A Look at SB 408’s Reinsurance Cost Recovery
In the property insurance arena, the legislative process is a delicate balancing act as the House and Senate attempt to make adjustments that will lead to insurance coverage that is both available and affordable while also ensuring that consumers are protected. SB 408, which recently passed in the legislature and is awaiting action by Governor Scott, reflects this balancing act. Some may be disappointed that the bill does not do enough to address the so-called cost drivers behind rate increases, while others may believe the bill went too far. In the end, though, the bill represents a reasonable balance between these views.
One provision that has been portrayed unfavorably is the reinsurance cost recovery clause. Current Florida law allows insurers to make reinsurance cost recovery filings with a 45-day review window instead of the 90 days that applies to base rate filings. The legislature made adjustments to this filing process in SB 408 that are designed to make the provision more useful. These efforts have been labeled by opponents of the bill as virtually assuring that Floridians will receive 15% rate increases, and allowing rate increases on top of other rate increases insurers receive. Neither of these criticisms is correct.
Reinsurance costs are one of the factors included in insurers’ rate filings. Section 627.062(2)(b) specifically includes reinsurance costs among the factors the Office of Insurance Regulation must consider in reviewing an insurer’s rates. The only questions then are when, and how, insurers recover those costs. One possibility is to include the reinsurance costs in their annual base rate filings. Insurers are required to submit base rate filings each year, or certify the appropriateness of their existing filings, under Section 627.0645. This helps ensure that insurers’ rates keep pace with the needed changes, both upward and downward. Thus, whether they are increasing or decreasing, insurers’ reinsurances cost can be one of the many factors included in base rate filings.
Another alternative is to separate the reinsurance costs into their own filings. Base rate filings have a review period of 90 days because the Office of Insurance Regulation must review many factors, including reinsurance costs, investment income, non-catastrophe losses, and others. Reinsurance cost filings can be reviewed under a 45-day calendar because they deal only with the single subject of reinsurance costs. However, those costs do not change by virtue of being included in their own filing, and an insurer cannot recover its current year’s reinsurance costs in a segregated reinsurance cost filing only to then seek a further increase for those costs in a base rate filing. Simply put, an insurer’s rates must take its reinsurance costs into account, and those costs will contribute to its overall rates only once in each annual filing cycle.
The Office of Insurance Regulation will review the reinsurance costs in the filings to make sure they are appropriate and accurately reflected in any proposed rate adjustments. The 15% limitation in SB 408 ensures that reinsurance cost recovery filings cannot exceed 15%, but does not provide that the filings must or will reach 15%. If an insurer makes a reinsurance cost recovery filing and justifies only a 4% change or 8%, or even zero or downward adjustments, then the Office of Insurance Regulation will approve only those amounts.
In this manner, the process can be viewed as allowing either one comprehensive rate filing during a year with a 90-day review period, or consideration of the same factors over the course of two filings. The logic behind segregating the reinsurance costs into their own filing is that the reinsurance costs can be readily identified, reviewed within the shorter 45-day window, and implemented in a manner designed to protect the solvency of insurers. Reinsurance costs make up a significant percentage of insurers’ expenses, and being able to better align the receipt of revenues with the outlay of expenses is an important part of making sure insurers are able to pay claims when due.
One can review SB 408 and wonder whether the legislature should have done more in some areas or less in others. However, it is unfair to characterize provisions of the bill as doing things they simply do not do. In the case of the reinsurance cost recovery provision, SB 408 does not assure that policyholders will receive 15% rate increases, and any adjustments made in reinsurance cost filing will not be “on top of” other rate changes in the sense that reinsurance costs recovered under one filing option cannot then be recovered again in another filing.