MITIGATION. A Report Card on. Florida s Quest to Harden Homes. Prepared by. The Florida Association of Insurance Agents

Transcription

1 MITIGATION A Report Card on Florida s Quest to Harden Homes Prepared by The Florida Association of Insurance Agents PO Box Tallahassee FL Telephone: Fax: Website: Created: August 12, 2009 Revised: September 2, 2009

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3 ABSTRACT In 1992, the Miami-Dade County Building Code was among the strongest in America. In the wake of Hurricane Andrew s 170 mph winds, however, its vulnerabilities were so pronounced they triggered a series of enactments lasting almost two decades. These government reactions fall into two categories: one, issues dealing with new construction, mostly the stringency and enforcement of building codes; and two, issues dealing with retrofitting of existing structures. The two taken together constitute mitigation within the meaning of this document. It isn t our intention here to bring new data or science to these issues. Rather it is to bring to light the issues themselves shortcomings of the current system so policymakers can learn whether legislation designed to harden Florida homes is working as intended. This paper will imply, therefore, whether mitigation credits are appropriate and correctly applied and whether consumers are receiving accurate information regarding the stormworthiness of their homes. It is our general conclusion that much is left to be done in both regards. This document is divided into the following sections: I. HISTORY AND BACKGROUND II. III. IV. INAPPROPRIATE PREMIUM CREDITS A FLAWED HOME INSPECTION SYSTEM CONCLUSION V. SOURCES 1

4 Building Codes I. HISTORY AND BACKGROUND Florida s growing population and hurricanes from 1940 to 1960 began the debate on the need for a statewide building code. A law was finally enacted in 1974 requiring local governments to adopt and enforce a building code, but allowing each to do so by choosing from one of four minimum standard models approved by the state. Under the 1974 enactment, the state s role was merely to promulgate minimum standards and revise the four model codes, leaving adoption, enforcement, and amendment up to each municipality. After Hurricane Andrew, Miami-Dade began an in depth review of its building code and its enforcement, making significant changes in both respects. Outside of Dade County, the Board of Building Codes and Standards (later the Florida Building Commission) embraced important enhancements to the four models and began licensing local enforcement personnel. Then, in 1996, a study commission recommended revisions to the 1974 law, including a single statewide code with state oversight. For the most part, those recommendations were adopted by the 1998 Legislature. Later, effective March 1, 2002, lawmakers implemented the first statewide building code (SBC) in the entire United States, which supplanted all local codes (with one exception cited below). The Florida Building Commission (FBC) is charged with annually reviewing the code and its application, as well as national code enhancements and innovations, so that new editions can be promulgated at least every three years. The first update occurred in 2004 and included the following improvements: t t t t t Increased design practices for homes from 100 mph to 110 mph; Higher standards to limit water intrusion through walls; Requirements for identifying pressure rating for windows on building plans and on window labels; Requirement for pressure ratings for garage and entry doors; and, Higher standards for roof covering wind ratings and testing. Legislation enacted in 2006 (SB 1774) removed a lingering exemption from the state code for the Northwest Florida Region, penned the Panhandle exemption. Mitigation Premium Credits Encouraged both by regulatory authorities and the insurance industry, lawmakers began to recognize the important role that insurance premium credits could play in motivating owners of existing structures to retrofit their properties. This included inspecting their structures owner and non-owner occupied dwellings, apartments, and individual units and common areas of condominiums in order to take corrective measures. 2

5 One of the early and persistent challenges was for premium payers to understand that home hardening was as much about protecting the lives and property inside the structure as it was about achieving savings on an insurance policy. And, to a slightly lesser extent, it was also about reducing the burdens of temporarily relocating people and possessions in a storm s aftermath. Much effort was (and is) expended explaining that wind mitigation discounts apply only to the wind portion of the premium and that dollar discounts vary according to the base premium of the carrier. While legislation regarding mitigation premium credits began as early as June 1, 2002 ( , F.S.), much of the current debate emerged a few months later with a 294- page report commissioned by the Florida Department of Community Affairs (DCA) based on research conducted by Applied Research Associates, Inc. (ARA). Its relativity chart, outlining various mitigation factors and their impact on premium discounts, indicated a level of credit that, even to casual observers, appeared elevated. Further, the report did not have the benefit of empirical data that would soon be available from the eight storms of 2004 and The political climate prior to the 2004/2005 storms was markedly different than today. Then, there was a focus on Citizens Property Insurance Corporation (Citizens) and its depopulation the process of keeping out and taking out policies. This was at a time when consumer access to Citizens was only granted if no other voluntary market option was available, creating an incentive to make the writing of business more attractive to voluntary carriers. In 2007 a foundation was laid for inflated premium credits when lawmakers made Citizens a competitive alternative. This and the public quest for lower premiums at any cost, perhaps, was the predicate for the Office of Insurance Regulation (OIR) to move the base home in the ARA 2002 study to the worst case home, allowing only credits to apply without any debits for poorly mitigated structures. Mathematically the results so skewed premiums that later the discounts were reduced by half. The Building Code Enforcement Grade It should be noted that one of the first credits available soon after Hurricane Andrew, and thus one of the first problems unearthed, was the result of lax code enforcement revealed in the wake of Hurricane Andrew. The Florida Home Builders, insurers, regulators, and policymakers felt lax enforcement was reducing the effectiveness of Florida s building codes. Ultimately, it was decided to give premium discounts based on enforcement levels of a local code, known as the Building Code Enforcement Grade (BCEG). Later, when mitigation credits became mandatory, the inconsistency of annually applying the BCEG credit to homes already built under enforced building codes in addition to discounts that usually flowed from an enforced code emerged as a persistent example of double credits and a flawed implementation process as discussed in more detail below (see II. Inappropriate Premium Credits). 3

6 Consumer Information & Agent Education Few deny a major component of mitigation is public information that is educating consumers on the true value of home hardening and how to earn premium credits by improving their structures. Initially, insurance agents, who would be the front line for any public information campaign, were only slightly more informed than consumers. Thus, two enactments occurred. First, in 2005, lawmakers implemented CS/SB 1486 creating a new , F.S., which required insurers to notify each policyholder at the time of policy issuance, and each renewal thereafter, of all construction options and the cost impact of each. The form prescribed by the OIR was to also explain the actions needed to obtain the discount. The form and the range of discounts offered by each insurer would then be placed on the websites of both the OIR and the Department of Financial Services (DFS). On December 8, 2005, the OIR issued Informational Memorandum OIR-05-22M, directing insurers to send the completed form to all new and renewal policies beginning February 1, This form, known today as the OIR-B1-1655, accompanies every residential policy, detailing every mitigation credit available, how much can be saved, whether the homeowner has the credit applied, its dollar and percentage impact, and how to obtain the credit if it is not currently available. When combined with another requirement for agents to allocate at least one hour of mandatory continuing education to the subject of mitigation, the OIR-B form virtually eradicated allegations as to any lack of knowledge by consumers and agents. Just as important, the tandem enactments eliminated misplaced concern that agents were withholding information about credits to keep from losing commissions. In fact, with such complete state designed disclosure accompanying every policy and renewal, agents, fearful of losing customers, were more often pushed to give undeserved credits. As discussed below, this phenomenon, which is the exact opposite of public pronouncements by the governor and other public figures, would grow into a major problem undermining Florida s mitigation framework and is discussed in more detail below (see III. A Flawed Home Inspection System). Inspections and Inspectors It became obvious early on that construction factors giving rise to mitigation credits needed examination by qualified experts. Homes needed to be site visited, access to attics obtained, and the quality of construction analyzed to determine if full credit was available. Neither homeowners, agents, or company employees were qualified or inclined to perform such analysis, and with millions of homes in need, there wasn t sufficient time or money to perform the inspections. Thus was born a program of inspections and grants called My Safe Florida Home (MSFH). The MSFH program provided inspections of site-built, single family, residential properties at no cost to the homeowner. The inspections were conducted by state-trained certified inspectors and were used to determine what mitigation measures were present or were 4

7 needed to reduce the property s risk of hurricane damage. By February 2008, the MSFH program had processed over 200,000 home inspection applications and conducted over 167,000 free inspections in all 67 counties. It had also trained and certified over 2,100 hurricane mitigation inspectors and provided matching grants of up to $5,000 to qualified homeowners for hardening their homes against hurricane wind damage. By all accounts the MSFH program was a success. At the conclusion of the 2009 legislative session, the MSFH program was allowed to expire effective June 30, Thus, the state no longer certifies wind inspectors. A list of inactive inspectors associated with the program is provided on the DFS website at www. mysafefloridahome.com, along with the dates they were active, to assist with verifying the Uniform Mitigation Verification Inspection Forms (Form 1802). Form 1802 is in effect today and used by carriers in determining premium credits. Unfortunately, the oversight and incentives to mitigate and other benefits of the MSFH project have been terminated and the inspection process is now entirely a private sector enterprise. History of Mitigation Credits In November 2006, at the request of Insurance Commissioner Kevin McCarty, the Financial Services Commission (FSC, basically the governor and Cabinet) doubled all mitigation discounts across the board, restoring them to levels in the original 2002 ARA study previously cut in half by OIR fiat. But, it was done with no allowance for the surcharges contemplated for the base in the original study recommendations and in tandem with a temporary moratorium on rate increases imposed by the presumed factor and subsequent true up filings implemented by the 2007 special session (HB 1A). During the 2007 Regular Session, the Legislature passed CS/HB 7057, which required the OIR, the DCA, and the FBC to conduct a study to assure the validity of windstorm mitigation premium discounts. It also required the FBC to develop recognized mitigation techniques for the building code by October 1, 2007, and the OIR issued a contract to have the study completed by April 1, Also during the 2007 Special Session lawmakers created the Windstorm Mitigation Study Commission. It was to investigate mitigation s affect on hurricane losses and make a report to the governor and Legislature by March 6, 2007, which it did in a report containing 55 recommendations divided into eight separate categories. Finally, the bill charged the FSC with adopting a uniform home grading scale to measure the ability of a home to withstand a hurricane and to provide home buyers with a standard measure of storm worthiness. They were to work with the DCA and adopt the scale no later than June 30, 2007, which has been done. In 2008, SB 2860 amended , F.S., requiring the OIR to develop a proposed method by February 1, 2011, for insurers to establish windstorm mitigation premium credits correlating to the uniform home rating scale. And, it required the FSC to adopt rules by Octo ber 1, 2011, requiring insurers to revise their credits accordingly, consistent with gen- 5

8 erally accepted actuarial prin ciples and wind loss mitigation studies. The rules must allow two years for a property owner to obtain an inspec tion or otherwise qualify for the revised credit, during which time the insurer must continue to apply the old mitigation credit. In 2009, as part of HB 1495, lawmakers repealed a provision requiring the owner of a home insured for $500,000 or more in Citizens and located in the wind-borne debris region to provide written disclosure of the home s uniform mitigation rating to any potential purchaser prior to closing. 6

9 TIMELINE 1974 Building Code adopted by county. Hurricane Andrew. August Building Code by county, four models only. Commission recommends revisions to 1974 law Revisions adopted. Applied Research Associates (ARA) Conducts Mitigation Credits Study. March 1, Statewide Building Code (SBC) adopted. June 1, First legislated Mitigation Premium Credits implemented January 23, Informational Memorandum M issued SBC updated. June 1, CS/SB 1486 Signed. December 8, Informational Memorandum OIR-05-22M issued. January 25, CS/HB 1A Signed. February, OIR Disapproves ISO Advisory Rate System. February 27, Informational Memorandum 07-03M issued. June 12, CS/HB 7057 Passes My Safe Florida Home (MSFH) Program Created Windstorm Mitigation Study Commission Created Property & Casualty Insurance Reform Committee 2007 February 1, Form OIR-B Implemented. May 15, CS/CS/SB 1980 Signed. July 1, Panhandle exemption to the SBC removed (CS/CS/SB 1774). November, Mitigation Credits Doubled ARA Conducts Second Mitigation Credits Study June 30, MSFH Program allowed to expire. 7

10 II. INAPPROPRIATE PREMIUM CREDITS FAIA s interviews and investigations have revealed that systemic problems with mitigation can be summed with two questions. They are: 1. Based on legislative mandates and available scientific data, have the responsible regulatory agencies ordered or approved the implementation of mitigation credits consistent with lawmakers intent? And, 2. Is each available discount bestowed only on those who deserve it? While a negative answer to either question might mean Florida s mitigation scheme is missing the mark by a wide margin, a negative answer to both questions means it most assuredly is. Unfortunately we found the answer to both of these very important questions to be a resounding NO! Based on interviews with experts and review of available data from the OIR, DFS, and other sources, we consistently found a strong belief that implementation of indicated mitigation credits was not done properly by the OIR. Even ARA s 2008 study, commissioned by the OIR, stated as much (see below). Research for the second question above, dealing with whether those receiving the credits deserve them, is a bit more anecdotal, but also less obscured by scientific terminology and mathematics and is fully discussed below (see III. A Flawed Home Inspection System). Flawed Implementation by the OIR With respect to the OIR s oversight and implementation of mitigation credits, there appear to be two studies of relevance, both conducted by ARA (Applied Research Associates). The first, referenced above, was the original 2002 study which prompted the OIR to reduce the credits by half and then later double them. It should also be noted that the second report was on a bid basis from an OIR RFP and that, despite AIR underbidding by $100,000, it was scored higher by the OIR and ARA was awarded the opportunity to do a second study. The second ARA study was critical of the OIR s interpretation and implementation of its first report. One of its more telling conclusions regarding the implementation of its first study was: Wind mitigation rate differentials should be implemented as part of a multifaceted program that: 8

11 1. Requires accurate determination of the presence/absence of wind mitigation features. 2. Encourages building owners to invest in cost-effective mitigation to achieve lower rates. 3. Encourages insurance companies to collect wind mitigation data on their portfolio of buildings so that rates can be accurately determined. 4. Provides for adequate and fair rates for insurance companies. The implementation of rate differentials should be a win-win situation for the insurance companies and the building owner. 5. Encourages reinsurance programs to reflect the actual distribution of wind mitigation features within an insurance company portfolio. 6. Promotes continued improvements to the Florida Building Code. 7. Promotes validation, updates, and refinements to loss mitigation modeling, building ratings, and rate differentials. Since the ARA s second report has not received much public exposure and we are not aware of any plans for implementation, we produce here two of ARA s more telling comments about the implementation of its first study: t t A program that neglects one or more of these facets will underperform. Florida s implementation of its wind mitigation program needs significant improvement. We do not think implementation has been very successful in Florida, since it is viewed as an insurance credit program and the emphasis has been on getting credits vs. cost-effective mitigation with the mitigation costs largely offset by reduced insurance premiums over time. Ten Basic Questions Persistent complaints from carriers, data showing generous credits awarded without the necessity of an upgrade, conclusions by ARA regarding OIR implementation, and calculations that yielded absurdly low, and in a few instances, even, negative premiums are the foundation for the following set of ten questions of the OIR regarding its implementation of credits. Hopefully, the answers will give rise to appropriate discounts and surcharges, so that Florida s quest to harden its homes can move forward as intended. 9

12 1. The Florida Building Code Mitigation Credits Statute, , F.S., led to the OIR s commissioning of the 2002 ARA study. Since the Florida Commission at that time had accepted multiple catastrophe models (AIR, RMS, EQE) from firms whose models all had the capability to perform similar studies, and those models were commonly used to set the hurricane loss costs underlying most insurers base rates, why was only one alternative firm chosen to perform the study? 2. The 2002 ARA report did not study mitigation benefits for apartments or condominiums, yet the OIR required the resulting premium modifiers to be applied to HO-4 and HO-6 policies. Why, and upon what basis, was this done? 3. The 2002 ARA report did not study mitigation of non-hurricane losses (e.g. other wind or tornado/hail), yet the OIR required the resulting premium modifiers to be applied to the entire wind portion of premiums. Why? (Note that hurricane premiums were already separately reported due to another section of , F.S., and so could have easily been separated from other wind premiums.) 4. OIR Memo M ordered that the premium modifier tables from the 2002 ARA study be converted to tables of credits only by re-scaling the tables so that the weakest home which in Terrain Category B (urban/suburban) carried a modifier of 2.37 or +137 percent from base premium was the base. This resulted in significant enlargement of all premium credits, such as the most favorable modifier of 0.41, or a -59 percent premium credit, re-scaling to 0.19 or an 81 percent premium credit. In its discussion and tables, ARA explicitly noted what type of home (which combination of construction and mitigation features) should be considered the average underlying current base rates. Why did the OIR not adhere to this conclusion in the study? 5. Despite the fact that mitigation credits reflect building code quality, as do the BCEGS credits required by statute, rather than allow the BCEGS credits to be superseded by the mitigation credits, the OIR allowed them to be tempered by only 25 percent. In other words, both a BCEGS credit and an overlapping mitigation credit were required. This tempering survives to this day in insurers approved rating plans. What was the rationale for the limitation to a 25 percent reduction in the existing BCEGS credits? 6. Having not followed the ARA recommendations scaling the credits to the weakest homes instead, the OIR ultimately conceded that credits could be implemented at one-half of the OIR s converted amounts, but required that insurers did not adjust their base rates upward to reflect the weakest home as the base to which the credits should be applied. An alternative would have been simply allowing normal rate filings under existing laws and rules, which would have 10

13 actuarially rebalanced the base rate to the credits. Why was this quid pro quo approach necessary? 7. In 2006, the Legislature enacted SB 1980, which added a section to , F.S., requiring the OIR to re-evaluate the existing mitigation credits based on actual experience or any other loss relativity studies. The OIR chose to simply require that the full ARA credits be adopted in drafting Rule 69O Under what logic did this qualify as a re-evaluation per the statute? 8. Rule 69O noted that base rates could be actuarially rebalanced when the full credits were adopted and required filings by March 15, However, after HB 1A was enacted in Jan. 2007, the OIR issued an Emergency Order, which prohibited any rate increases. Then, in Memo 07-03M, the OIR required that the mitigation credit filings proceed anyway with no adjustment to base rates. It follows that the resulting rates without actuarial rebalancing, for any insurer, would be inadequate even if they were adequate prior to the filing. How would this combination of requirements square with the general requirement in , F.S., that rates be adequate, not excessive, and not unfairly discriminatory? 9. Rule 69O also noted that alternative systems of mitigation modifiers could be used as long as actuarial justification was provided. A long-standing alternative system of modifiers had been adopted by the Insurance Service Office, Inc. (ISO), since the 2003 statutory implementation, based on the AIR hurricane model. The OIR had approved this system in ISO s advisory rate filings every year since In Feb. 2007, the OIR disapproved the same system of credits despite the fact it had been ruled acceptable for several years. What made a previously acceptable system unacceptable? 10. The OIR re-commissioned a study of residential mitigation modifiers in Dec after receiving an appropriation of $700,000 from the Legislature in 2007 s regular session. Despite a bid lower by $100,000 by AIR, the OIR chose to award the study to ARA again. The study was completed in late summer of What are the OIR s plans, if any, for implementing the results of the 2008 ARA study? 11

14 III. A FLAWED HOME INSPECTION SYSTEM Of course, even if all premium credits were based on valid science and applied appropriately to actuarially sound insurance premiums, if they are bestowed on those who do not deserve them, the system is still undermined. The purpose of credits, to incentivize the hardening of homes, can t have full impact when those who receive the credits don t have to perform the upgrades. A resulting tragedy is also that many homeowners are lead to believe their homes are safer than they really are. At the macro level, one consequence is that Florida s housing stock is not being upgraded as it could, or should be. This not only means carriers are more exposed, but over time, reinsurance is more expensive than it otherwise would have been. This places upward pressure on the base premiums of all Floridians, even those with hardened homes. The following statement, taken from the 2008 OIR commissioned study by ARA, speaks volumes about the broader negative effects of flawed implementation: We note that a 1% reduction in average annual residential loss in Florida would amount to an annual statewide loss reduction savings of about $50 million in 2008 dollars. Each 1% loss reduction that we can wring out of new construction (through FBC improvements) and existing construction (through mitigation) will result in long-term exponential reductions in statewide losses. Fraud at the Retail Level There appears to be both active and passive fraud occurring at the retail level, the latter being the most prevalent and contingent upon competitive factors and lack of any government oversight. One scenario--an inspector or inspection company hungry for business does drive-by inspections or otherwise short circuits the process, resulting in credits being awarded where credits are not due (active fraud). Rumors of how to get lower premiums spread around the neighborhood, inducing those nearby to get the same inspectors. This phenomenon implodes around agents who can only keep (or attract) customers with the lower price that comes from recommending the same inspectors who gave rise to the problem in the first place (passive fraud). And, as usual, everybody s happy until the wind blows. The carrier didn t collect enough premium and the homeowner is upset because his fully credited roof is in his neighbor s front yard and his family is living at a Motel 6. Our investigations, based on field reports from agents, underwriters, and inspectors, are mostly anecdotal and don t address frequency. However, reinspection programs by carriers, as explained below, confirm the fraud problem appears to be broad, and is even more pronounced in some geographic areas. 12

15 Some Examples Often a homeowner is promised that the inspection fee, which may run around $150 (sometimes more or less), is guaranteed to be offset by premium savings resulting from the inspection. This is partially why the average premium savings of getting your home inspected is purported to be 16 percent without incurring the cost of any upgrades. And, on rare occasions we found an agent was paid a finders fee for referring customers to inspectors with a reputation for either being intentionally generous (active fraud) or frequently careless (passive fraud). There have been a few reported instances where insurance agents, urged by a client complaint about an accurate inspection report, recommended another, alternate, inspection from a firm allegedly more likely to give an undeserved credit. Sometimes, clients show up at an agent s office saying they want to get the same credits that their neighbors have and why don t you use that inspection company? Another report we received revealed that one or more inspection companies were giving agents $25 gift cards for every inspection of $125 or more. There are, of course, a few unfortunate examples of blatant, perhaps felonious, fraud. In at least one instance, an inspector and an agent were cooperating with each other to give false inspection reports and undeserved credits. In another, the parties had actually preprinted uniform mitigation forms, so they only needed to change the name and address of the homeowner when submitting it to companies. One inspection company was pre-signing blank reports for a fee. Inspections and Re-inspections Perhaps the best information on the extent of fraud at the retail level can come from reinspection reports. This is, essentially, a second opinion request prompted by an insurance underwriter who receives an inspection report that appears suspicious maybe it doesn t match the location or area of the home concerned, or perhaps is signed by an unqualified inspector. A second opinion inspection is normally carried out by an insurerapproved inspection company at the time of underwriting. A re-inspection program is a more broad application of the same concept. Carriers become more proactive and conduct studies via re-inspections of a portion or all of their policies or applications. Some have already done pilot studies and some are in the process. Mitigation credits that do not appear correct are red flagged and bundled for re-inspection. For example, comprehensive hurricane protection on a home in Orange or Marion Counties would naturally generate attention of an underwriter. The concept of re-inspections, then, is not only testament to the existence of mitigation fraud, it s an example of how fraud is adding another avoidable cost to the system. Our interviews reveal re-inspection reports showing error ranges from percent, depending on the region. While only one section of the report needs to be incorrect to 13

16 constitute erroneous, the highest error ratio from a re-inspection was almost 82 percent erroneous. It was interesting, for example, that the Wind Borne Debris regions appear to be more prone to errors allegedly due to the size and value of the discounts. One company underwriter reported that 90 percent of independent inspector reports will give credits to the homeowner for the Florida Code compliance, whereas the same percentage of the Wind Certification Entities (WCEs) through the MSFH program will not grant the same credit. This is likely a result of MSFH holding the WCEs to strict compliance and quality assurance requirements. The statutes were definitive on one hand as to which individuals can certify an 1802 form, but on the other hand stated the WCEs had to comply with strict Quality Assurance guidelines under their state contract. It seems logical to require everyone who can complete a mitigation verification form to comply with the highest possible standards and the most comprehensive levels of quality assurance. Insurer Inspection Fraud It should be noted that even though an insurance company will collect less premium and still have greater exposure to loss by extending a false credit, there may still be an incentive for an insurer to acquire policies and premiums in the short run by granting false credits. This can occur through an insurer s tolerance of false inspection reports or construction characteristics (passive fraud) or the promotion and encouragement of such reports by either consumers or inspectors (active fraud). In one instance, a direct response Internet insurer was discovered applying false credits to virtually all new applicants, in part by encouraging them to request, or to state, that their homes had construction characteristics which they did not have. In this instance, the Building Code Enforcement Credit (BCEG), only available to homes built after 1992, was granted to homes built in 1952 (or any date for that matter) with the conflict clearly present on the face (dec page) of every policy. This same carrier was not requiring inspections (in violation of its certificate of authority) and was granting hip-roof credits to homes clearly identifiable as gabled. This attempt to capture short-term market share would eventually, in all likelihood, lead to sticker shock at a future renewal, when the bait and switch nature of the scheme would come to roost. Within short order, over 35,000 new policies were written under these false pretenses. Regrettably, to keep from losing business, competing agents were pressured to do likewise for what may have been thousands more policies, thus creating perhaps the perfect example of how lax enforcement can very quickly undermine Florida s entire mitigation system. We also discovered at least one report of kickbacks being requested by an insurance company for referring customers to a specific inspection company. Whether an insurer, agent, inspector, or consumer, one consistent theme we uncovered is that a public message emphasizing only premium savings appears to justify fraud in 14

17 the minds of those committing it, especially when, as in this instance, there is little or no oversight or enforcement. Potential Solutions to Retail Fraud The following are just some initial recommendations that could be considered in an attempt to prohibit retail level fraud: 1. Establish a mitigation oversight board within the appropriate regulatory body, which would oversee activities related to inspections as well as certify and regulate inspectors. 2. Require the licensed inspector to personally perform all inspections or, at a minimum, to be present when the inspection is performed to insure oversight of any employee or subcontractor who may perform some parts of the inspection, such as accessing attics. 3. Allow insurers to require or request additional documentation as deemed necessary e.g. permit records, copies of contracts, product approvals, and photos of qualifying features. 4. Allow qualified and certified inspection firms to apply for preferred vendor status from insurers as a means for underwriters to qualify and/or verify features reported by a licensed inspector. 5. Prohibit any corporate affiliation between entities in the mitigation inspection chain i.e. agents and inspectors or insurers and inspectors. 6. Prohibit any exchange of value between any homeowner, agent, inspector, insurer, or inspection company for referrals, fee splitting, advertising, etc. 7. Prohibit, directly or indirectly, the tying of an inspection fee to anything else of value, particularly an insurance premium. 8. Increase the windstorm or hurricane deductible when the policyholder has committed or participated in a fraudulent inspection or inspection report. 9. Require pictures to accompany the Uniform Mitigation Verification Inspection Form (Form OIR B1-1802) of any mitigation characteristic not visible to the naked eye from outside the structure. For outside characteristics in plain view, prohibit reliance on Internet or GPS pictures more than one (1) year old. 10. For Citizens Property Insurance Corporation, require an annual reinspection program to be filed with the OIR for statistically valid segments of business in areas where discounts are particularly high, such as wind borne debris zones. 15

18 11. Require independent reinspections for wind borne debris zones for any carrier within the first three years after receiving a Certificate of Authority. Require similar programs for any carrier under a consent order related to misrating of policies or application of credits. 12. To reduce the need for continuing inspections of homes, consider a database, possibly maintained by local tax assessors, of mitigation characteristics for new structures and retrofitted structures (Form 1802?) available for insurance purposes to qualified individuals such as insurance agents, realtors, and the homeowner. 13. Review recommendations currently under study by the OIR regarding the completion and use of the of the uniform inspection form, such as: t t t t Additional signature lines for inspectors that physically perform the inspection. Require the address of the home at the bottom of each page of the form. Bold all the exterior opening protections (Windows, Doors, Garage Doors and Skylights) and indicate whether the opening protections are passive or active. Add a statement for the homeowners signature acknowledging that Form 1802 is part of the application process and false certification constitutes insurance fraud, as well as other penalties that may be enacted (such as an increase in any applicable deductible). 16

19 IV. CONCLUSION Often forgotten is the tremendous cost if we do not implement the full multifaceted mitigation scheme referenced in the 2008 ARA study. When opportunities to achieve a fully hardened stock of homes are squandered in favor of improper, short term premium savings, it may create a favorable public response, but Florida s future is mortgaged in exchange. Consider that the unregulated, global reinsurance market, charges carriers based on scientific models (AIR, RMS, EQE, etc.) that make no allowance for local politics or misapplied mitigation credits. Surplus accumulation for future storms is impossible when carriers are sandwiched between higher reinsurance costs and inadequate retail premiums. Overall rate suppression, combined with inflated mitigation credits, is the deadly combination discouraging new capital from coming to Florida and causing existing capital to leave even after three and a half seasons without a single storm. And when carriers are less able to profit by insuring mitigated homes, they insure those less mitigated. This puts the more hardened structures in Citizens. Over time, the result is a complete perversion of Florida s market of last resort concept. Finally, and most disastrous, is that homeowners are lead to believe their homes are safer than they really are. Lives that could ve been saved will be lost. Families that could ve remained intact will be disrupted or torn apart. And Florida s long-term capacity to selfsustain in the face of a major storm is entirely defeated. The crisis of availability and affordability in Florida and its causes can be debated by all concerned, but if Florida s housing stock was entirely built to withstand hurricane force winds, we would have no crisis at all. If nothing else is accomplished from this paper but the creation of dialogue that might lead to a more effective mitigation system, it has achieved its purpose. Those who can change Florida s policies, regulations, and laws need to examine the questions herein carefully and react accordingly. We believe if that is done, the harm of the current system will become apparent and the case for reform will be so compelling it cannot be ignored. The Florida Association of Insurance Agents 17

20 V. SOURCES Written by Scott Johnson, AAI, CAE, executive vice president of the Florida Association of Insurance Agents (FAIA), this document drew from existing reports, research papers, and studies available and indentified below. In addition, interviews were conducted with experts in mitigation and underwriting, including: insurer executives and underwriters, independent actuaries, insurance consultants, attorneys representing insurers, representatives of insurer trade groups, representatives of Florida s top inspection firms and state certified inspectors and WCEs, insurance agents, employees of Citizens, and academicians, including those with the Florida Catastrophic Storm Risk Management Center at Florida State University. Published Studies and Research Papers 2007 Windstorm Mitigation Study Committee. Report to the Florida Legislature. March 6, Applied Research Associates, Inc. Final Report: Evaluation and Report on the Insurability of Attached and Free Standing Structures. May 1, Development of Loss Relativities for Wind Resistive Features of Residential Structures. ARA, 2002a Development of Loss Relativities for Wind Resistive Features of Residential Buildings with Five or More Units. ARA, 2002b Florida Residential Wind Loss Mitigation Study. Florida Department of Financial Services; Alex Sink, chief financial officer. My Safe Florida Home 2008 Annual Report. < Property and Casualty Insurance Reform Committee, Lt. Governor Toni Jennings, chair Final Report. November 15, Presentations Torres, Tami. My Safe Florida Home Presentation to Senate Government Operations Appropriations Committee. February 3, Risk Management Services, Inc. Hurricane Mitigation Analysis Presentation. November 13,

21 Relevant Rules and Memoranda 69O Windstorm Mitigation Discounts. 69OER07-3. Transition Provisions for the use of the Uniform Mitigation Verification Inspection Form by the My Safe Florida Home Program. June Informational Memorandum OIR-07-03M. Premium Discounts for Hurricane Loss Mitigation. Office of Insurance Regulation. February 27, 2007 Informational Memorandum OIR-07-14M. Notice of Premium Discounts for Hurricane Loss Mitigation. Office of Insurance Regulation. September 14, Informational Memorandum OIR M. Implementation of Revision to Section (1), F.S. Concerning Residential Property Insurance Rate Filings. Office of Insurance Regulation. Effective June 1, Informational Memorandum OIR-07-06M. Presumed Factor Filings. Office of Insurance Regulation. March 7,

22 INFORMATIONAL MEMORANDUM OIR M ISSUED January 23, 2003 Office of Insurance Regulation Kevin M. McCarty Director All Property and Casualty Insurers Authorized to Write Residential Property Insurance in the State of Florida Implementation of Revision to Section (1), F.S. Concerning Residential Property Insurance Rate Filings, Effective June 1, 2002 Supplement to INFORMATIONAL MEMORANDUM M issued on June 6, 2002 The purpose of this memorandum is to assist insurers with the filing requirements for this referenced statutory revision. The Department has analyzed the study, Development of Loss Relativities for Wind Resistive Features of Residential Structures commissioned by the Florida Department of Community Affairs, and created suggested sets of credits for new and existing construction. These suggested credits are available on the Department s website and are intended to facilitate filing preparation and review as well as simplify administration and application of such credits. For existing construction, the Department s analysis combined Tables 6-1, 6-2, and 6-4 from the above-referenced study. For purposes of determining credits, all of the relativities were divided by the existing construction relativity for the non-fbc equivalent roof cover, roof deck attachment A, roof-wall toe nails connection, and no opening protection for Terrain B and C, respectively. This approach was confirmed as appropriate with the firm that conducted this study. Credits were then determined and tempered by 50%. This tempering was applied in view of the large rate changes which might otherwise be induced, the approximations needed to produce practical results (such as the specifications of the houses used for modeling and the number of rating factors used), and the potential for differences in results using different hurricane models. As filers become able to measure the effects of implementation accurately, this tempering must be curtailed. An examination of the resultant credits indicated that the differences between the credits for certain fixtures/techniques were minimal. The suggested credits, therefore, combined the credits for the following fixtures/techniques: 1 Roof Deck Attachment D and Roof Deck Attachment C. 2 Hurricane Opening Protection for All Openings and Windows Only. 3 Basic Opening Protection for All Openings and Windows Only. 4 Braced Gable Roof Shape and Unbraced Gable Roof Shape. 20

23 The suggested additional credits for Masonry and Reinforced Masonry Construction were eliminated recognizing the fact that insurers currently use construction type in the rating of their policies and will continue to do so. For new construction, the Department s analysis combined Tables 6-6 and 6-7 from the above-referenced study. For purposes of determining credits, all of the relativities were divided by the existing construction relativity for the non-fbc equivalent roof cover, roof deck attachment A, roof-wall toe nails connection, and no opening protection for Terrain B and C, respectively (the Terrain C relativity was used for the High Velocity Hurricane Zone). This approach was confirmed as appropriate with the firm that conducted this study. Credits were then determined and tempered by 50%. This tempering was applied in view of the large rate changes which might otherwise be induced, the approximations needed to produce practical results (such as the specifications of the houses used for modeling and the number of rating factors used), and the potential for differences in results using different hurricane models. As filers become able to measure the effects of implementation accurately, this tempering must be curtailed. An examination of the resultant credits indicated that the differences between the credits for certain fixtures/techniques were minimal. The suggested credits, therefore, combined the credits for the following fixtures/techniques: 1 Dimensional Lumber Deck and Other Roof Deck. 2 Terrain B and Terrain C - Wind Speed 120, Wind Borne Debris Region. 3 High Velocity Hurricane Zone and Terrain C. 4 Terrain B FBC Wind Speed = 100, all Wind Speeds of Design. 5 Terrain B FBC Wind Speed = 110, all Wind Speeds of Design. 6 Enclosed and Partially Enclosed Structures. 7 Opening Protection All Openings and Windows Only. The suggested additional credits for Masonry and Reinforced Masonry Construction were eliminated recognizing the fact that insurers currently use construction type in the rating of their policies and will continue to do so. These suggested sets of credits contemplate the elimination of insurers current windstorm protective devices (i.e. shutter) credits. Insureds who currently qualify for a windstorm protective devices credit should at least qualify for a Basic Opening Protection credit. Insurers should continue to give Building Code Effectiveness Grading Schedule (BCEGS) credits to those insureds that qualify for such credits. The Department suggests tempering these credits by 25% to eliminate any overlap between these credits and the suggested windstorm loss reduction credits. The Department is willing to consider the reduction or elimination of new home discounts on wind premiums for homes that qualify for new construction credits. Questions regarding this memorandum may be directed to Ken Ritzenthaler. He can be contacted at (850) or ritzenthalerk@dfs.state.fl.us. 21

24 INFORMATIONAL MEMORANDUM OIR-05-22M ISSUED December 8, 2005 Florida Office of Insurance Regulation Kevin M. McCarty, Commissioner To All Property and Casualty Insurers in the State of Florida Premium Discounts for Hurricane Loss Mitigation During the 2005 Legislative Session, the Florida Legislature passed Senate Bill 1486 creating Section , Florida Statutes, titled Notice of premium discounts for hurricane loss mitigation. Section , Florida Statutes: Using a form prescribed by the Office of Insurance Regulation (Office), the insurer shall at the issuance of a new policy and at each renewal, clearly notify the applicant or policyholder of any personal lines residential property insurance policy of the availability and the range of each premium discount, credit, other rate differential, or reduction in deductibles for properties on which fixtures or construction techniques demonstrated to reduce the amount of loss in a windstorm can or have been installed or implemented. The prescribed form shall describe generally what actions the policyholders may be able to take to reduce their windstorm premium. The prescribed form, and a list of such ranges approved by the Office for each insurer licensed in the state and providing such discounts, credits, other rate differentials, or reductions in deductibles for properties described in this subsection, shall be available for electronic viewing and download from the Department of Financial Services or the Office Internet website. The Financial Services Commission may adopt rules to implement this subsection. The aforementioned form is available on the Office website at htm. The Office has initiated the Rule Making Process to adopt this form. The Office has held both a Rule workshop and a Rule Hearing. There is an example of a partially completed form on the aforementioned website for insurers who have filed and adopted the credits published by the Office. For insurers that have adopted the Insurance Service Office (ISO) credits, a partially completed form is available from ISO. Forms should be submitted electronically, no later than January 31, 2006, using the online application also found at floir.com/hottopics_other htm. This online application is similar to I-File in that it will prompt you to create an account. You will then select the appropriate company name and line of business, complete the online form and submit the form to the Office. This online application will be available starting December 15, Should any questions arise, please direct them to Michael Milnes at (850) or Michael.Milnes@FLDFS.com. 22

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26 69O Windstorm Mitigation Shutter Discounts. (1)(a) This rule applies to all residential property insurance rate filings filed on or after January 1, All residential property insurers must make new filings by March 1, 2007, to reflect the requirements in this rule. For the purpose of determining appropriate discounts, credits, rate differentials, or reductions in deductibles for residential properties on which shutters or other wind mitigation devices or fixtures have been installed, pursuant to Section (1), Florida Statutes, any rate filing which provides discounts, credits, rate differentials, or reductions in deductibles consistent with any statewide rating organization plan currently approved pursuant to Section , Florida Statutes, shall be considered in compliance with the applicable requirements of Section (1), Florida Statutes. (b) A rate filing which does not provide at least the same level of discounts, credits, rate differentials, or reductions in deductibles as specified in such a plan will be disapproved, unless the insurer demonstrates that the discounts, credits, rate differentials, or reductions comply with the requirements of Sections and (1), Florida Statutes. (2) Section , F.S., states that discounts on an actuarially reasonable basis or appropriate reductions in deductibles must be provided in the rates for residential property insurance for fixtures or construction techniques, including minimum provisions of the Florida Building Code which have been demonstrated to reduce windstorm loss. The discounts must reflect the discounts as set forth in Form OIR-B1-1700, Windstorm Mitigation Discounts; Non-Single Family Residences" (10-06) and 1 24

27 Form OIR-B "Windstorm Mitigation Discounts; Single Family Residences" (10-06), which are incorporated by reference, and which are based upon the studies Development of Loss Relativities for Wind Resistive Features of Residential Structures and Development of Loss Relativities for Wind-Resistive Features of Residential Structures of Five or More Units. These discounts must be used without any modification unless they are supported by detail alternate studies where all assumptions are available to the Office for review. These public domain studies providing data and information on estimated loss reduction for wind resistive building features in residences are incorporated by reference, and are available for downloading at the website of the Florida Department of Community Affairs, at and respectively. The forms are available for downloading at the Office s website at Any insurer that has implemented a residential property rate filing on or after July 1, 1994, that does not provide at least the level of discounts, credits, rate differentials, or reductions in deductibles provided for in an approved rating plan referenced in subsection (1) above, or otherwise comply with the requirements of Section (1), Florida Statutes, shall make a shutter discount filing immediately. (3) Filings can modify other rating factors to reflect revenue impact on current business only if they have actual information on policies receiving the discounts currently to support the modification. An insurer shall provide to residential property insurance policy applicants at the time of procurement of the policy application actual notice of the availability of discounts, credits, rate differentials, or reductions in 2 25

28 deductibles, as well as all requirements that must be satisfied in order to qualify for such discounts, credits, rate differentials or reductions. For all residential property insurance policies in force on the effective date of this rule, an insurer shall, at the next renewal, provide such actual notice to the policyholder. After once providing such actual notice to a policyholder or policy applicant, an insurer shall not be required to again provide such notice at the time of renewal of the policy unless the insurer implements changes to its discounts, credits, rate differentials, reductions in deductibles, or requirements that must be satisfied to qualify for such discounts, credits, rate differentials, or reductions. Failure to provide such notice shall be considered a violation of Section (1)(a)1., Florida Statutes. Specific Authority (1), (1) FS. Law Implemented (1), (1), (2)(b), (e), (f), (g), (1) FS. History New , Formerly , Amended. 3 26

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30 INFORMATIONAL MEMORANDUM OIR-07-06M ISSUED March 07, 2007 Florida Office of Insurance Regulation Kevin M. McCarty, Commissioner To All Licensed Residential Property Insurers Presumed Factors Filings The purpose of this memorandum is to provide guidance regarding filing procedures for the Presumed Factor the subsequent True-Up filing. During the 2007 Special Session, the Florida Legislature passed House Bill 1A (HB 1A) requiring every resid property insurer to make a filing with the Office of Insurance Regulation (Office) to reflect the savings or red loss exposure to the insurer. On February 19, 2007, the Office issued an order advising residential insurers to make rate filings to include t discount factors mandated by HB 1A. The new discount factors required in HB 1A have been calculated by th and all residential property insurers must make a rate filing incorporating the new savings on or before March Information related to the presumed factors can be found at htm. The procedure for submitting the Presumed Factors filing as prescribed in Section 3 of HB 1A and the Tru as prescribed in the Office s Presumed Factors order can be found in the applicable attachments and are sum below. A filing adopting the Office s Presumed Factors (Short Form). This filing shall reflect the effects of the Presumed Factors on the rates currently in effect and shall be made and use basis. The filing shall be limited to the effects of the Presumed Factors on the rates currently in eff elimination of the 25% rapid cash buildup portion of the insurer s Florida Hurricane Catastrophe Fund premiu procedures for submitting this type of Presumed Factors filing can be found in Attachment A. A filing that uses, but does not strictly adopt the Presumed Factors (Long Form). A Presumed Factors filing that uses the factors to reflect a rate decrease to take into account the Presumed shall be made on a use and file basis and shall provide all the information used in preparing the filing includ of all reinsurance treaties. Such a filing is subject to credits and refunds if the rate reductions are determined inadequate. This type of filing shall also be limited to the effects of the Presumed Factors on the rates curre effect and the elimination of the 25% rapid cash buildup portion of the insurer s Florida Hurricane Catastroph premium, and must be accompanied by a sworn statement from the chief executive officer or chief financial o actuary responsible for preparing the filing. The procedures for submitting this type of Presumed Factors fi found in Attachment B. A True-Up filing as required by the Office s Presumed Factors order. 1 28

31 After making the Presumed Factors filing, insurers shall make a True-Up filing pursuant to the file and use provisions of s (2)(a)1, Florida Statutes, that is a complete rate filing to reflect the savings or reductions in loss exposure to the insurer due to all of the provisions of HB 1A and the anticipated 2007 reinsurance program. The procedure for submitting the True-Up filing is identical to the annual rate filing procedure in I-File, except the appropriate selections now read as Rates Only Including True Up Filings Pursuant to the Presumed Factors Order or Rate & Rule Including True Up Filings Pursuant to the Presumed Factors Order. If you have any questions regarding the filing process, please contact Mike Milnes, Deputy Director, Property and Casualty Product Review, Florida Office of Insurance Regulation at Michael.Milnes@fldfs.com or (850)

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