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Final Report Discusses Mitigation Discount Process

Final Report Discusses Mitigation Discount Process

The Florida Commission on Hurricane Loss Projection Methodology has released its final Windstorm Mitigation Discounts Report discussing problems with the current mitigation discount process and recommending a series of potential solutions.  The 2009 Florida Legislature asked the modeling commission to review the current process by which personal and commercial residential policyholders receive discounts on their property insurance premiums based on construction techniques or fixtures designed to reduce hurricane damage.  Although the insurance industry and many others in Florida have said that improving the storm-readiness of the state’s housing stock is an important long-term goal, insurers have pointed out that problems with the current mitigation discounts have created market distortions and have contributed to poor operating results even in the recent storm-free years.

The modeling commission observes that the financial performance of the residential property insurance market has worsened in recent years since full implementation of the discounts, even as Florida has not experienced any hurricanes during that time.  The commision’s report identifies several factors that seemingly have contributed to that result, including concerns with how the discounts have been implemented, differences between the model used to determine the loss relativies and the models used by insurers in ratemaking, and the presence of fraud and errors in the inspection process.

The commission makes a series of recommendations about how to improve the process.  Among these, the commission believes that the legislature should establish the mitigation discount review process as a function of the Commission on Hurricane Loss Projection Methodology rather than the Office of Insurance Regulation.  The modeling commission then would develop standards for the mitigation discount modules of the various models, and insurers would be required to use the same models to develop their discounts as they use in making their rates.

The commission also points out that under some insurer’s rating plans, a mitigation incentive program might include both discounts and surcharges, as compared to the current approach where only discounts are provided.  The commission further suggests that the components of an insurer’s coverage (dwelling, other structures, contents, etc.) should be considered separately because mitigation techniques affect the expected losses under these coverages differently.

Testimony before the commission revealed significant concerns with the quality of inspection data.  This can be attributed to fraud in some instances, but inadvertent errors and inadequate training also contribute to the recording of incorrect information.  The modeling commission recommends that the penalty for participating in mitigation fraud be increased from a misdemeanor to a felony.  In addition, the commission supports creation of an independent inspection organization that would serve as a clearinghouse for inspection information throughout the state.  All residential properties in the state would have to be inspected periodically, and the inspections would be subject to a quality control process.

The commission’s report is an important step in Florida’s review of the mitigation discount process.  Next, the Florida Legislature will decide in the 2010 session that begins in March whether to implement some or all of the commission’s recommendation or to take other actions designed to improve the process by which incentives are connected with improvements in residential properties throughout the state.