07-003947 Florida Farm Bureau Casualty Insurance Company And Florida Farm Bureau General Insurance Company vs. Office Of Insurance Regulation
 Status: Closed
Recommended Order on Tuesday, April 1, 2008.


View Dockets  
Summary: Insurance company failed to reflect the savings of the expansion from the CAT Fund in its rate filing.

1STATE OF FLORIDA

4DIVISION OF ADMINISTRATIVE HEARINGS

8FLORIDA FARM BUREAU CASUALTY )

13INSURANCE COMPANY AND FLORIDA )

18FARM BUREAU GENERAL INSURANCE )

23COMPANY, )

25)

26Petitioners, )

28)

29vs. ) Case No. 07-3947

34)

35OFFICE OF INSURANCE REGULATION, )

40)

41Respondent. )

43)

44RECOMMENDED ORDER

46Pursuant to notice, a final hearing was held in this case

57on January 14 through 17, 2008, in Tallahassee, Florida, before

67Susan B. Harrell, a designated Administrative Law Judge of the

77Division of Administrative Hearings.

81APPEARANCES

82For Petitioners: Paul R. Monsees, Esquire

88Qualified Representative

90Foley & Lardner, LLP

94Washington Harbour

963000 K Street Northwest, Suite 500

102Washington, D.C. 20007-5143

105Nate Wesley Strickland, Esquire

109Foley & Lardner, LLP

113106 East College Avenue, Suite 900

119Tallahassee, Florida 32301

122For Respondent: S. Marc Herskovitz, Esquire

128Office of Insurance Regulation

132200 East Gaines Street

136Tallahassee, Florida 32399-0333

139STATEMENT OF THE ISSUE

143The issue in this case is whether Petitioners' rate filing

153numbered FCP 07-08928 should be approved.

159PRELIMINARY STATEMENT

161By letter dated July 15, 2007, Respondent, Office of

170Insurance Regulation (Office or OIR), issued a Notice of Intent

180to Disapprove (NOI) a homeowners' insurance rate filing numbered

189FCP 07-08928, by Petitioners Florida Farm Bureau Casualty

197Insurance Company (FFB Casualty) and Florida Farm Bureau General

206Insurance Company (FFB General) (collectively referred to as

214FFB). The NOI listed 12 grounds for the Office's intended

224denial.

225On July 20, 2007, FFB filed a Petition for Administrative

235Hearing Involving Disputed Issues of Fact (Petition) and

243requested an administrative hearing. FFB amended the Petition

251on August 13, 2007 (Amended Petition). On August 29, 2007, the

262Office referred the Amended Petition to the Division of

271Administrative Hearings (DOAH). The case was originally

278assigned to Chief Administrative Law Judge Robert S. Cohen, but

288was transferred to Administrative Law Judge Susan B. Harrell.

297The final hearing was originally scheduled for November 5

306through 9, 2007. On October 15, 2007, the Office filed a Motion

318for Continuance, which was granted, and the final hearing was

328rescheduled for January 14 through 18, 2008.

335Prior to the final hearing, the parties stipulated that of

345the 12 grounds for disapproval which were listed in the NOI,

356items 7, 8, 11 and 12 were no longer at issue.

367At the final hearing, FFB called the following witnesses:

376Rade T. Mulin, former vice president of Operations for FFB and

387currently the head of Technical Services at AON Re Australia;

397Michael Moran, FFB's reinsurance broker and account

404representative at AON Re, Inc.; Shannon E. Sanders, FFB's Senior

414Reinsuance & Risk Management Planner; Janet Katz, senior

422vice-president and chief operating officer of American

429Agricultural Insurance Company (American Ag); and Dr. Mark

437Crawshaw, who testified as an expert witness. Petitioners'

445Exhibits 1 through 64 were admitted in evidence.

453At the final hearing, the Office called Robert Lee, an

463actuary and agency representative for the Office. Mr. Lee

472testified as an expert witness. Respondent's Exhibits 1 through

48139 were admitted in evidence.

486The seven-volume Transcript was filed on February 4, 2008.

495At the final hearing, the parties were given ten days after the

507transcript was filed to file their proposed recommended orders.

516On February 7, 2008, the Office filed a Motion for Extension of

528Time to File Proposed Recommended Orders. The motion was

537granted, and the deadline for filing proposed recommended orders

546was extended to February 25, 2008.

552The parties timely filed their Proposed Recommended Orders,

560which have been considered in the preparation of this

569Recommended Order.

571FINDINGS OF FACT

5741. FFB Casualty and FFB General are both stock insurance

584companies which are domiciled in Florida. FFB General is a

594wholly-owned subsidiary of FFB Casualty, which in turn is a

604wholly-owned subsidiary of Southern Farm Bureau Casualty

611Insurance Company of Jackson, Mississippi (SFB Casualty). FFB

619is headquartered in Gainesville, Florida, and its insurance

627products are sold exclusively in Florida. FFB only insures

636members of the Florida Farm Bureau Federation, a non-profit

645organization.

6462. On June 8, 2006, FFB made a rate filing for their

658homeowners' line of business seeking a significant rate increase

667with an effective date of December 1, 2006, in OIR file number

67906-07515. Due to the size of the requested rate increase a

690public hearing was held on August 16, 2006, in Gainesville,

700Florida, in accordance with the requirement of Section 627.0629,

709Florida Statutes (2006), which provides that "[a]ny rate filing

718that is based in whole or in part on data from a computer model

732may not exceed 15 percent unless there is a public hearing."

743§ 627.0629(7), Fla. Stat. (2006).

7483. At the public hearing, Burt Gindy, FFB's vice president

758of Government Affairs and Compliance, commenced the presentation

766of FFB by stating: "Okay, then, simply put, this filing is all

778about catastrophe reinsurance cost." Later in the public

786hearing, Mr. Gindy stated: "The homeowners' rate filings before

795you, FCP 06-07515, seeks to recognize the increase in profit

805catastrophe reinsurance costs that have escalated due to

813increasing hurricane activity." Mr. Gindy talked about the

821typical amount of reinsurance sought by FFB, stating: "We

830typically insure to a 250 year event, this year we've only been

842able to insure capacity and cost wise to about 160 year

853capacity. We know AM Best looks at that and we want to keep our

867AM Best ratings."

8704. Insurers, including FFB, generally measure and evaluate

878their potential losses from hurricanes and other extreme events

887in terms of probable maximum loss (PML), an estimate of the

898dollar amount of losses that an insurer will experience at a

909given probability. For example, a one-percent probability of

917experiencing a loss greater than a certain amount equals a

927100 year or one-in-100 year PML. This does not mean that the

939insurer is expected to incur the 100 year PML only once every

951100 years; it means that in any given year there is a

963one-percent chance of the insurer incurring a loss of that

973magnitude. When Mr. Gindy indicated that FFB had typically

982insured to a 250 year event, he meant that FFB insured for a

9950.25 percent chance of loss of a certain magnitude occurring in

1006any given year.

10095. On September 25, 2006, the Office approved a rate

1019increase for FFB of .8 percent with an effective date of

1030December 1, 2006. Because rate filings are prospective, the

1039rate increase, with an effective date of December 1, 2006,

1049appeared calculated to pay for FFB's 2007 reinsurance program.

10586. Since the mid-1990's, FFB has purchased a portion of

1068its reinsurance coverage from the Florida Hurricane Catastrophe

1076Fund (CAT Fund), as required by law. 1/ The CAT Fund is a public

1090entity which provides a statutorily specified layer of

1098reinsurance at a substantially lower cost than the private

1107market because of the CAT Fund's non-profit structure and tax

1117exempt status. The effective date of CAT Fund coverage is

1127June 1. FFB normally purchased the remainder of its reinsurance

1137from private reinsurers for one-year terms, which are generally

1146effective on January 1. Through 2006, FFB purchased a

1155significant portion of its reinsurance from its parent company,

1164SFB Casualty, and purchased other layers of coverage from

1173American Ag. Starting in 2007, SFB Casualty no longer provided

1183reinsurance for FFB, and FFB purchased coverage in the global

1193market with the assistance of AON with whom FFB had worked for

1205many years as SFB Casualty's broker.

12117. FFB generally begins planning in the summer for its

1221purchase of reinsurance to be effective for the next January 1

1232by gathering FFB's exposure date ( i.e. , how many houses FFB

1243insured, where they are located and how much they cost, etc.),

1254which data FFB runs through its own and Alliance Insurance

1264Research (AIR) computer models to estimate FFB's anticipated

1272hurricane losses and PML's. FFB then determines its desired

1281reinsurance structure, including its retention ( i.e. , amount of

1290losses that could be absorbed by FFB), and sends this

1300information to reinsurance markets in the Fall. After receiving

1309and vetting quotes seeking the most advantageous terms, FFB

1318negotiates its reinsurance program, and most of its reinsurance

1327agreements are bound by December for a January 1 effective date.

1338FFB sometimes makes adjustments to its reinsurance program after

1347January 1 to obtain additional coverage at more favorable

1356prices, subject to market conditions, or to make adjustments due

1366to changes in the CAT Fund. However, the general goal of the

1378company is to always place the lion's share of the reinsurance

1389program by the beginning of the year.

13968. By January 1, 2007, FFB had placed the majority of its

1408reinsurance program for 2007. The cost for FFB private

1417reinsurance in January 2007 was $65,984,426.

14259. Recognizing a crisis in homeowners' insurance premiums,

1433on January 9, 2007, the Florida Legislature issued a Joint

1443Proclamation to convene a special session pursuant to

1451Article III, Section (3)(c), Florida Constitution, and

1458Section 11.011, Florida Statutes (2006), to commence on

1466January 16, 2007, for the "sole and exclusive purpose" to

1476consider the following:

1479a. Legislation to reduce current property

1485insurance premiums in Florida;

1489b. Legislation to reduce the future growth

1496of property insurance premiums in Florida;

1502c. Legislation to improve availability and

1508stability of property insurance in Florida;

1514d. Legislation relating to building codes

1520in Florida.

152210. The special session convened on January 16, 2007, and

1532on January 22, 2007, the Legislature enacted Chapter 2007, Laws

1542of Florida (Chapter 2007-1), which was signed into law by the

1553Governor on January 25, 2007. One of the primary features of

1564the legislation was a massive expansion of the CAT Fund.

157411. Prior to the enactment of Chapter 2007-1, the CAT Fund

1585had an industry-wide capacity of approximately $16 billion for

1594those carriers writing property insurance in the State of

1603Florida. As a result of the enactment of Chapter 2007-1 and the

1615expansion of the CAT Fund, industry-wide coverage went from

1624approximately $16 billion to approximately $28 billion. It was

1633the intent of the Legislature that the expansion of the CAT Fund

1645would result in a rate filing that reflected "savings or

1655reduction in loss exposure to the insurer."

166212. Chapter 2007-1 required the Office to issue an order

1672specifying the date or dates on which the required rate filings

1683were to be made and be effective "in order to provide rate

1695relief to policyholders as soon as practicable." By March 15,

17052007, the Office was required to calculate a presumed factor or

1716factors to be used in the rate filings required by Chapter

17272007-1 to reflect the impact to rates based on the changes to

1739the CAT Fund.

174213. The Office issued Informational Memorandum OIR-07-06M,

1749which describes the procedure for the rate filings required by

1759Chapter 2007-1 and provides in relevant part:

1766The purpose of this memorandum is to provide

1774guidance regarding filing procedures for the

"1780Presumed Factors" filing and the subsequent

"1786True-Up" filing.

1788During the 2007 Special Session, the Florida

1795Legislature passed House Bill 1A (HB 1A)

1802requiring every residential property insurer

1807to make a filing with the Office of

1815Insurance Regulation (Office) to reflect the

1821savings or reduction in loss exposure to the

1829insurer.

1830On February 19, the Office issued an order

1838advising residential insurers to make rate

1844filings to include the new discount factors

1851mandated by HB 1A. The new discount factors

1859required in HB 1A have been calculated by

1867the Office and all residential property

1873insurers must make a rate filing

1879incorporating the new savings on or before

1886March 15, 2007. Information related to the

1893presumed factors can be found at

1899http://www.floir.com/HotTopics.htm.

1900The procedure for submitting the "Presumed

1906Factors" filing as prescribed in Section 3

1913of HB 1A and the True-Up" filing as

1921prescribed in the Office's "Presumed

1926Factors" order can be found in the

1933applicable attachments and are summarized

1938below.

1939A filing adopting the Office's "Presumed

1945Factors" (Short Form).

1948This filing shall reflect the effects of the

"1956Presumed Factors" on the rates currently in

1963effect and shall be made on a "file and use"

1973basis. The filing shall be limited to the

1981effects of the "Presumed Factors" on rates

1988currently in effect, and the elimination of

1995the 25% rapid cash buildup portion of the

2003insurer's Florida Hurricane Catastrophe Fund

2008premium. [2/] The procedures for submitting

2014this type of "Presumed Factors" filing can

2021be found in Attachment A.

2026A filing that uses, but does not strictly

2034adopt the "Presumed Factors" (Long Form).

2040A "Presumed Factors" filing that uses the

2047factors to reflect a rate decrease to take

2055into account the "Presumed Factors" shall be

2062made on a "use and file" basis and shall

2071provide all the information used in

2077preparing the filing including copies of all

2084reinsurance treaties. Such a filing is

2090subject to credits and refunds if the rate

2098reductions are determined inadequate. This

2103type of filing shall also be limited to the

2112effects of the "Presumed Factors" on the

2119rates currently in effect and the

2125elimination of the 25% rapid cash buildup

2132portion of the insurer's Florida Hurricane

2138Catastrophe Fund premium and must be

2144accompanied by a sworn statement from the

2151chief executive officer or chief financial

2157officer and actuary responsible for

2162preparing the filing. The procedures for

2168submitting this type of "Presumed Factors"

2174filing can be found in Attachment B.

2181A "True-Up" Filing as required by the

2188Office's "Presumed Factors" order.

2192After making the "Presumed Factors" filing,

2198insurers shall make a "True-Up" filing

2204pursuant to the "file and use" provisions of

2212s. 627.062(2)(a)1, Florida Statutes, that is

2218a complete rate filing to reflect the

2225savings or reductions in loss exposure to

2232the insurer due to all the provisions of

2240HB 1A and the anticipated 2007 reinsurance

2247program. The procedure for submitting the

"2253True Up" filing is identical to the annual

2261rate filing procedures in I-file, except the

2268appropriate selections now read as "Rates

2274Only Including 'True Up' Filings Pursuant to

2281the 'Presumed Factors' Order" or "Rate &

2288Rule Including 'True Up' Filings Pursuant to

2295the 'Presumed Factors' Order."

229914. On March 1, 2007, the Office issued its "Presumed

2309Rating Factors" report, which estimated an overall statewide

2317savings of 24.3 percent attributed to the changes to the CAT

2328Fund made in Section 2 of Chapter 2007-1. The Presumed Factors

2339included the savings from the new reinsurance made available to

2349insurers under Chapter 2007-1 and the savings due to the

2359elimination of the 25 percent rapid cash buildup provision of

2369prior law.

237115. On March 15, 2007, FFB made their Presumed Factors

2381filing using the "short form" process described in Informational

2390Memorandum OIR-07-06M. FFB requested and received approval of

2398an overall homeowners' insurance rate decrease of -24.5 percent.

2407The effective date of the filings was to be June 1, 2007.

241916. On May 9, 2007, FFB made their "True Up" filing, which

2431is at issue in this case. The first filing sought a rate

2443increase of .8 percent, which when combined with the Presumed

2453Factor filing would have resulted in a rate decrease for their

2464policyholders of -3.6 percent. The effective date selected by

2473FFB for their "True-Up" filing was October 1, 2007.

248217. On May 14, 2007, the Office acknowledged receipt of

2492FFB's rate filing. In return, the Office asked 51 questions

2502seeking catastrophe model support information in accordance with

2510Section 627.0628, Florida Statutes (2006). The Office also

2518requested that FFB update its statewide rate indications.

252618. On May 21, 2007, FFB responded to the Office's May 14,

25382007, request by providing a document prepared by Applied

2547Insurance Research (AIR) concerning the AIR model, which FFB had

2557used in its calculations supporting its rate filing.

256519. On May 25, 2007, FFB updated the statewide indications

2575and further amended their filing to divide the HO forms and the

2587HXL Form 9.

259020. On June 22, 2007, FFB revised the May 9, 2007, filing,

2602claiming that the revision had resulted from the "delay of

2612Florida Farm Bureau Filing 07-15 (OIR Filing FCP 07-03807), the

2622renegotiation of [their] 2007 reinsurance program, a systems

2630restraint not previously accounted for, and to follow up after

2640the March 15, 2004, effective rate filing." The effect of the

2651amendment was that FFB was now seeking a .3 percent rate

2662increase, which when combined with their Presumed Factor filing

2671would have resulted in a rate decrease for their policyholders

2681of -1.6 percent.

268421. Following its review of the amended filing, the Office

2694asked a number of questions on July 2, 2007. FFB provided

2705additional information in response to the questions on July 8,

27152007.

271622. On July 10, 2007, a public hearing was held in

2727Tallahassee, Florida, in accordance with Section 627.0629,

2734Florida Statutes (2007), 3/ to discuss the rate increase requested

2744by FFB.

274623. By letter dated July 17, 2007, and forwarded to FFB on

2758July 19, 2007, the Office issued its Notice of Intent to

2769Disapprove the filing of FFB. The Office listed 12 deficiencies

2779as its grounds for denying the rate filing. The parties have

2790stipulated that items 7, 8, 11, and 12 of the NOI are no longer

2804in issue. The remaining reasons for denial are listed below:

28141. The rate filing and requested rate

2821fail to reflect a reduction in policyholder

2828premiums consistent with the expansion of

2834the Florida Hurricane Catastrophe Fund

2839coverage contrary to the intent and

2845requirements of HB1A.

28482. Company has not provided sufficient

2854support that the reinsurance cost in the

2861filing reflecting coverage levels,

2865reinsurance premium amounts and expected

2870recoveries does not result in excessive

2876reinsurance cost related to services

2881rendered not permitted per Section 627.062,

2887F.S.

28883. Company has not provided sufficient

2894support that Florida Hurricane Catastrophe

2899Fund cost filing is consistent with tax

2906exempt status of the fund.

29114. Company failed to completely respond

2917to the Office questions for required

2923disclosure of all assumptions and factors

2929used by the Hurricane model as required by

2937Section 627.0628, F.S.

29405. Company has failed to support use of

2948model for Catastrophe losses other than

2954hurricane.

29556. Company has failed to support that

2962loss trend is not excessive.

2967* * *

29709. Company has failed to support the

2977trend procedure used to adjust hurricane

2983model losses is appropriate and consistent

2989with premium trending in the indications.

299510. Company has failed to support the

3002allocation of reinsurance cost to territory

3008in their territorial indications.

3012DEFICIENCY 1: FAILURE TO REFLECT A REDUCTION IN POLICYHOLDER

3021PREMIUMS CONSISTENT WITH THE EXPANSION OF THE CAT FUND

303024. FFB received a healthy rate increase in December 2006,

3040ostensibly to alleviate the industry-wide increase in the

3048reinsurance premiums. FFB had the majority of its reinsurance

3057coverage in place by January 2007, and the reinsurance placed

3067FFB at a one-in-190 year PML. FFB had intended to purchase

3078additional reinsurance during 2007 in order to get the PML level

3089closer to the one-in-250 year PML, which had been its goal in

3101previous years.

310325. In January 2007, FFB had reinsurance with the CAT

3113Fund, American Ag, and other private reinsurance providers

3121brokered through AON. Chapter 2007-1 provided that the rate

3130change had to consider the available coverage options provided

3139by the expansion of the CAT Fund and provided that any

3150additional cost for private reinsurance that duplicates the

3158coverages offered by the CAT Fund could not be factored in

3169determining the change in the rate. FFB estimates that

3178$25,127,526 of its January 1, 2007, reinsurance premium

3188duplicated the less expensive coverage available from the newly

3197expanded CAT Fund. The estimated premiums for the CAT Fund

3207coverage available after the enactment of Chapter 2007-1 were

3216$7,555,058.

321926. The reinsurance treaty between FFB and American Ag

3228contained a provision which allowed FFB to essentially cancel

3237coverage which was duplicative of coverage provided by the CAT

3247Fund as a result of legislative changes. FFB did not have such

3259a provision in its treaties with its other private reinsurers.

326927. FFB's Third Master layer of reinsurance was placed

3278with American Ag who, in turn, reinsured that coverage in the

3289private reinsurance market. FFB was able to renegotiate the

3298Third Master layer to remove the CAT Fund overlap because the

3309contract required American Ag's reinsurers to amend the contract

3318if the CAT Fund was amended.

332428. The First High reinsurance layer was placed through

3333FFB's broker, AON, with a number of other private reinsurers.

3343Since the treaties with these private reinsurers did not contain

3353a provision similar to the American Ag treaty, these private

3363insurers were unwilling to reduce the coverage with FFB to

3373eliminate duplication from the CAT Fund. FFB had contracted to

3383pay $15,750,000 for it First High coverage. The CAT Fund

3395coverage would have eliminated all but $1.75 million of that

3405premium. FFB had already paid a portion of the $15.75-million

3415premium to it private insurers, and the reinsurers were

3424resisting refunding the premium. FFB offered to purchase a

3433third event coverage for the First High and to add a new top

3446layer of $50 million coverage in return for a reduction of First

3458High premium of several million dollars. The effective date of

3468the renegotiated First High and the new Third High reinsurance

3478contracts were made retroactive to January 1, 2007. FFB

3487purchased a $30 million aggregate following the enactment of

3496Chapter 2007-1 and the renegotiation of their reinsurance

3504program.

350529. The increased reinsurance coverage resulting from the

3513renegotiations with the private reinsurers brought FFB's PML

3521more in line with its one-in-250 year goal. In order to

3532determine the amount of reinsurance to purchase to bring it to

3543its one-in-250 year goal, FFB used a near term sensitivity

3553analyses on the AIR model "as a benchmark for its PML

3564determinations and reinsurance program purchases." The near

3571term sensitivity analysis was used in "response to requirements

3580from rating agencies, such as A.M. Best." According to FFB, the

3591use of the near sensitivity analyses "exceeds that of the normal

3602'10K standard' event set and is used in preparation for A.M.

3613Best's annual rating agency review, as required." FFB

"3621believe[d] the version 8.2 representation of near term

3629sensitivity to be overstated, but use[d] this analysis as

3638required by A.M. Best." The use of the near term sensitivity

3649model would result in an increase of the amount of reinsurance

3660needed to reach the one-in-250 year PML.

366730. The increase in reinsurance coverage is being borne by

3677the policyholders. As stated by Mark Crawshaw, FFB's expert

3686witness:

3687Generally, the more reinsurance FFB buys,

3693the greater financial security FFB offers

3699its policyholders. However, this greater

3704security comes at a cost of greater

3711reinsurance premiums which are passed on to

3718the policyholders. In other words, there is

3725a trade-off between the level of financial

3732security and the cost of that security to

3740policyholders. The Best's Financial

3744Strength Ratings provide an objective basis

3750for quantifying and evaluating this trade-

3756off.

375731. FFB has failed to comply with the intent of the

3768Legislature in Chapter 2007-1. It has failed to reflect in its

3779rate filing the savings in the form of reduction in premiums to

3791the policyholders that would be realized from the expansion of

3801the CAT Fund and the reduction in CAT Fund premiums.

3811DEFICIENCY 2: FAILURE TO PROVIDE SUPPORT THAT REINSURANCE COSTS

3820DOES NOT RESULT IN EXCESSIVE REINSURANCE COST

382732. Item 2 addresses the Office's assertion that FFB has

3837not provided sufficient support that the reinsurance cost in the

3847rate filing reflecting coverage levels, premium amounts and

3855expected recoveries does not result in excessive reinsurance

3863cost related to services rendered. In reviewing the rate filing

3873of FFB, the Office determined that FFB's reinsurance costs were

3883significantly higher than the rest of the market. More

3892significantly, the amount of catastrophe recoveries was both

3900unsupported and understated. FFB's support for recoveries in

3908the filing was reliance upon the AIR model, with the only

3919information based on FFB's data for one month. Although

3928believing that a recovery percentage of less than ten percent

3938was an inadequate return given the cost of the reinsurance, the

3949actuary for the Office was unable to independently verify the

3959recoveries.

396033. FFB has failed to demonstrate that its reinsurance

3969costs are not excessive related to the services rendered by the

3980reinsurers.

3981DEFICIENCY 3: FAILURE TO PROVIDE SUPPORT THAT THE CAT FUND COST

3992IN THE FILING IS CONSISTENT WITH THE TAX EXEMPT STATUS OF THE

4004CAT FUND

400634. Item 3 addresses the Office's assertion that FFB has

4016not provided sufficient support to show that the CAT Fund cost

4027is consistent with the tax exempt status of the CAT Fund. The

4039CAT Fund makes no profit and as a tax exempt entity, has a very

4053large investment income credit. The result is that the CAT Fund

4064will basically pay more for losses to the insurance companies

4074than they will collect in reinsurance premiums. In its rate

4084filing, FFB did not consider the larger recoveries from the CAT

4095Fund that would result from the CAT Fund's tax exempt status and

4107did not provide sufficient support why the tax exempt status of

4118the CAT Fund was not considered.

4124DEFICIENCY 4: FAILURE TO DISCLOSE ALL ASSUMPTIONS AND FACTORS

4133RELATING TO THE USE OF THE AIR MODEL

414135. Item 4 addresses the Office's assertion that FFB

4150failed to provide access to all assumptions and factors in the

4161AIR model which FFB used in its rate filing. Section 627.0628,

4172Florida Statutes, provides that an insurer may use a model in a

4184rating filing to determine hurricane loss factors when the model

4194has been determined by the Florida Commission on Hurricane Loss

4204Projection Methodology (Commission) to be accurate and reliable

4212to determine hurricane loss factors, and the Office and the

4222Consumer Advocate appointed, pursuant to Section 627.0613,

4229Florida Statutes, have "access to all the assumptions and

4238factors that were used in developing the . . . model . . . and

4253are not precluded from disclosing such information in a rate

4263proceeding."

426436. The AIR model 8.0 used by FFB has been determined

4275acceptable by the Commission for projecting hurricane loss costs

4284in rate filings. Thus, the issue remaining is whether the

4294Office and the Consumer Advocate had access to the assumptions

4304and factors used in developing the model.

431137. On May 14, 2007, after the Office received FFB's

4321initial rate filing, the Office sent FFB a standard

4330questionnaire consisting of 51 questions concerning the AIR

4338model which FFB utilized. The same questionnaire is sent to all

4349insurers who use models in their rate filings. As of the final

4361hearing, no insurer has ever answered all the questions to the

4372satisfaction of the Office. In other words, no insurer has

4382physically given the Office all the assumptions and factors that

4392were used in developing the model. This information is

4401proprietary and is not given to the insurer by the company

4412providing the model. The information is available only from the

4422company providing the model.

442638. FFB asked AIR to respond to the questions. FFB

4436provided the response prepared by AIR to the Office on May 24,

44482007. Some of the responses provided that AIR would make the

4459information available to the Office for review and would work

4469with the Office to provide the information in an acceptable

4479format. Because much of the information is proprietary and

4488confidential, AIR was not willing to relinquish possession of

4497the information to the Office. AIR has an office in

4507Tallahassee, and staff of the Office could review the materials

4517at the Tallahassee Office.

452139. By letter dated July 3, 2007, the Office advised FFB

4532that the responses to the catastrophe model questionnaire were

4541incomplete. On July 9, 2007, FFB provided the following

4550response concerning the catastrophe model information requested:

4557Florida Farm Bureau has provided the Office

4564with all the formulas and functions

4570available to us by AIR Worldwide, Inc. The

4578catastrophe models are proprietary by their

4584very nature and require extreme care in

4591disclosure. The AIR model used in this

4598filing was reviewed and accepted by the

4605Florida Commission on Hurricane Loss

4610Projection Methodology (Commission).

4613Additionally, the AIR models are widely used

4620and accepted in the insurance, reinsurance,

4626and capital markets. Reasonability measures

4631are taken and maintained by AIR and Florida

4639Farm Bureau as explained in the IFILE

4646Catastrophe Model Questionnaire.

4649AIR Worldwide, Inc. has worked with and will

4657continue to work with and will continue to

4665be available to the Office regarding their

4672catastrophe models. In complete cooperation

4677with the Office, AIR has extended the

4684availability of their personnel and models

4690to the Office for review, including all

4697formulas and functions, at their Tallahassee

4703office. It is not the intent of AIR or

4712Florida Farm Bureau to conceal any relevant

4719or necessary information from the Office;

4725the proprietary nature of the information

4731simply demands that all protections are in

4738place to keep trade secret information

4744inside the AIR office and out of the public

4753domain.

4754Florida Farm Bureau has submitted its

4760exposure data as requested by the Office to

4768run in the public hurricane model. Although

4775we do not have access to the inner workings

4784of this model and cannot validate its

4791results or methodologies, the Office seems

4797comfortable with its results and has used

4804its results as a reasonability check versus

4811our results in past filings.

481640. The Office takes the position that making the

4825information available at the Tallahassee office of AIR is not

4835sufficient and does not provide access to the assumptions and

4845factors requested by the Office. Thus, the Office did not avail

4856itself of the opportunity to go to the AIR office in Tallahassee

4868and review the information.

487241. The Office takes the position that FFB did not provide

4883to the Consumer Advocate access to the assumptions and factors

4893used in developing the AIR model. There was no evidence

4903presented that the Consumer Advocate requested such information.

491142. In past filings, where no insurer has supplied the

4921requested proprietary information concerning the catastrophe

4927models used, the Office has used the Public Model to test the

4939reasonability of the losses projected by the insurer using a

4949vendor model such as AIR. In the instant case, the Office did

4961submit the data provided by FFB to be inputted in the Public

4973Model. The results of the Public Model showed approximately

4982$5 million more in potential losses than FFB indicated in its

4993rate filing based on the AIR Model.

5000DEFICIENCY 5: FAILURE TO SUPPORT USE OF MODEL FOR CATASTROPHE

5010LOSSES OTHER THAN HURRICANE

501443. The Office objected to the modeled figures used by FFB

5025as support for its non-hurricane losses. The expert for FFB

5035provided an analysis for non-hurricane catastrophe losses using

5043FFB's actual historical losses without relying on the results of

5053the model. The actuary for the Office conceded that FFB's

5063expert used a reasonable analysis and the more common method of

5074supporting the non-hurricane catastrophe losses. FFB has

5081provided support through its expert at final hearing for the

5091non-hurricane catastrophe losses. Therefore, the fifth

5097deficiency is not viable and cannot serve as a basis for

5108disapproving the rate filing.

5112DEFICIENCY 6: FAILURE TO SUPPORT THAT LOSS TREND IS NOT

5122EXCESSIVE

512344. In its Proposed Recommended Order the Office conceded

5132that the methodology used by FFB's expert at the final hearing

5143with respect to the loss trend was appropriate. Therefore, FFB

5153has provided support that its loss trend is not excessive.

5163DEFICIENCY 9: FAILURE TO SUPPORT THAT THE TREND PROCEDURE USED

5173TO ADJUST HURRICANE MODEL LOSSES IS APPROPRIATE AND CONSISTENT

5182WITH PREMIUM TRENDING IN INDICATIONS

518745. In its Proposed Recommended Order, the Office conceded

5196that the methodology used by FFB's expert at the final hearing

5207with respect to premium trending was appropriate. Therefore,

5215FFB has provided support for a zero-percent loss ratio trend by

5226assuming that the hurricane loss trend and the reinsurance

5235premium trend were equal.

5239DEFICIENCY 10: FAILURE TO SUPPORT THE ALLOCATION OF REINSURANCE

5248COST TO TERRITORY IN TERRITORIAL INDICATIONS

525446. The tenth deficiency deals with FFB's allocation of

5263the cost of reinsurance on a county-by-county basis. FFB

5272allocated their cost of reinsurance by using the largest 200

5282storms in their model, rather than the entire 10,000 storm set.

5294The 200 largest storms would invariably be in the more coastal

5305counties and could lead to the coastal counties subsidizing the

5315inland counties, which would be unfair discrimination. The use

5324of the 200 largest storms as opposed to the 10,000 storm set

5337does not support FFB's allocation of reinsurance cost to

5346territory in their indications.

535047. In its Amended Petition, FFB alleges that the Office

5360relied on an unadopted rule as a basis to support the NOI.

5372Specifically, FFB alleges that the Office is interpreting

5380Chapter 2007-1

5382[T]o essentially freeze insurers'

5386reinsurance coverage levels and costs at

5392whatever was already filed and approved for

5399such insurers at the time HB 1A became

5407effective (essentially the reinsurance

5411coverage levels and costs for 2006), unless

5418the change in 2007 reinsurance coverage

5424levels or costs would result in a rate

5432decrease.

543348. The Office does not interpret Chapter 2007-1 in the

5443manner asserted by FFB. Chapter 2007-1 does not prohibit an

5453insurer from having a greater amount of reinsurance in 2007 than

5464it did in 2006, but Chapter 2007-1 does require that any savings

5476that resulted from the expansion of the CAT Fund and reduced

5487premiums of the CAT Fund be passed along to the policyholders.

5498CONCLUSIONS OF LAW

550149. The Division of Administrative Hearings has

5508jurisdiction over the parties to and the subject matter of this

5519proceeding. §§ 120.569 and 120.57, Fla. Stat.

552650. The NOI represent preliminary agency action. This

5534proceeding is a de novo proceeding. Boca Raton Artificial

5543Kidney Center, Inc. v. Florida Department of Health and

5552Rehabilitative Services , 475 So. 2d 260, 262 (Fla. 1st DCA

55621985).

556351. As Petitioners, FFB has the burden of persuasion to

5573show by a preponderance of the evidence that the proposed rates

5584are not excessive, inadequate, or unfairly discriminatory.

5591§ 627.062(2)(b) and (g), Fla. Stat., and Florida Department of

5601Transportation v. J.W.C. Co. , 396 So. 2d 778 (Fla. 1st DCA

56121981).

561352. In determining whether a rate filing is excessive,

5622inadequate, or unfairly discriminatory, the Office must consider

5630the factors contained in Section 627.062, Florida Statutes,

5638which provides:

5640(1) The rates for all classes of

5647insurance to which the provisions of this

5654part are applicable shall not be excessive,

5661inadequate, or unfairly discriminatory.

5665(2) As to all such classes of insurance:

5673(a) Insurers or rating organizations

5678shall establish and use rates, rating

5684schedules, or rating manuals to allow the

5691insurer a reasonable rate of return on such

5699classes of insurance written in this state.

5706A copy of rates, rating schedules, rating

5713manuals, premium credits or discount

5718schedules, and surcharge schedules and

5723changes thereto, shall be filed with the

5730office under one of the following procedures

5737as except as provided in subparagraph 3.:

57441. If the filing is made at least 90 days

5754before the proposed effective e date and the

5762filing is not implemented during the

5768office's review of the filing and any

5775proceeding and judicial review, then such

5781filing, shall be considered a "file and use"

5789filing. In such case, the office shall

5796signalize its review by issuance of a notice

5804of intent to approve or a notice of intent

5813to disapprove within 90 days after receipt

5820of the filing. The notice of intent to

5828approve and the notice of intent to

5835disapprove constitute agency action for

5840purposes of the Administrative Procedure

5845Act. Requests for supporting information,

5850requests for mathematical or mechanical

5855corrections, or notification to the insurer

5861by the office of its preliminary findings

5868shall not toll the 90-day period during any

5876such proceedings and subsequent judicial

5881review. The rate shall be deemed approved

5888if the office does not issue a notice of

5897intent to approve or a notice of intent to

5906disapprove within 90 days after receipt of

5913the filing.

5915* * *

59183. For all filings made or submitted

5925after January 25, 2007, but before December

593231, 2008, an insurer seeking a rate that is

5941greater than the rate most recently approved

5948by the office shall make a "file and use"

5957filing. This subparagraph applies to

5962property insurance only. For purposes of

5968this subparagraph, motor vehicle collision

5973and comprehensive coverages are not

5978considered to be property coverages.

5983(b) Upon receiving a rate filing, the

5990office shall review the rate filing to

5997determine if a rate is excessive,

6003inadequate, or unfairly discriminatory. In

6008making that determination, the office shall,

6014in accordance with generally accepted and

6020reasonable actuarial techniques, consider

6024the following factors:

60271. Past and prospective loss experience

6033within and without this state.

60382. Past and prospective expenses.

60433. The degree of competition among

6049insurers for the risk insured.

60544. Investment income reasonably expected

6059by the insurer, consistent with the

6065insurer's investment practices, from

6069investable premiums anticipated in the

6074filing, plus any other expected income from

6081currently invested assets representing the

6086amount expected on unearned premium reserves

6092and loss reserves. The commission may adopt

6099rules utilizing reasonable techniques of

6104actuarial science and economics to specify

6110the manner in which insurers shall calculate

6117investment income attributable to such

6122classes of insurance written in this state

6129and the manner in which such investment

6136income shall be used in the calculation of

6144insurance rates. Such manner shall

6149contemplate allowances for an underwriting

6154profit factor and full consideration of

6160investment income which produce a reasonable

6166rate of return; however investment income

6172from invested surplus shall not be

6178considered.

61795. The reasonableness of the judgment

6185reflected in the filing.

61896. Dividends, savings, or unabsorbed

6194premium deposits allowed or returned to

6200Florida policyholders, members, or

6204subscribers.

62057. The adequacy of loss reserves.

62118. The cost of reinsurance.

62169. The trend factors, including trends in

6223actual losses per insured unit for insurer

6230making the filing.

623310. Conflagration and catastrophe

6237hazards, if applicable.

624011. A reasonable margin for underwriting

6246profit and contingencies. For that portion

6252of the rate covering risk of hurricanes and

6260other catastrophic losses for which the

6266insurer has not purchased reinsurance and

6272has exposed capital and surplus to such

6279risk, the office must approve a rating

6286factor that provides the insurer a

6292reasonable rate of return that is

6298commensurate with such risk.

630212. The cost of medical services, if

6309applicable.

631013. Other relevant factors which impact

6316upon the frequency or severity of claims or

6324upon expenses.

6326(c) In the case of fire insurance rates,

6334consideration shall be given to the

6340availability of water supplies and the

6346experience of the fire insurance business

6352during a period of not less than the most

6361recent 5-year period for which such

6367experience is available.

6370(d) If conflagration or catastrophe

6375hazards are given consideration by and

6381insurer in its rates or rating plan,

6388including surcharges and discounts, the

6393insurer shall establish a reserve for that

6400portion of the premium allocated to such

6407hazard and shall maintain the premium in a

6415catastrophe reserve. Any removal of such

6421premiums from the reserve for purposes other

6428than paying claims associated with a

6434catastrophe or purchasing reinsurance for

6439catastrophes shall be subject to approval of

6446the office. Any ceding commission received

6452by an insurer purchasing reinsurance for

6458catastrophes shall be placed in the

6464catastrophe reserve.

6466(e) After consideration of the rate

6472factors provided in paragraphs (b), (c), and

6479(d), a rate may be found by the office to be

6490excessive, inadequate, or unfairly

6494discriminatory based upon the following

6499standards:

65001. Rates shall be deemed excessive if

6507they are likely to produce a profit from

6515Florida business that is unreasonably high

6521in relation to the risk involved in the

6529class of business or if expenses are

6536unreasonably high in relation to services

6542rendered.

65432. Rates shall be deemed excessive if,

6550among other things, the rate structure

6556established by a stock insurance company

6562provides for replenishment of surpluses from

6568premiums, when the replenishment is

6573attributable to investment losses.

65773. Rates shall be deemed inadequate if

6584they are clearly insufficient, together with

6590the investment income attributable to them,

6596to sustain projected losses and expenses in

6603the class of business to which they apply.

66114. A rating plan, including discounts,

6617credits, or surcharges, shall be deemed

6623unfairly discriminatory if it fails to

6629clearly and equitably reflect consideration

6634of the policyholder's participation in a

6640risk management program adopted pursuant to

6646s. 627.0625.

66485. A rate shall be deemed inadequate as

6656to the premiums charged to a risk or group

6665of risks if discounts or credits are allowed

6673which exceed a reasonable reflection of

6679expense savings and reasonably expected loss

6685experience from the risk or group of risks.

66936. A rate shall be deemed unfairly

6700discriminatory as to a risk or group of

6708risks if the application of premium

6714discounts, credits, or surcharges among such

6720risks does not bear a reasonable

6726relationship to the expected loss and

6732experience among the various risks.

6737(f) In reviewing a rate filing, the

6744office may require the insurer to provide at

6752the insurer's expense all information

6757necessary to evaluate the condition of the

6764company and the reasonableness of the filing

6771according to the criteria enumerated in this

6778section.

6779* * *

6782(h) In the event the office finds that a

6791rate or rate change is excessive, inadequate

6798or unfairly discriminatory, the office shall

6804issue an order of disapproval specifying

6810that a new rate or rate schedule which

6818responds to the findings of the office be

6826filed by the insurer. The office shall

6833further order, for any "use and file" filing

6841made in accordance with subparagraph (a)2.,

6847that premiums charged each policy holder

6853constituting the portion of the rate above

6860that which was actuarially justified be

6866returned to such policyholder in the form of

6874a credit or refund. If the office finds

6882that an insurer's rate or rate change is

6890inadequate, the new rate or rate schedule

6897filed with the office in response to such a

6906finding shall be applicable only to new or

6914renewal business of the insurer written on

6921or after the effective date of the

6928responsive filing.

6930(i) Except as otherwise specifically

6935provided in this chapter, the office shall

6942not prohibit any insurer, including residual

6948market plan or joint underwriting

6953association, from paying acquisition costs

6958based on the full amount of premium, as

6966defined in s. 627.403, applicable to any

6973policy, or prohibit any such insurer from

6980including the full amount of acquisition

6986costs in a rate filing.

6991(j) With respect to residential property

6997insurance rate filings, the rate filing must

7004account for mitigation measures undertaken

7009by policyholders to reduce hurricane losses.

701553. The rate filing at issue stems from the requirements

7025in Chapter 2007-1, which was passed in Special Session in the

7036early part of January 2007, primarily to reduce property

7045insurance premiums, as well as the future growth of property

7055insurance premiums. The preamble to Chapter 2007-1 provides:

7063WHEREAS, the homeowners in the State of

7070Florida are struggling under increased

7075insurance costs and increased housing prices

7081as a result of damage caused by hurricanes

7089and tropical storms, and

7093WHEREAS, this increase in the cost of

7100property insurance for the state's residents

7106demands immediate attention, and

7110WHEREAS, the affordability of property

7115insurance creates financial burdens for

7120Florida's residents and financial crises for

7126some property owners, and

7130WHEREAS, in addition to affordability, the

7136availability and stability or property

7141insurance are critical issues to the

7147residents of this state, and

7152WHEREAS, because there is no single, quick,

7159or easy solution to the crisis, a

7166comprehensive and creative approach is

7171required, and

7173WHEREAS, property insurance is so interwoven

7179with other forms of insurance, through

7185business, regulation, advocacy, purchasing,

7189and other interactions, that the viability

7195of the insurance market is at risk, and

7203WHEREAS, expanding coverage offered by the

7209Florida Hurricane Catastrophe Fund can help

7215address this crisis, and

7219WHEREAS, taking steps to control or reduce

7226the premiums charged by Citizens Property

7232Insurance Corporation can help address this

7238crisis, and

7240WHEREAS, strengthening the Florida Building

7245Code and providing for voluntary guidelines

7251in addition to the requirements of the code

7259can help to address this crisis, and

7266WHEREAS, sinkhole coverage is a critical

7272part of this crisis in certain areas of the

7281state and must be addressed as part of any

7290comprehensive solution, and

7293WHEREAS, requiring property insurers to

7298offer additional deductibles and exclusions

7303that apply at the option of the property

7311owner can help to address the crisis, and

7319WHEREAS, authorizing various groups of

7324public and private entities to enter into

7331forms of self-insurance or guaranty groups

7337can help to address this crisis, and

7344WHEREAS, strengthening the process for

7349establishing property insurance rates can

7354help to address this crisis, and

7360WHEREAS, the role of consumer advocacy is a

7368critical part of addressing this crisis and

7375consumer advocacy for property insurance is

7381critical, if not the predominant, part of

7388consumer advocacy regarding insurance, and

7393WHEREAS, promoting, through financial and

7398regulatory methods, the ability of property

7404insurers and reinsurers to do business in

7411Florida can help address this crisis, and

7418WHEREAS, promoting through financial and

7423regulatory incentives for property owners,

7428the strengthening of property to withstand

7434the effects of windstorm damage can help to

7442address this crisis, NOW THEREFORE,

7447Be it enacted by the Legislature of the

7455State of Florida; . . . .

746254. The legislation itself represents a multi-pronged

7469attack on rapidly escalating insurance premiums, which the

7477Legislature believed was driven by rapidly escalating

7484reinsurance costs. The centerpiece of the legislation was the

7493expansion of the CAT Fund from $16 billion to $28 billion.

7504Additionally, the legislation eliminated the 25 percent rapid

7512cash build-up portion of the CAT Fund premium, thereby reducing

7522the premium amounts.

752555. To effectuate savings resulting from the expansion of

7534the CAT Fund, Chapter 2007-1 contained filing requirements for

7543insurers and corresponding duties for the Office. Section 3 of

7553Chapter 2007-1 provides:

7556Section 3.(1) Every residential property

7561insurer must make a rate filing with the

7569Office of Insurance Regulation, pursuant to

7575the "file and use" provisions of s.

7582627.062(2)(a)1., Florida Statutes, which

7586reflects the savings or reduction in loss

7593exposure to the insurer due to the

7600provisions of section 2 of this act. An

7608insurer may not obtain a rate increase due

7616to the election of coverage options from the

7624Florida Hurricane Catastrophe Fund pursuant

7629to s. 215.555(4), (16), or (17), Florida

7636Statutes.

7637(2) The office shall specify, by order,

7644the date or dates on which the rate filings

7653required by this section must be made and be

7662effective in order to provide rate relief to

7670policyholders as soon as practicable.

7675(3) By March 15, 2007, the Office of

7683Insurance Regulation shall calculate a

7688presumed factor or factors to be used in the

7697rate filings required by this section to

7704reflect the impact to rates of the changes

7712made by sections 2 of this act and this

7721section.

7722(4) In determining the presumed factor,

7728the Office of Insurance Regulation shall use

7735generally accepted accounting actuarial

7739techniques and standards in determining the

7745expected impact on losses, expenses, and

7751investment income of insurers.

7755(5) The office may contract with an

7762appropriate vendor to advise the office in

7769determining the presumed factor or factors.

7775(6) Each residential property insurer

7780shall reflect a rate change that takes into

7788account the presumed factor determined under

7794subsection (3) for any policy written or

7801renewed on or after June 1, 2007. Such

7809factor must be taken into account for the

7817coverage options offered pursuant to s.

7823215.555(4), (16), and (17), Florida

7828Statutes, for an insurer eligible to elect

7835such optional coverage, whether or not the

7842insurer purchases that coverage. Any

7847additional cost for private reinsurance or

7853loss exposure that duplicates such coverage

7859options may not be factored in the rate,

7867whether or not such coverage options are

7874purchased.

787556. In addition, Chapter 2007-1, amended Section 627.062,

7883Florida Statutes, to require a certification be filed with each

7893rate filing. The amendment provided:

7898(9)(a) Effective March 1, 2007, the chief

7905executive officer of chief financial officer

7911of a property insurer and the chief actuary

7919of a property insurer must certify under

7926oath and subject to the penalty of perjury,

7934on a form approved by the commission, the

7942following information, which must accompany

7947the rate filing:

79501. The signing officer and actuary have

7957reviewed the rate filing;

79612. Based on the signing officer's and

7968actuary's knowledge, the rate filing does

7974not contain any untrue statement of a

7981material fact or omit to state a material

7989fact necessary in order to make the

7996statements made, in light of the

8002circumstances under which such statements

8007were made, not misleading.

80113. Based on the signing officer's and

8018actuary's knowledge, the information and

8023other factors described in s. 627.062(2)(b),

8029including but not limited to, investment

8035income, fairly present in all material

8041respects the basis of the rate filing for

8049the periods presented in the filing; and

80564. Based on the signing officer's and

8063actuary's knowledge, the rate filing

8068reflects, all premium savings that are

8074reasonably expected to result from

8079legislative enactments and are in accordance

8085with generally accepted and reasonable

8090actuarial techniques.

8092(b) A signing offer or actuary knowingly

8099making a false certification under this

8105subsection commits a violation of s.

8111626.9541(1)(e) and is subject to penalties

8117under s. 626.9521.

8120(c) Failure to provide such certification

8126by the officer and actuary shall result in

8134the rate filing being disapproved without

8140prejudice to be refilled.

8144(d) The commission may adopt rules and

8151forms pursuant to ss. 120.536(1) and 120.54

8158to administer this subsection.

8162(Emphasis supplied.)

816457. It is clear that the Legislature intended that the

8174changes to the CAT Fund should result in savings in reinsurance

8185costs to the insurers which, in turn, would be passed along to

8197the policyholders.

819958. In the deficiency listed as the first item in the NOI,

8211the Office correctly contends that the rate filing failed to

8221reflect a reduction in policyholder premiums consistent with the

8230expansion of the CAT Fund and is contrary to the intent of

8242Chapter 2007. There is nothing in Chapter 2007-1 which

8251prohibits FFB from increasing their amount of reinsurance;

8259however, whatever savings are realized from the expansion of the

8269CAT Fund should be passed to the policyholders in the form of

8281rate reductions not in the form of increased reinsurance so that

8292FFB can maintain its ratings with A.M. Best.

830059. In the deficiency listed as the second item in the

8311NOI, the Office correctly contends that FFB failed to provide

8321support that its reinsurance costs were not excessive.

832960. In the deficiency listed as the third item in the NOI,

8341the Office contends that FFB did not provide sufficient support

8351to show that the cost of premiums for the CAT Fund is consistent

8364with the CAT Fund's tax exempt status. FFB did not take into

8376consideration the CAT Fund would pay out more in recoveries than

8387it takes in premiums because of the large investment credit

8397income resulting from not having to pay federal income tax.

8407This deficiency is sustained.

841161. In the deficiency listed as the fourth item in the

8422NOI, the Office contends that FFB did not provide access to the

8434assumptions and factors used in the development of the AIR

8444models as required by Subsection 627.0628, Florida Statutes,

8452which provides:

8454(1)(c) It is the intent of the

8461Legislature to create the Florida Commission

8467on Hurricane Loss Projection Methodology as

8473a panel of experts to provide the most

8481actuarially sophisticated guidelines and

8485standards for projection of hurricane losses

8491possible, given the current state of

8497actuarial science. It is the further intent

8504of the Legislature that such standards and

8511guidelines must be used by the State Board

8519of Administration in developing

8523reimbursement premium rates for the Florida

8529Hurricane Catastrophe Fund, and subject to

8535paragraph (3)(c), may be used by insurers in

8543rate filings under s. 627.062 unless the way

8551in which such standards and guidelines were

8558applied by the insurer was erroneous, as

8565shown by a preponderance of the evidence.

8572* * *

8575(3) ADOPTION AND EFFECT OF STANDARDS AND

8582GUIDELINES.--

8583(a) The commission shall consider any

8589actuarial methods, principles, standards,

8593models, or output ranges that have the

8600potential for improving the accuracy of or

8607reliability of the hurricane loss

8612projections used in residential property

8617insurance rate filings. The commission

8622shall, from time to time, adopt findings as

8630to the accuracy or reliability of particular

8637methods, principles, standards, models, or

8642output ranges.

8644(b) In establishing reimbursement

8648premiums for the Florida Hurricane

8653Catastrophe Fund, the State Board of

8659Administration must, to the extent feasible,

8665employ actuarial methods, principles,

8669standards, models, or output ranges found by

8676the commission to be accurate or reliable.

8683(c) With respect to a rate filing under

8691s. 627.062, an insurer may employ actuarial

8698methods, principles, standards, models, or

8703output ranges found by the commission to be

8711accurate or reliable to determine the

8717hurricane loss factors for use in a rate

8725filing under s. 627.062. Such findings and

8732factors are admissible and relevant in

8738consideration of a rate filing by the office

8746or in any arbitration or administrative or

8753judicial review only if the office and the

8761consumer advocate appointed pursuant to

8766s. 627.0613 have access to all of the

8774assumptions and factors that were used in

8781developing the actuarial methods,

8785principles, standards, models, or output

8790ranges, and are not precluded from

8796disclosing such information in a rate

8802proceeding. In any rate hearing under

8808s. 120.57 or in any arbitration proceeding

8815under s. 627.062(6), the hearing officer,

8821judge, or arbitration panel may determine

8827whether the office and the consumer advocate

8834were provided with access to all of the

8842assumptions and factors that were used in

8849developing the actuarial methods,

8853principles, standards, models, or output

8858ranges and to determine their admissibility.

886462. The term "access" is not defined by statute or rule,

8875and it is left to the Administrative Law Judge to determine

8886whether access to the assumptions and factors was provided.

8895FFB did provide access to the information requested by the

8905Office. Access does not equate to physically giving possession

8914of the documents to the Office. AIR made the information

8924available to the Office at AIR's Tallahassee office. Thus, the

8934Office had access to the information, but failed to avail itself

8945of the offer by FFB and AIR.

895263. The Office contends that FFB did not meet the

8962requirements of Section 627.0628, Florida Statutes, because it

8970did not provide access to the Consumer Advocate. There was no

8981evidence presented that the Consumer Advocate ever requested the

8990information from FFB for this particular rate filing. Unless

8999there was a request for the information, it cannot be said that

9011access was denied.

901464. In the deficiency listed as the fifth item, the Office

9025contended that FFB failed to provide support for its non-

9035hurricane catastrophe losses because it relied on a model that

9045was not approved by the Commission. At the final hearing, FFB

9056provided support through its expert witness for the non-

9065catastrophe losses used in the rate filing and has eliminated

9075Deficiency 5 as a ground for disapproval of its rate filing.

908665. In the deficiencies listed as the sixth and ninth

9096items, relating to loss trend and premium trend respectively,

9105the Office has conceded in its Proposed Recommended Order that

9115the methodology used by FFB's expert at the final hearing is

9126acceptable. Therefore, FFB has eliminated Deficiency 6 and

9134Deficiency 9 as grounds for disapproval of its rate filing.

914466. In the deficiency listed as item ten, the Office

9154correctly contends that FFB's use of the largest 200 storms to

9165support their allocation of reinsurance cost to territory in

9174their indications. This deficiency remains as a basis for

9183disapproval of the rate filing.

918867. Pursuant to Subsection 120.57(1)(e), Florida Statutes,

9195FFB has challenged an interpretation of Chapter 2007-1, which it

9205attributes to the Office as being an unpromulgated rule.

9214Subsection 120.57(1)(e), Florida Statutes, provides:

9219(e)1. Any agency action that determines

9225the substantial interests of a party and

9232that is based on an unadopted rule is

9240subject to de novo review by an

9247administrative law judge.

92502. The agency action shall not be

9257presumed valid or invalid. The agency must

9264demonstrate that the unadopted rule:

9269a. Is within the powers, functions, and

9276duties delegated by the Legislature or, if

9283the agency is operating pursuant to the

9290authority derived from the State

9295Constitution, is within that authority;

9300b. Does not enlarge, modify, or

9306contravene the specific provisions of law

9312implemented;

9313c. Is not vague, establishes adequate

9319standards for agency decisions, or does not

9326vest unbridled discretion in the agency;

9332d. Is not arbitrary or capricious. A

9339rule is arbitrary if it is not supported by

9348logic or the necessary facts; a rule is

9356capricious if it is adopted without thought

9363or reason or is irrational;

9368e. Is not being applied to the

9375substantially affected party without due

9380notice; and

9382f. Does not impose excessive regulatory

9388costs on the regulated person, county, or

9395city.

93963. The recommended and final orders in

9403any proceeding shall be governed by the

9410provisions of paragraphs (k) and (l), except

9417that the administrative law judge's

9422determinations regarding the unadopted rule

9427shall not be rejected by the agency unless

9435the agency first determines from a review of

9443the complete record, and states with

9449particularity in the order, that such

9455determination is clearly erroneous or does

9461not comport with the essential requirements

9467of law. In any proceeding for review under

9475s. 120.68, if the court finds that the

9483agency's rejection of the determination

9488regarding the unadopted rule does not

9494comport with the provisions of this

9500subparagraph, the agency action shall be set

9507aside and the court shall award to the

9515prevailing party the reasonable costs and a

9522reasonable attorney's fee for the initial

9528proceeding and the proceeding for review.

953468. FFB has failed to establish that the Office has relied

9545on an interpretation of Chapter 2007-1 that would prohibit an

9555insurer from having more reinsurance in 2007 than it did in

95662006. That is not the Office's interpretation. Because FFB has

9576failed to demonstrate that the interpretation, which it contends

9585that the Office relied upon to disapprove FFB's rate filing, is

9596an interpretation relied upon by the Office, FFB's claim

9605pursuant to Subsection 120.57(1)(e), Florida Statutes, must

9612fail.

9613RECOMMENDATION

9614Based on the foregoing Findings of Fact and Conclusions of

9624Law, it is

9627RECOMMENDED that a final order be entered disapproving

9635FFB's rate filing.

9638DONE AND ENTERED this 1st day of April, 2008, in

9648Tallahassee, Leon County, Florida.

9652S

9653SUSAN B. HARRELL

9656Administrative Law Judge

9659Division of Administrative Hearings

9663The DeSoto Building

96661230 Apalachee Parkway

9669Tallahassee, Florida 32399-3060

9672(850) 488-9675 SUNCOM 278-9675

9676Fax Filing (850) 921-6847

9680www.doah.state.fl.us

9681Filed with the Clerk of the

9687Division of Administrative Hearings

9691this 1st day of April, 2008.

9697ENDNOTES

96981/ Subsection 215.55(4), Florida Statutes (2007), provides that

9706as a condition of doing business in the State of Florida, each

9718insurer who writes covered policies for residential property is

9727required to enter into reimbursement contracts with the State

9736Board of Administration to provide the insurer with

9744reimbursement for certain percentages of losses from each

9752covered event in excess of the insurer's retention, plus five

9762percent of the reimbursed losses to cover adjustment expenses.

9771The reimbursement is made from the CAT Fund which is

9781administered by the State Board of Administration. In exchange

9790for the reimbursement coverage, the insurer is required to pay

9800reimbursement premiums to the CAT Fund. § 215.555(5), Fla.

9809Stat. (2007) .

98122/ Subsection 212.555(5)(b), Florida Statutes (2006), provided

9819that the formula used to determine the premiums for the CAT Fund

9831was to include "a factor of 25 percent of the fund's actuarially

9843indicated premium in order to provide for more rapid cash

9853buildup in the fund." The elimination of the 25 percent rapid

9864cash buildup portion of the CAT Fund premium reflected a 25

9875percent reduction of the CAT Fund premiums to insurers.

98843/ Unless otherwise indicated, all references to the Florida

9893Statutes are to the 2007 codification.

9899COPIES FURNISHED :

9902Honorable Kevin M. McCarty

9906Commissioner

9907Office of Insurance Regulation

9911200 East Gaines Street

9915Tallahassee, Florida 32399-0305

9918Steve Parton, General Counsel

9922Office of Insurance Regulation

9926200 East Gaines Street

9930Tallahassee, Florida 32399-0305

9933Paul R. Monsees, Esquire

9937Qualified Representative

9939Foley & Lardner, LLP

9943Washington Harbour

99453000 K Street Northwest, Suite 500

9951Washington, DC 20007-5143

9954Nate Wesley Strickland, Esquire

9958Foley & Lardner, LLP

9962106 East College Avenue, Suite 900

9968Tallahassee, Florida 32301

9971S. Marc Herskovitz, Esquire

9975Office of Insurance Regulation

9979200 East Gaines Street

9983Tallahassee, Florida 32399-0333

9986NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

9992All parties have the right to submit written exceptions within

1000215 days from the date of this Recommended Order. Any exceptions

10013to this Recommended Order should be filed with the agency that

10024will issue the Final Order in this case.

Select the PDF icon to view the document.
PDF
Date
Proceedings
PDF:
Date: 10/10/2008
Proceedings: Notice of Service of Respondent`s First Set of Interrogatories to Petitioner filed.
PDF:
Date: 07/02/2008
Proceedings: Final Order filed.
PDF:
Date: 04/01/2008
Proceedings: Recommended Order
PDF:
Date: 04/01/2008
Proceedings: Recommended Order (hearing held January 14 through 17, 2008). CASE CLOSED.
PDF:
Date: 04/01/2008
Proceedings: Recommended Order cover letter identifying the hearing record referred to the Agency.
PDF:
Date: 02/25/2008
Proceedings: (Petitioner`s Proposed) Recommended Order filed.
PDF:
Date: 02/25/2008
Proceedings: Petitioner`s Notice of Filing Proposed Recommended Order filed.
PDF:
Date: 02/25/2008
Proceedings: Letter to Judge Harrell from W. Strickland enclosing CD containing Petitioners` Proposed Recommended Order filed.
PDF:
Date: 02/25/2008
Proceedings: Repondent`s Proposed Recommended Order filed.
PDF:
Date: 02/07/2008
Proceedings: Order Granting Extension of Time (proposed recommended orders to be filed by February 25, 2008).
Date: 02/07/2008
Proceedings: CASE STATUS: Motion Hearing Held.
PDF:
Date: 02/06/2008
Proceedings: Respondent`s Motion for Extension of Time to File Proposed Recommended Orders filed.
Date: 02/04/2008
Proceedings: Transcript (Volumes 1 through 7) filed.
PDF:
Date: 01/16/2008
Proceedings: Order Accepting Qualified Representative.
PDF:
Date: 01/15/2008
Proceedings: Petitioner`s Request for Authorizaiton of a Qualified Representative filed.
Date: 01/14/2008
Proceedings: CASE STATUS: Hearing Held.
PDF:
Date: 01/11/2008
Proceedings: Deposition of Rade Musulin filed.
PDF:
Date: 01/11/2008
Proceedings: Deposition of Rade Musulin Exhibits Only (exhibits not available for viewing) filed.
PDF:
Date: 01/11/2008
Proceedings: Telephonic Deposition of Mark Crawshaw Exhibits Only (exhibits not available for viewing) filed.
PDF:
Date: 01/11/2008
Proceedings: Telephonic Deposition of M. Crawshaw filed.
PDF:
Date: 01/11/2008
Proceedings: Notice of Filing Deposition (M. Crawshaw).
PDF:
Date: 01/11/2008
Proceedings: Notice of Filing Deposition (R. Musulin).
PDF:
Date: 01/11/2008
Proceedings: Respondent`s Amended Unilateral Pre-hearing Stipulation filed.
PDF:
Date: 01/09/2008
Proceedings: Deposition of Melissa Shelley filed.
PDF:
Date: 01/09/2008
Proceedings: Notice of Filing Deposition (M. Shelley) filed.
PDF:
Date: 01/09/2008
Proceedings: Telephonic Deposition of Bert Gindy filed.
PDF:
Date: 01/09/2008
Proceedings: Notice of Filing Deposition (B. Gindy) filed.
PDF:
Date: 01/07/2008
Proceedings: Petitioners` Prehearing Statement filed.
PDF:
Date: 01/07/2008
Proceedings: Notice of Taking Telephonic Deposition filed.
PDF:
Date: 01/07/2008
Proceedings: Respondent`s Unilateral Pre-hearing Stipulation filed.
PDF:
Date: 12/19/2007
Proceedings: Order on Motion to Compel.
PDF:
Date: 12/18/2007
Proceedings: Notice of Taking Deposition filed.
PDF:
Date: 12/18/2007
Proceedings: Notice of Taking Telephonic Deposition filed.
Date: 12/18/2007
Proceedings: CASE STATUS: Motion Hearing Held.
PDF:
Date: 12/13/2007
Proceedings: Respondent`s Response to Petitioners` Motion to Compel Production of Documents, Response to Interrogatories, and Deposition Testimony filed.
PDF:
Date: 12/06/2007
Proceedings: Petitioners` Motion to Compel Production of Documents, Response to Interrogatories, and Deposition Testimony filed.
PDF:
Date: 11/13/2007
Proceedings: Amended Notice of Taking Deposition filed.
PDF:
Date: 11/08/2007
Proceedings: Notice of Taking Deposition filed.
PDF:
Date: 10/19/2007
Proceedings: Order Granting Continuance and Re-scheduling Hearing (hearing set for January 14 through 18, 2008; 9:00 a.m.; Tallahassee, FL).
Date: 10/18/2007
Proceedings: CASE STATUS: Motion Hearing Held.
PDF:
Date: 10/18/2007
Proceedings: Second Amended Notice of Taking Deposition Duces Tecum of Respondent filed.
PDF:
Date: 10/17/2007
Proceedings: Amended Notice of Taking Deposition Duces Tecum of Respondent filed.
PDF:
Date: 10/17/2007
Proceedings: Notice of Taking Deposition Duces Tecum of Respondent filed.
PDF:
Date: 10/16/2007
Proceedings: Petitioners` Response in Opposition to Motion for Continuance filed.
PDF:
Date: 10/15/2007
Proceedings: Motion for Continuance filed.
PDF:
Date: 10/09/2007
Proceedings: Petitioners` Responses to Respondent`s First Request for Production of Documents filed.
PDF:
Date: 10/09/2007
Proceedings: Notice of Service of Petitioners` Answers to Respondent`s First Set of Interrogatories filed.
PDF:
Date: 10/02/2007
Proceedings: Notice of Service of Answers to Petitioners` First Set of Interrogatories to Respondent filed.
PDF:
Date: 09/17/2007
Proceedings: Notice of Transfer.
PDF:
Date: 09/17/2007
Proceedings: Order of Pre-hearing Instructions.
PDF:
Date: 09/17/2007
Proceedings: Notice of Hearing (hearing set for November 5 through 9, 2007; 9:00 a.m.; Tallahassee, FL).
PDF:
Date: 09/07/2007
Proceedings: Notice of Service of Respondents` First Set of to Petitioners Interrogatories filed.
PDF:
Date: 09/06/2007
Proceedings: Joint Response to Initial Order filed.
PDF:
Date: 08/31/2007
Proceedings: Notice of Service of Petitioners` First Set of Interrogatories to Respondent filed.
PDF:
Date: 08/31/2007
Proceedings: Petitioners` First Request for Production of Documents to Respondent filed.
PDF:
Date: 08/30/2007
Proceedings: Initial Order.
PDF:
Date: 08/29/2007
Proceedings: Amended Petition for Administrative Hearing Involving Disputed Issues of Fact filed.
PDF:
Date: 08/29/2007
Proceedings: Agency referral filed.
PDF:
Date: 07/29/2007
Proceedings: Notice of Intent to Disapprove filed.

Case Information

Judge:
SUSAN BELYEU KIRKLAND
Date Filed:
08/29/2007
Date Assignment:
09/13/2007
Last Docket Entry:
10/10/2008
Location:
Tallahassee, Florida
District:
Northern
Agency:
Office of Insurance Regulation
 

Counsels

Related DOAH Cases(s) (1):

Related Florida Statute(s) (16):