature acts to cure the constitutional infirmity,” essentially returning Florida’s workers’ compensation attorney fees structure to the pre-SB 50A system based on hourly fees. The decision emphasizes that “the fee schedule remains the starting point, and that the revival of the predecessor statute does not mean that claimants’ attorneys will receive a windfall. Only where the claimant can demonstrate … that the fee schedule results in an unreasonable fee—such as in a case like this—will the claimant’s attorney be entitled to a fee that deviates from the fee schedule.”
The concern is that this also means a return to the high pre-SB 50A levels of attorney-represented claim costs. In response to the Castellanos decision, the NCCI initially proposed a rate increase of 17.1% to new, renewal, and all in-force policies effective on or after August 1, 2016.1 Subsequently, the NCCI proposed amending the filing to include the impact of the Westphal decision as well, and proposed a rate increase of 19.6% effective October 1, 2016.2 It should also be noted that the Castellanos and Westphal decisions have a retroactive impact on all claims that remain open or are reopened on or after July 1, 2009, and January 1, 1994, respectively. Because workers’ compensation rate-making is prospective only, insurers are not able to recoup premium to cover such unforeseen retroactive system costs.
For now, carriers and self-insured employers can look for increasingly more expensive workers’ compensation claims in Florida. Unless a legislative solution of some kind emerges, they should start preparing for higher attorney’s fees. More changes from the courts and the legislature are almost certain and should be monitored closely.
Sinkholes in Florida have threatened the balance sheets of insurance companies, and have endangered their profitability and even their solvency—as one firm experienced. Although several bills have been passed to address the exposure that insurers face, the sinkhole crisis continues.
In his new article “Sinkhole peril: Reducing exposure and managing risk,” Matt Chamberlain discusses how insurance companies can manage the risk associated with sinkholes.
Here is an excerpt:
Excluding sinkhole coverage and offering it as a buyback with a 10% mandatory sinkhole deductible after an inspection is one of the most important tools that insurers currently have. However, the dramatic example of adverse selection that occurred in recent years in Pasco and Hernando counties should serve as a reminder of the importance of risk differentiation. Adverse selection occurs because policyholders or competitors have more information about an insured risk. Insurers can reduce this risk by adopting granular rating plans that align the premium charged as closely as possible with the expected loss.
Because insurers based their calculations on territories designed for wind risk—consisting of a coastal and inland region—they failed to adequately differentiate risk within these counties based on underlying geology, changes in underground aquifers, and claim patterns. Further, since sinkhole claims are relatively uncommon, albeit very severe, companies often lack credible data, which encourages them to utilize territories that are not homogenous.
SB408 has diminished the sense of crisis in the industry and creates an opportunity for insurers to get ahead of the risks they face. Companies are now able to charge a separate premium for the sinkhole peril and they should begin utilizing territories that better reflect the variation in the underlying risk from that peril. Doing so, coupled with other important risk management strategies, will decrease the likelihood that they will have the sort of unfavorable experience that has been so damaging to the industry in recent years.
In a previous article, Matt discussed the benefits of utilizing geocoding models to rate hurricane coverage on a granular level in Florida. To read that article, click here.