Commissioner Discusses Misalignment Between Rates and Mitigation Discounts
Florida Insurance Commissioner Kevin McCarty presented ideas for “principle-based” insurance reform to the Senate Banking and Insurance Committee this afternoon. In his presentation, Commissioner McCarty identified several reasons the private market has difficulty competing with Citizens Property Insurance Corporation. Among these, the Commissioner noted a “mismatch” between primary rate levels and the mitigation discounts for which consumers may qualify.
Commissioner McCarty noted that an insurer may choose from among several models approved by the Florida Commission on Hurricane Loss Projection Methodology to assist in their ratemaking. However, Florida’s mitigation discount table is predicated on loss relativities derived from using a single model (the ARA model). Additionally, insurers run their chosen models on their specific portfolios, whereas the mitigation relativity study is not unique to a particular insurer’s business. Commissioner McCarty proposes that insurers be allowed to use the mitigation relativities used by the same models they otherwise use for ratemaking, as long as those mitigation components are reviewed by the Florida Commission on Hurricane Loss Projection Methodology.
The Commissioner’s proposal would be helpful in rectifying one concern with the mitigation discount program. The mitigation discounts are intended to reflect the reduction in losses associated with certain construction techniques and loss prevention devices. However, the losses derived by the various models are different. That’s not to say any one model is better than another– each model must be approved by the modeling commission before the insurer can use it in ratemaking. The point is simply that if the models project losses differently, then the benefits of reducing those losses through mitigation features also will be different. This results in anomalous pricing situations in which the starting point for premiums on a particular risk might be appropriate but after considering the level of discounts the insurer no longer considers the premium to be reasonable. The result often will be that the insurer won’t write the risk, and the risk ends up in Citizens. Establishing a common source for loss projections and mitigation discounts won’t solve the problem, but it is one step in the right direction.