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.
Recommended Order on Tuesday, April 1, 2008.
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.
- Date
- Proceedings
- PDF:
- Date: 10/10/2008
- Proceedings: Notice of Service of Respondent`s First Set of Interrogatories to Petitioner filed.
- 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: Letter to Judge Harrell from W. Strickland enclosing CD containing Petitioners` 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: 01/15/2008
- 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 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.
- 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: 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: 10/16/2007
- Proceedings: Petitioners` Response in Opposition to 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 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: 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.
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
-
S. Marc Herskovitz, Esquire
Address of Record -
Thomas Maida, Esquire
Address of Record -
Paul R. Monsees, Esquire
Address of Record -
Nate Wesley Strickland, Esquire
Address of Record