Insurance Capital Build-Up Incentive Program

 

STATE BOARD OF ADMINISTRATION

RULE NO: RULE TITLE
19ER07-1: Insurance Capital Build-Up Incentive Program
SPECIFIC REASONS FOR FINDING AN IMMEDIATE DANGER TO THE PUBLIC HEALTH, SAFETY OR WELFARE: The 2007 Legislature passed HB 1A during the Special Legislative Session in January 2007, effective January 25, 2007, and CS/SB 2498, effective upon becoming law, during the 2007 Regular Legislative Session. This legislation impacts the Insurance Capital Build-Up Incentive Program (Program), which was created by the Legislature in 2006. The purpose of this Program is to increase the availability of residential property insurance covering the risk of hurricanes in Florida and to mitigate premium increases. The State Board of Administration of Florida (Board) is directed to administer the Program. The 2007 Hurricane Season began on June 1, 2007, and the funding for this Program reverts to General Revenue on June 30, 2007; therefore, time is of the essence to implement these new changes to the Program.
REASON FOR CONCLUDING THAT THE PROCEDURE IS FAIR UNDER THE CIRCUMSTANCES: The Program changes need to be implemented immediately in order to have an impact on the 2007 Hurricane Season. Rulemaking has already begun and a rule workshop notice was published in the May 25, 2007, Florida Administrative Weekly. In addition, the Board has created a place for the Program on its website and updated it with the new legislative changes.
SUMMARY: CS/SB 2498 expanded the applicability of the Program, as created by HB 1A, by defining the phrase “an insurer writing only manufactured housing policies” as including the following for purposes of the Program: 1. A Florida domiciled insurer that begins writing personal lines residential manufactured housing policies in Florida after March 1, 2007, and that removes a minimum of 50,000 policies from Citizens Property Insurance Corporation without accepting a bonus, provided at least 25 percent of its policies cover manufactured housing. Such an insurer may count any funds above the minimum capital and surplus requirement that were contributed into the insurer after March 1, 2007, as new capital under this statute and 2. A Florida domiciled insurer that writes at least 40 percent of its policies covering manufactured housing in Florida. In addition, HB 1A provided that insurers writing only manufactured housing were eligible for a surplus note of up to $7 million and, for those applying for a surplus note after July 1, 2006, the amount of new capital had to double the amount of the surplus note. Thus, the new capital would be $14 million for a $7 million surplus note if the manufactured housing insurer applied after July 1, 2006. This was changed in CS/SB 2498 passed during the Regular Legislative Session. Now the surplus requirement for an insurer writing only manufactured housing need only be equal to the surplus note. Thus, a $7 million surplus note would require a new capital contribution of $7 million.
THE PERSON TO BE CONTACTED REGARDING THE EMERGENCY RULE IS: Jack E. Nicholson, Senior FHCF Officer, Florida Hurricane Catastrophe Fund, State Board of Administration, P.O. Box 13300, Tallahassee, FL 32317-3300; telephone [phone]

THE FULL TEXT OF THE EMERGENCY RULE IS:

19ER07-1 Insurance Capital Build-Up Incentive Program. (19-15.001).

(1) Purpose. Section 215.5595, F.S., creates the Insurance Capital Build-Up Incentive Program (“Program”) for the purposes of increasing the availability of residential property insurance covering the risk of hurricanes in Florida and mitigating premium increases. The State Board of Administration of Florida (“Board”) is directed to administer the Program. This rule is promulgated to implement the Program.

(2) Scope.

(a) The Legislature has appropriated a total of $250 million for the purposes of this Program.

(b) The Board in an effort to implement this Program in a timely fashion consistent with the start of the June 1, 2006, hurricane season and consistent with the flexibility provided for in Section 215.5595(2)(h), F.S., has established an earlier implementation date of June 1, 2006, and pursuant to this rule has allocated the total $250 million, less moneys needed for administrative expenses, to be made available to Insurers applying within the time frame of June 1, 2006 until June 15, 2006. Any remaining funds which are not committed shall be available to those Insurers applying during the second time frame, June 16, 2006 until July 1, 2006. If there are funds remaining following the two initial time frames, such funds will be available for those Insurers which apply within the time frame of July 2, 2006 until June 1, 2007. The unexpended balance of the appropriation shall revert to general revenue, but not until June 30, 2007.

(c) The proceeds derived from the Surplus Note issued by the Insurer, pursuant to Section 215.5595(4), F.S., is intended to be an asset for statutory accounting purposes and not a liability on the Insurer’s balance sheet.

(d) The Board’s actions and determinations in administering this Program are exempt from Chapter 120, F.S., pursuant to Section 215.5595(6), F.S.

(e) An Insurer may qualify and be eligible for consideration under this Program provided that the Insurer contributes New Capital and commits to meeting the Minimum Writing Ratio for the term of the Surplus Note. Additionally, the Insurer’s Surplus, New Capital contribution, and Surplus Note must total at least $14 million for those Insurers writing only manufactured housing policies, must total at least $50 million for other Insurers, and all Insurers must submit the application as adopted under this rule within the time frames referenced in Section 215.5595(2)(b), F.S.

(f) The Board may Approve an application by an eligible and qualifying Insurer for a Surplus Note, unless the Board determines that the financial condition of the Insurer and its business plan for writing residential property insurance in Florida places an unreasonably high level of financial risk to the state of nonpayment in full of the interest and principal. The Board shall consult with the Office and may contract with independent financial and insurance consultants in making this determination.

(g) If the amount of Surplus Notes requested by Insurers exceeds the amount of funds available, the Board may prioritize Insurers that are eligible and Approved, regardless of the date of application within the application time frames. Consideration shall be given to the type of insurance written, with preference given to insurers writing only manufactured housing policies, financial strength of the Insurer, the viability of the Insurer’s proposed business plan for writing additional residential property insurance, and the effect on competition.

(3) Definitions.

(a) “Applicant” means the Insurer making application under the Program.

(b) “Approve,” “Approving,” “Approved,” or “Approval” means the Insurer’s application has been approved contingent upon a review and prioritization of all the applicants who may have applied for the limited funds available under the Program during the application periods specified in paragraphs (4)(e), (f), or (g) below. If the amount of the Surplus Notes requested does not exceed the funds available during these application periods, it will not be necessary for the Board to prioritize applicants prior to distributing funds, but in all cases the Insurer shall be required to contribute New Capital and provide verification of a deposit prior to the Board distributing the proceeds derived from the Surplus Note.

(c) “Board” means the State Board of Administration of Florida.

(d) “Cash” or “Cash Equivalents” means unencumbered cash or unencumbered cash equivalents as specified in Section 625.012(1), F.S. Cash Equivalents are short-term, highly liquid investments, with original maturities of 3 months or less, which are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates.

(e) “Impair” or “Impaired” means the Insurer’s Surplus is below the Minimum Required Surplus as specified in Section 215.5595(2)(c), F.S.

(f) “Insurer” means an authorized insurance company seeking to participate in the Program.

(g) “Insurer writing only manufactured housing” includes an Insurer that 1. is a Florida domiciled insurer that begins writing personal lines residential manufactured housing policies in Florida after March 1, 2007, and that removes a minimum of 50,000 policies from Citizens Property Insurance Corporation without accepting a bonus, provided at least 25 percent of its policies cover manufactured housing. Such an insurer may count any funds above the minimum capital and surplus requirement that were contributed into the insurer after March 1, 2007, as new capital under this statute or 2. is a Florida domiciled insurer that writes at least 40 percent of its policies covering manufactured housing in Florida.

(h)(g) “Minimum Capital Contribution” means, with respect to Insurers who apply to the Board by July 1, 2006, a contribution of New Capital to its Surplus which is at least equal to the amount of the Surplus Note. “Minimum Capital Contribution” means, with respect to all other applicants applying after July 1, 2006 and before June 1, 2007, a contribution to its Surplus that is twice the amount of the Surplus Note. For insurers writing only manufactured housing as defined in paragraph (3)(g), the New Capital Contribution is required to be equal to the amount of the Surplus Note amount subject to paragraph (3)(i), below.

(i)(h) “Minimum Required Surplus” means, for purposes of this Program, that the Insurer’s total Surplus, after the issuance of the Surplus Note and New Capital contribution equals at least $14 million for Insurers writing only manufactured housing policies and $50 million for all other Insurers.

(j)(i) “Minimum Writing Ratio” means a 2:1 ratio of Net Written Premium to Surplus except as to a newly formed Insurer writing only manufactured housing policies. The “Minimum Writing Ratio” for an Insurer writing only manufactured housing policies shall be the ratio provisions provided in Section 624.4095, F.S.

(k)(j) “Net Written Premium” means direct Premium plus assumed Premium less ceded Premium.

(l)(k) “New Capital” must be in the form of Cash or Cash Equivalents and be recorded as additional paid-in capital or new stock issued. New Capital does not include Citizens Property Insurance Corporation take-out bonuses pursuant to Section 627.3511, F.S. Except as provided below, a A New Capital contribution does not constitute contributions by the Insurer made prior to the Insurer’s application date for the Surplus Note or any other funds contributed to the Insurer’s Surplus which are made for purposes other than in conjunction with the requirements of the Program. New Capital may include the initial contribution to surplus for a new Insurer if such Insurer has been formed in order to participate in the insurance Capital Build-up Incentive Program and the capital contribution was made in conjunction with the Insurer applying for the surplus note. An insurer described in subparagraph (3)(g)1., above, may count any funds above the minimum capital and surplus requirement that were contributed into the insurer after March 1, 2007, as new capital.

(m)(l) “Surplus Note” means the Surplus Note issued by the Insurer to the Board.

(n)(m) “Office” means the Office of Insurance Regulation, which was created in Section 20.121(3), F.S.

(o)(n) “Premium” means premiums relating to residential property insurance in Florida including the peril of wind.

(p)(o) “Program” means the Insurance Capital Build-Up Incentive Program created by Section 215.5595, F.S.

(q)(p) “Substantial Impairment” or “Substantially Impair” means that the Commissioner of Insurance Regulation (Commissioner) has solvency concerns that the Insurer may not be able to meet the obligations of its policyholders and has provided the Board with a written explanation.

(r)(q) “Surplus” means the Insurer’s admitted assets less the Insurer’s liabilities and refers to the entire Surplus of the Insurer.

(4) Administration.

(a) The Legislature has appropriated $250 million for the Program with a limitation of one percent of this amount used for administrative cost and fees.

(b) For purposes of applications and other documentation provided to the Board the date of receipt shall be the date that the item has actually been delivered to the Board by 5:00 p.m. E.T. Any items received after 5:00 p.m. E.T. will be deemed to have been received on the next business day that is not a Saturday, Sunday, or legal holiday. Neither the United States Postal Service postmark nor a postage meter date is determinative.

(c) Incomplete applications will be returned to the Insurer and will not be considered by the Board.

(d) The submission of a completed application by an Insurer that has met all the conditions necessary for Approval is no guarantee that a Surplus Note will be executed and that funds will be available and distributed to an Insurer.

(e) Application time frame from June 1, 2006 to June 15, 2006: Applications received from June 1, 2006 to June 15, 2006, if accompanied by all the information needed to review the application and if all the Surplus Note requirements have been met, will be reviewed by the Board before any applications received after that time.

(f) Application time frame from June 16, 2006 to July 1, 2006: If there are funds remaining after the review of applications received on or before June 15, 2006, then applications received from June 16, 2006 to July 1, 2006, if accompanied by all the information needed to review the application and if all the Surplus Note requirements have been met, will be reviewed by the Board before any applications received after that time.

(g) Application time frame from July 2, 2006 to June 1, 2007: If there are funds remaining after the review of applications received on or before July 1, 2006, then applications received from July 2, 2006 to June 1, 2007, if accompanied by all the information needed to review the application and if all the Surplus Note requirements have been met, will be reviewed by the Board.

(h) Additional information may be requested by the Board as provided for in subsection (7) below.

(i) The Board shall not reserve funds based on an Insurer’s application date or the date which funds are requested by the Insurer. Funds will not be committed to an Insurer until the Surplus Note is executed by both the Insurer and the Board.

(5) Statutory Requirements for an Insurer’s Participation in the Program. In determining whether an Insurer has met the requirements outlined below, the Board shall consult with the Office and may consult with independent financial and insurance consultants.

(a) Insurers who apply to the Board on or before July 1, 2006, must contribute an amount of New Capital to its Surplus which is at least equal to the amount of the Surplus Note requested.

(b) Insurers who apply to the Board after July 1, 2006, other than insurers writing only manufactured housing, but before June 1, 2007, must contribute an amount of New Capital to its Surplus which is at least twice the amount of the Surplus Note requested.

(c) Insurers must submit a completed application including supplying all the required documentation to the Board. The application, Form SBA 15-1, rev. 09/07 2/07, is hereby adopted and incorporated by reference into this rule. This Form is available on the Board’s website, www.sbafla.com, under “Insurance Capital Build-Up Incentive Program”.

(d) Prior to the time the application, Form SBA 15-1, rev. 09/07 06/07, is submitted, the Insurer must review and accept the terms of the Surplus Note, Form SBA 15-2, rev. 09/07 06/07, which is hereby adopted and incorporated by reference into this rule. The Surplus Note is available on the Board’s website, www.sbafla.com, under “Insurance Capital Build-Up Incentive Program”.

(e) The principal amount of the Surplus Note issued to any Insurer or Insurer group, other than an Insurer writing only manufactured housing policies may not exceed $50 million. The principal amount of the Surplus Note issued to any Insurer or Insurer group writing only manufactured housing policies may not exceed $7 million.

(f) For Insurers, other than those writing only manufactured housing policies, an Insurer’s Surplus, New Capital, and the Surplus Note must total at least $50 million as a result of participating in the Program. For an Insurer writing only manufactured housing policies, the Insurer’s Surplus, New Capital, and the Surplus Note must total at least $14 million as a result of participating in the Program.

(g) Prior to the execution of the Surplus Note, the Insurer must arrange for the Board to receive a letter from a depository institution which states the amount of unencumbered Cash or Cash Equivalents that have been deposited into the Insurer’s account.

(h) Prior to the execution of the Surplus Note, the Insurer must provide the Board with a letter from the Insurer’s top executive officer attesting that the New Capital contribution, for purposes of the Insurer, is not subject to any liens or other encumbrances.

(i) The Insurer must commit to meeting the Minimum Writing Ratio of Net Written Premium for the term of the Surplus Note and must submit quarterly filings to the Office and the Board. The quarterly filings shall be on Form SBA 15-3, rev. 09/07 06/07, which is hereby adopted and incorporated by reference into this rule. This Form is available on the Board’s website, www.sbafla.com, under “Insurance Capital Build-Up Incentive Program”.

(j) Insurer’s plan of operation, submitted as part of the application process, must address how the Insurer intends to reach the required Minimum Writing Ratio within sixty days of the Board distributing funds to the Insurer.

(k) Insurer shall provide documentation showing that the Insurer is currently in compliance with Section 627.0645, F.S., which requires an annual base rate filing.

(l) Only those Insurers that can demonstrate as a result of their financial condition and business plan that they do not create an unreasonably high level of financial risk to the state involving the full repayment both interest and principal will be considered for Approval by the Board after consulting with the Office and after any other review deemed necessary by the Board.

(6) Prioritization of Applications. The Board may consult with the Office and with independent financial and insurance consultants in prioritizing Approved applications. The intent of the prioritization process is to provide the Surplus Note proceeds to those Insurers that are expected to have the greatest impact and result in the greatest benefits to the residential property insurance market in a timely fashion so as to relieve short term market pressures. Prioritization shall occur based upon the following criteria:

(a) The earlier an application is filed, the better the chance that there will be funds remaining in the Program to provide to qualified and Approved Applicants.

(b) The type of insurance written. All other prioritization factors being equal, preference will be given to Insurers writing only manufactured housing policies.

(c) The amount of an Insurer’s New Capital contributions in excess of the minimum requirement.

(d) An Insurer’s financial strength.

(e) The Insurer’s ability to timely and expeditiously meet the Minimum Writing Ratio requirement as described in the Insurer’s business plan.

(f) The viability and the level of detail and specificity associated with the Insurer’s proposed business plan for writing additional residential property insurance covering the peril of wind.

(g) The effect on competition in the residential property insurance market including the number of new policies which the Insurer contemplates writing as a result of the Program.

(h) Whether the repayment of the Surplus Note will be guaranteed by a financially strong guarantor.

(i) Whether the Insurer is willing to pledge any assets as collateral for the repayment of the Surplus Note.

(j) Any other concessions an Applicant is willing to make that would enhance the purposes and effectiveness of the Program.

(7) Additional Information.

(a) In addition to Insurers submitting the Surplus Note application, SBA Form 15-1, rev. 09/07 06/07, the Board may request additional information and data prior to the time the Surplus Note is executed. Such additional information may consist of additional documentation, answers to questions that arise as a result of the review process, and additional information solicited through oral interviews.

(b) Additional information may only be solicited by the Board. The Insurer shall not unilaterally submit additional information or data past the application time frame for which the Surplus Note is being considered. If the Insurer desires to submit such additional information, the Insurer may request that a new application submission date be established and that the Insurer be considered for the next application time frame as designated in paragraph (4)(e), (f), or (g) above.

(8) Payment Conditions.

(a) Interest Rate: The Surplus Note shall accrue interest on the unpaid principal balance at a rate equivalent to the 10-year U.S. Treasury Bond rate. The rate will be adjusted quarterly for the term of the Surplus Note based on the 10-year Constant Maturity Treasury rate.

(b) Interest for the First Three Years: For the first three years of the Surplus Note, an Insurer is required to pay interest only. However, principal payments can be made during this time at the option of the Insurer. Interest payments shall begin to accrue from the date that the Surplus Note proceeds are distributed to the Insurer.

(c) Repayment Limitations: Any payment of principal or interest by the Insurer on the Surplus Note must be approved by the Commissioner, who shall approve the payment unless the Commissioner determines that such payment will result in a Substantial Impairment to the financial condition of the Insurer. If such a determination is made, the Commissioner shall approve such payment that will not Substantially Impair the financial condition of the Insurer or recommend to the Board a limited time period for the suspension of payments. The Board will seek approval of payments from the Commissioner and will notify any Insurer if a payment of principal and/or interest has been disapproved or, if a lower amount has been approved, the amount by which the usual payment is to be reduced, or whether a payment(s) have been suspended for a limited period of time. If full payments of principal and interest are not received in a timely fashion, the Board may lengthen the term of the Surplus Note and make any other adjustments with the Approval of the Commissioner that will protect the state’s interest in the repayment of the proceeds.

(d) Interest shall continue to accrue even in situations where payments under the Surplus Note have been suspended as a result of the Commissioner’s actions.

(9) Default: Conditions, Consequences, and Insurer Responsibilities.

(a) Conditions Resulting in Default:

1. Failure to reach the Minimum Writing Ratio within 60 days of an Insurer receiving the proceeds of the Surplus Note distributed by the Board or the failure to maintain the Minimum Writing Ratio once reached unless a supplemental agreement is provided for in the Surplus Note that allows the Insurer more time to reach the Minimum Writing Ratio due to financial considerations.

2. Failure to submit quarterly filings of Form SBA 15-3, rev. 09/07 06/07, to the Office.

3. Failure to maintain the Minimum Required Surplus except for situations involving the payment of losses resulting from a catastrophic event or a series of events resulting in catastrophic losses or where Minimum Required Surplus is reduced as a result of the accounting treatment for deferred acquisition costs or where Minimum Required Surplus is reduced as a result of the repayment of principal.

4. Misuse of Program Proceeds: The Surplus Note will be in default if proceeds received pursuant to the Surplus Note are converted into any asset not authorized under Part II of Chapter 625, F.S.

5. Failure to make a payment of interest and/or principal where the payment by the Insurer has been approved by the Office.

6. Failure to make a payment of interest and/or principal where the payment by the Insurer has not been approved by the Office, but alternative payments have been approved.

7. False or Misleading Statements: Any representations, including those made in the application and/or accompanying documentation, which are false or misleading.

8. When the Insurer pays any ordinary or extraordinary dividend when there are payments of principal or interest payments that are past due under the Surplus Note.

(b) Consequences of Default: For all defaults, the Board, in its sole discretion, may exercise any one of the following options:

1. Increase the interest rate to the maximum interest rate permitted by law;

2. Accelerate the repayment of principal and interest;

3. Shorten the term of the Surplus Note;

4. Call the Surplus Note and demand full repayment.

(c) Insurer responsibilities: The Insurer shall notify the Board when any of the above conditions resulting in default arises.

Specific Authority 215.5595 FS. Law Implemented 215.5595(2), (2)(c), (d), (e), (g) FS. History–New 2-22-07, Amended 6-3-07, 6-12-07.

THIS RULE TAKES EFFECT UPON BEING FILED WITH THE DEPARTMENT OF STATE UNLESS A LATER TIME AND DATE IS SPECIFIED IN THE RULE.
EFFECTIVE DATE: June 12, 2007