Rate Process, Depreciation Holdback Among Key Legislative Issues
Each year at the outset of the legislative session, there is considerable speculation as to proposals that might pass and those that will fall by the wayside. Some proposals evoke strong feelings from opposing sides of the debate, as is likely to be the case in 2010 with proposals like the “consumer choice” bill that would create considerable rating flexibility for residential insurers. Other proposals seem to produce early consensus, with perhaps only the details to be worked out as the session moves along. As the 2010 session begins, it appears that an inflationary rating adjustment and modification of the depreciation holdback statute fall into the latter category– many parties appear to recognize a need for change, with the details to be worked out.
Property insurance rates have been under substantial scrutiny in recent years, prompted in large part by rate changes sought after the active 2004 and 2005 hurricane seasons. However, just as abrupt pricing changes might create difficulties for some consumers, rate changes that occur too slowly or at insufficient levels create solvency and capital-raising problems for insurers. The legislature in 2009 took a step toward balancing these considerations when it allowed insurers to recover reinsurance costs and certain other costs in an expedited filing, subject to a 10% cap on policyholders’ rate changes. An early proposal for 2010 would add an additional component to this filing process– an inflationary adjustment that insurers could make according to a factor that would be published each year by the Office of Insurance Regulation. If an insurer does not currently believe its rates to be adequate, the insurer is unlikely to reach rate adequacy through only an inflationary adjustment. In that case, the insurer could choose to use the full filing process that has existed for many years. However, for insurers starting with adequate rates, the inflationary adjustment provision would offer a streamlined opportunity for them to keep pace with cost changes while ensuring that the annual impact to policyholders is moderate.
Another important change would affect Florida’s depreciation holdback statute. For many insurers, insurance policies provided that losses to property covered at replacement cost would be handled first through payment of the actual cash value, to then be followed by payment for the balance upon proof that repairs or replacements had been made. This was an important part of the claims-handling process because it served to limit fraudulent or inflated claims. Following the 2004 and 2005 hurricanes, however, the legislature perceived a need to ensure that policyholders received full claims payments as quickly as possible so they could effectuate repairs (particularly for roof damage). The legislature therefore specified that insurers would pay the full replacement cost without regard to depreciated value, whether or not the insured chose to repair or replace the property. Looking back, many observers now believe that the legislature went too far in addressing the post-hurricane concerns, resulting in an increase in fraudulent or inflated claims that the holdback provision was designed to avoid. Early proposals in the House of Representatives and the Senate would address this issue by restoring the ability of insurers to initially pay less than the full replacement cost of damaged property with the full payment due as insureds make repairs or replacements. The proposals, however, would establish a minimum amount of the insurer’s initial payment (such as 40-50% of replacement cost) to ensure that policyholders have enough money to begin repairing or replacing the damaged property. Regardless of the chosen payment threshold, the current proposals will be helpful in alleviating some of the problems that have resulted from the earlier decision to eliminate depreciation holdbacks.
We will follow the major insurance bills of the 2010 session on the legislative page of our website. In addition, our Florida Insurance Report covers timely topics relating to the Florida insurance industry, and free subscriptions are available through a link on our webpage.