Insurance Journal 2014 Florida Supplement by Insurance Journal

JUNE 16, 2014 | VOL. 92, NO. 12

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News & Markets Florida Waiting to See If Private Flood Insurance Market Develops By Michael Adams

lorida lawmakers recently passed legislation to encourage private insurers to offer flood insurance, but the industry is tamping down expectations that it will result in a viable market anytime soon, reminding the public that private insurers could offer flood policies under existing law if they wanted. The legislation creates a framework for private insurers to offer four types of personal residential flood coverage including a copycat of the current National Flood Insurance Program (NFIP) policy and three enhanced coverages. The legislation also allows private insurers to file their own rates prior to October 1, 2019, after which they must be approved by regulators. The time lag is so insurers can develop state flood data that is currently not available under the NFIP. Florida Insurance Commissioner Kevin McCarty said the law will ultimately benefit consumers. He said his office will work with Florida insurers and “well-capitalized reinsurers” interested in providing a private sector alternative to the federal NFIP. The Personal Insurance Federation of Florida backed the legislation even though it thinks it is unnecessary. “Our initial reaction is there is no need for a new law,” said Michael Carlson, executive director. “But we support engaging in self-help. Florida’s market is complex and perhaps it will bring new capital into the market.” Jay Neal, executive director of the Florida Association for Insurance Reform, had a similar view. “Having a robust flood market is not going to happen overnight,” said Neal. “It’s going to be a long process, but this legislation was a good exercise.” Lawmakers first pursued the bill with a sense of urgency in response to the federal Biggert-Waters Insurance Reform Act of 2012, which was designed to address NFIP’s $24 billion debt. Biggert-Waters called for flood premiums to rise, in some cases substantially, and for

subsidies to be phased-out. It also called for new flood maps, which also raised premiums and expanded flood zone areas. An estimated 280,000 in Florida were affected by the Biggert-Waters rate hikes. More than two million Florida residents are covered through the NFIP and together they pay $3.60 in premiums to the NFIP for every $1 in claims. Proponents cited these figures as favoring creation of a private market. However, the urgency over the private flood bill waned when, in response to the public uproar over the Biggert-Waters changes, Congress amended the law to limit rate increases, retain premium subsidies and allow subsidies to pass through to new owners. Surplus Lines One domestic insurer has already begun offering private flood. Homeowners’ Choice Property and Casualty Insurance Co. is doing so to its 140,000 policyholders. Surplus lines insurers are the most likely to pursue the market. Gainesville, Florida-based Flood Insurance Agency markets Private Market Flood, underwritten by Lloyd’s of London. Agency CEO Evan Hecht said he started the program for those losing their federal premium subsidies under Biggert-Waters. He now offers it in 19 states. In April, Private Market Flood reduced its rates for new customers and those who bought in the previous three months. “That should help some families and small businesses with their budgets at a time when rising flood insurance premiums have done just the opposite,” said Hecht. Hecht attributed the cut in rates to reinsurers looking for markets and surplus lines insurers having more leeway than admitted insurers to choose which customers to write. “In any individual state we can cherry-pick policies from the top down,” Hecht

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said. “States are widely supporting that and asking what they can do to help.” Security First Managers has joined with surplus lines insurer Ironshore to offer primary flood coverage up to $500,000, twice the limit of the NFIP. It is also offering excess coverage for luxury homes up to $5 million. According to Don Brown, a senior fellow at the free-market think tank R Street Institute, while surplus lines insurers may be leading the way now, the new legislation has provisions that could result in more involvement by private admitted insurers. First, Brown said, they can offer “customized coverage” that can be broader than the standard coverage available from the NFIP. Second, Brown said, since insurers are allowed to set their own rates until October 1, 2019, they will have time to develop actuarial rates and gain a greater understanding of risk-based pricing in the market. “I believe that when companies refine the rating territories to a more granular level,” Brown said, “that some companies will come up with a creative way to insure some properties.” Lawmakers specifically directed that the state itself stay out of the flood insurance business. Citizens Property Insurance Corp. is prohibited from offering flood coverage and the Florida Hurricane Catastrophe Fund is prohibited from offering insurers reinsurance that includes reimbursements for flood losses. www.insurancejournal.com

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News & Markets Lawmakers Tweak Florida’s Workers’ Comp Law By Michael Adams

ith Florida’s recently concluded legislative session dominated by flood insurance, use of gun ownership in underwriting and changes to the state-backed property insurer, other insurance legislation tended to go unnoticed. Lawmakers have been reluctant to touch the workers’ compensation system since 2003 when they passed a reform act — which has produced a 60 percent reduction in rates over the last decade — but this year they did make two changes. First, lawmakers gave large employers greater control over their premiums through the use of retrospective rating plans. Lawmakers also created a statutory framework so that employers can restart their operations more quickly after being issued a stop-work order. Retrospective Rating Large employers in Florida have long used retrospective rating plans as a means to control workers’ compensation costs. Unlike regular workers’ compensation policies where an employer’s premiums are calculated upfront based on payroll, industry and loss experience, retrospective plans are based on an employer’s actual losses in a policy year. Under current law, employers and insurers can negotiate a retrospective policy based on a number of factors such as the formula used to calculate an underwriting profit and contingency margin, prospective investment income or expenses. However, there are regulatory limits on those negotiations designed to assure that premiums are actuarially sound. This year, lawmakers granted a small number of large multi-state employers and their insurers even more latitude to negotiate an employer’s actual premium without those limits or regulatory approval. The new legislation applies to multi-state employers based in Florida that have an

estimated annual statewide premium of $100,000 and an estimated annual countrywide premium of $750,000 or more. Only insurers with more than $500,000 in surplus will be allowed to issue the negotiated policies. The negotiated policies will not have to comply with current law that mandates the factors for determining rates. Although the policies must be filed with the rating bureau — the National Council on Compensation Insurance (NCCI) — and approved by regulators, the employers and their insurers will not have to disclose their negotiated premium. Stop-Work Orders Another change in the law is designed to provide employers with an expedited path-

way to resuming their operations after being issued a stop-work order for non-compliance with the law. Employers in the construction industry with one or more employees are required to have workers’ compensation coverage. Non-construction employers face the same requirement if they have four or more employees. In the agricultural industry, employers with more than five permanent employees and 12 or more seasonal workers are likewise required to have insurance. Employers who fail to obtain coverage or who misreport payroll or misclassify workers to improperly reduce their premiums face the prospect of being issued a stop-work order and fined.

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The Department of Financial Services in fiscal year 2012-2013 inspected 34,000 employers, which resulted in 2,444 employers being issued stop-work orders. DFS assessed $24 million in fines and ordered the employers to provide coverage for an additional 9,795 workers. Under current law, employers found in non-compliance are issued a stop-work order until they purchase the necessary coverage and pay all fines. Employers also can have the stop-work order lifted if they and the DFS agree on a plan to pay the fines in installments. Currently, employers found in non-compliance are assessed a penalty equal to 1.5 times what the employer should have paid in premiums during the preceding three years. Lawmakers this year sought to make it easier for employers to meet those conditions by lowering the fines and streamlining how they are calculated. The DFS, however, said the current process is forcing employers to wait longer than necessary to have a stopwork order lifted. “Employers are often unable to quickly provide all records required to calculate the penalty and until the DFS has calculated the penalty, the stop-work order remains in effect and the employer cannot conduct business,” said legislative analysts. Lawmakers reduced the number of years used to calculate the penalty from three to two. And even though lawmakers increased the penalty multiplier from 1.5 percent to two percent, the change is still expected to lower fines on average. The new legislation will also allow employers to have a stop-work order lifted if they make a $1,000 down payment toward their fine and agree to pay the remaining amounts per a schedule. The legislation also repealed a requirement that employers issued a stop-work order must file reports with regulators showing that they are staying in compliance of the law over a two-year period. www.insurancejournal.com

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News & Markets No New Rights in Florida’s Homeowners’ Bill of Rights By Michael Adams

lorida’s new “homeowners’ claims bill of rights” promises to give policyholders more information on how claims should be handled but some advocates say it could have done more. The so-called bill of rights, initially drafted by the state’s insurance consumer advocate’s office, was a priority for Chief Financial Officer Jeff Atwater. Atwater said the bill was needed given that 350,000 homeowners file claims each year and his office receives 125,000 calls from policyholders either filing complaints or searching for answers about their claims. “This much-needed bill of rights will notify Florida homeowners of their rights and responsibilities when filing an insurance claim and give them confidence that they will be treated fairly during a stressful situation involving their home,” stated Atwater. However, the final version largely codifies current law while avoiding difficult issues such as policyholders assigning their claims payments to contractors. The 12-point bill of rights informs homeowners of timelines such as one requiring insurance companies to acknowledge a claim within 14 days of it being filed. Additionally, insurers must within 30 days of receiving a proof-of-loss statement, confirm a claim is covered, partially covered or denied. Within 90 days, insurers must either pay the claim in full or in part or deny the claim. The bill of rights also advises policyholders what they need to do in case they have property damage, including that they should contact their insurer before hiring a contractor. Insurance Consumer Advocate Steve Burgess said the purpose is to inform policyholders about the claim and repair process in plain language, thereby giving them more control and making them less at the mercy of insurers and contractors. “Not everybody will use it but a large

group will be more empowered and less intimidated,” said Burgess. While Atwater and his allies have been declaring victory, others who participated in crafting the bill walked away disappointed that the final bill created no new legal rights for homeowners or insurers. What seemed at first a non-controversial piece of legislation turned into a heated debate over a so-called “assignment of benefits” provision. Under this provision, homeowners can sign over their financial rights for payments on a claim to a contractor making repairs. The contractor also assumes the policyholder’s legal rights to dispute a claim and file suit against an insurer. If the contractor prevails in court, in addition to the insurer having to pay the claim, it must also pay the contractor’s legal bills. From insurers’ point of view, this has motivated some trial lawyers and contractors to maximize the monies they can receive from insurers regardless of the real cost of the claim. Personal Insurance Federation of Florida executive director Michael Carlson said that is why his association supported doing away with the assignment of benefits. “What we are seeing under assigned benefits is unscrupulous contractors who tell homeowners that in order to get repairs they have to sign a form signing away their rights,” said Carlson. “Then the vendor will inflate the claims costs then tell the insurer you owe us this much or we will sue you.” Carlson said that in addition to increasing claims costs and fostering litigation, the assignment of benefits practice keeps consumers in the dark about their own claims. For example, he said, policyholders have had lawsuits filed on their behalf without their knowledge. Given the circumstances, Carlson said that the provision should be limited to allowing a contractor to be paid by the insurer for the work agreed to under a

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covered claim. “This gives the consumer the ability to say to the insurer, ‘Here is the insured loss, here is the work they have done, now you can pay them,’” said Carlson. Even some contractors favored assignment of benefits reform. “We just think it is over-reaching. After all it is the property owner that has contracted with the insurer, not us,” said Cam Fentriss, legislative counsel, Florida Roofers, Sheet Metal and Air Condition Contractors Association. Fentriss said that the FRSA would rather make the property owner and contractor co-payees so that the two parties would

have to negotiate a price before a claim check is cashed. Disagreements over the assignment of benefits provision threatened to undermine the whole bill. So instead, lawmakers approved a bill that skipped the provision. “It is much harder to change things than maintain the status quo,” said Fentriss. The Florida Association for Insurance Reform was disappointed. “We found the process to be superficial at best,” said Jay Neal, executive director. “To call something a ‘bill of rights’ should be comprehensive and it is not. The question is whether we get another bite of the apple.” Burgess acknowledged that this year’s effort to achieve a “bill of rights” was tougher than he expected. But, he said, he is not giving up. “I believe we will get another chance next year,” said Burgess about the assignment of benefits. “What I intend to do is to build a better case for it.” www.insurancejournal.com

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News & Markets Calm, Cat Bonds and Condos Color Florida’s Storm Picture

By Barbara Liston

ight hurricane-free years in Florida and a seller’s market in catastrophe bonds have fortified the state against the cost of major storm damage as the 2014 Atlantic hurricane season started on June 1. “Florida is in its best position in a decade,” said Robert Hartwig, president of the Insurance Information Institute. Yet the nation’s riskiest state for storm damage opened the six-month-long hurricane season against a backdrop of new condominium towers piling new risk along the vulnerable South Florida coast. This year Florida stands to benefit from an El Niño weather pattern which forecasters think will hold the number of storms near or below average. However, with images still fresh of coastal devastation in the New York area from Hurricane Sandy in 2012, forecasters caution that it only takes one major storm to make for a disastrous season. The condo boom is testament to the insatiable appetite for coastal living. More than 200 new residential towers a short distance from Atlantic waters have been proposed for south Florida since the middle of 2011, according to CondoVultures, a Miami-based real estate consulting firm. At least 50 new

The last hurricane to hit Florida was Wilma in 2005, which was the end of a string of five major hurricanes. The calm since those storms has allowed Florida’s Hurricane Catastrophe Fund, designed to help private insurers pay claims, to build its reserves to $13 billion. The state-run Citizens Property Insurance Corp. — intended as an insurer of last resort but in practice the largest residential carrier in the state — begins the season with a $7.6 billion surplus. State policy calls for reducing Citizens’ portfolio through rate hikes and tightening coverage limits. Rates for 2014 rose by an average of 6.6 percent, with some coastal policyholders seeing hikes close to the 10 percent cap, said Citizens spokesman high-rises have already broken ground or Michael Peltier. been completed since 2011. The company reduced its 2014 expo “The reality is, on balance, the state is in sure by 40 percent from its 2012 peak. a worse position in terms of sensible deciBy off-loading policies onto a recovering sions about building and putting things in private market, Citizens cut its numbers harm’s way in the coastal area,” said Charles to 940,000 and its exposure to under $300 Lee, director of advocacy for the Florida billion. Audubon Society. To backstop its cash surplus, Citizens Smartersafer.org, a coalition of fiscal took advantage of a surge of interest in conservatives, environmentalists, housing catastrophe bonds from pension and hedge organizations and insurers, has called for a funds and other non-traditional capital national mitigation strategy that discouragseeking higher yields in a low-interest era, es high-risk as well as investments development. New condo towers are adding uncorrelated to standard “Simply economic factors. to risk along the coast. rebuilding “What the Federal isn’t enough. We need to start approaching Reserve does in terms of impacting interdisasters with a focus on preventing losses est rates, or whether the situation in the rather than simply trying to recover from Ukraine makes stock markets go up or them,” said Jimi Grande, vice president, down, the cat bonds are completely indeNational Association of Mutual Insurance pendent of all of that,” Hartwig said. Companies, and a member of the coalition. The competition from an influx of cat Because of its size and geographical bond investors since 2006 cut Citizens’ reinposition sticking out into the warm waters surance costs by more than half, allowing where the Caribbean meets the Atlantic, the company to nearly double its coverage Florida is a uniquely risky insurance marto $3.1 billion, Peltier said. ket. Almost 80 per cent of its insured resi “Capital market investors are now bearing dential and commercial property — valued some of the risk rather than the citizens of at about $3 trillion — lies in coastal areas the state of Florida or the Florida Hurricane vulnerable to both wind damage and floodCatastrophe Fund,” Hartwig said. ing, according to risk modeling experts. Copyright 2014 Reuters.

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News & Markets Female-Named Hurricanes More Deadly But Less Feared By Seth Borenstein

hich scares you more: Hurricane Victor or Hurricane Victoria? People are slightly less likely to flee an oncoming storm with a feminine name than a masculine one, a new study finds. But here is Victoria’s secret: Hurricanes with feminine names turn out to be deadlier in the United States than their more macho-sounding counterparts, probably because their monikers make people underestimate their danger, the researchers conclude. In fact, the two deadliest storms to make landfall in the U.S. since 1979, when male names were introduced, were named Katrina and Sandy. The study, which didn’t involve any experts in meteorology or disaster science, was published in the Proceedings of the National Academy of Sciences. Atlantic hurricane season started on June 1. In six different experiments, more than 1,000 test subjects told behavioral scientists at the University of Illinois in Champaign that they were slightly more likely to evacuate from an oncoming storm named Christopher than Christina, Victor than Victoria, Alexander than Alexandra and Danny than Kate. They found female names less frightening. “People are looking for meaning in any information that they receive,’’ said study co-author Sharon Shavitt, a professor of marketing. “The name of the storm is providing people with irrelevant information that they actually use.’’ Shavitt said both men and women rated female storms less scary and they both “are likely to believe that women are milder and less aggressive.’’ It fits with other research about gender perception differences, she said. Sandy, while it can also be a male name, was chosen as a female name by weather authorities in 2012. Shavitt said it also ranked as rather feminine when she asked a small group of people to assess names on a masculine-feminine scale.

Hurricane and disaster science experts, such as MIT’s Kerry Emanuel, were skeptical at first. Then after more consideration some but not all found merit in the work, noting that it is more about psychology rather than physical science. Emanuel said confusion over whether 2012’s Sandy was called a hurricane or post-tropical storm did cause confusion, so maybe names could make a difference too. He joked that maybe names matter and perhaps meteorologists should start using scarier-sounding ones like Jack-the-Ripper or King Kong. But Susan Cutter, director of the University of South Carolina’s Hazards and Vulnerability Research Institute, dismissed the idea that female-named storms are deadlier. She considered the study results just coincidence. To examine past death rates, Shavitt and doctoral student Kiju Jung used Shavitt’s scale that rated names from 1 to 11 in terms of masculinity and femininity. They looked at death rates going back to 1950 and found that, in general, the deadlier storms were more feminine. However, male-named storms weren’t introduced until 1979. Only female names were used for storms from 1953 to 1978. From 1950 to 1952, military-style phonetic names (like Able, Baker, Charlie) were used and before that, there were no official names for storms. While since 1979, female storms have been deadlier — even with the outlier of

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Katrina removed — the sample size is so small that the trend from 1979 is not statistically significant. But it is significant when combined with data from 1950, Shavitt said. Also telling is that the amount of damages is not much different between male and female storms, indicating the big difference is not the size of the storm but how people react to it, Jung said. This year’s hurricane names will be Arthur, Bertha, Cristobal, Dolly, Edouard, Fay, Gonzalo, Hanna, Isaias, Josephine, Kyle, Laura, Marco, Nana, Omar, Paulette, Rene, Sally, Teddy, Vicky and Wilfred. Jung and Shavitt said one name jumps out at them for danger: Dolly. It’s considered highly feminine. Copyright 2014 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed. www.insurancejournal.com

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Arthur J. Gallagher, MGA Insurance Arthur J. Gallagher & Co. has acquired MGA Insurance Group of Lakewood Ranch, Florida. Terms of the transaction were not disclosed. Established in 1989, MGA Insurance Group (MGA) is a national program administrator that provides insurance programs for independent insurance and financial service contractors. It specializes in professional liability and other affinity products such as life, ancillary health, business service discounts and training. MGA’s Lou Marinaccio and his team will continue to operate from the Lakewood Ranch location under the direction of Kevin Garvin, head of Gallagher’s North American affinity operations. Heritage IPO Clearwater, Florida-based Heritage Insurance Holdings Inc., a property/ casualty insurance holding company, held an initial public offering on May 23, selling 6,000,000 shares of its common stock at a price to the public of $11.00 per share. The proceeds came to $66 million, which was below the $100 million at $15 per share that the company was hoping to raise. The shares list on the New York Stock Exchange under the ticker symbol “HRTG.” The offering closed on May 29, 2014. Heritage offers personal residential insurance for single-family homeowners and condominium owners in Florida through

Brown & Brown, The Wright Insurance Group Brown & Brown Inc. completed its acquisition of specialty and flood insurance company The Wright Insurance Group, LLC. Florida-based national insurance broker Brown & Brown acquired TWIG for $602.5 million from Aquiline Capital Partners, Wright’s lead equity partner. This amount was comprised of cash payments of $587.5 million for the program business, $7.5 million for Wright National Flood Insurance Co. (WNFIC) and $7.5 million for WNFIC statutory surplus, according to Brown & Brown. The transaction was a cash acquisition and not subject to financing conditions. TWIG, with $114 million in revenues, is a fee-based specialty insurance services company that underwrites and administers property/casualty risks through three distinct segments: Wright Flood, program services servicing reciprocals and self-insured groups, and managing general agent services. It is the largest provider involved in the federal flood insurance program. B&B has acquired 100 percent of the membership interests of TWIG and its subsidiaries, with the exception of WRM America Indemnity Co. of Uniondale, N.Y., which serves the education market. TWIG subsidiaries acquired include: Wright Risk Management Co., LLC; Wright Specialty Insurance Agency, LLC; Wright Risk Consulting, LLC, Wright Program Management, LLC, Wright National Flood Insurance Services, LLC, and Wright National Flood Insurance Co. Wright’s operations will become part of Brown & Brown’s National Programs Division. The firms said that Wright’s current leadership team will remain in place and will continue to operate from offices in Uniondale and Albany, New York, and St. Petersburg, Florida. Wright’s public entity/ program services/specialty operations in

14 | INSURANCE JOURNAL-FOCUS ON FLORIDA June 16, 2014

New York will report to Tony Grippa, regional vice president, and Wright’s flood program operations will report to Chris Walker, regional executive vice president. Following the announcement of the deal closing, ratings agency A.M. Best affirmed the financial strength rating of A- (Excellent) and issuer credit rating of “a-” of Wright National Flood Insurance Co. (WNFIC). The outlook assigned to both ratings is stable. Hilb Group, Newman Crane & Associates The Hilb Group of Richmond, Va., has acquired Newman Crane & Associates of Orlando, Fla. NCA will continue to operate at its current location under the leadership of Steve and Jamie Buckner. NCA sells personal and commercial insurance and benefits in the greater Orlando area. NCA is The Hilb Group’s second acquisition in Florida in 2014. In January, it acquired Hockman Insurance Agency Inc. of Tampa. Brown & Brown, Agency Management Corp./ Recreational Protection Management Insurance agency Brown & Brown has acquired the assets of two agencies specializing in the recreational vehicle market. The businesses acquired are Agency Management Corp. (AMC) and its affiliate, Recreational Protection Management Inc. (RPI), both of Bradenton, Florida, and both owned by Clay S. Purton. Following the transaction, Purton and the rest of the AMC and RPI team will join Brown & Brown’s branch location in Tampa, Florida. Brown & Brown’s National RV Center is based in Columbia, Kentucky and also has locations in Simi Valley, California and Albany, New York. The National RV Center operates under the leadership of Mike Neal, executive vice president of Brown & Brown of Kentucky. AMC provides extended vehicle service contracts, appearance protection, gap protection, roadside assistance protection, tire/ continued on page 16 www.insurancejournal.com

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ition.pdf

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continued from page 14 wheel protection, and other similar products to RV dealerships and their customers throughout the southeastern United States. RPI, an affiliate of AMC, offers personal lines property/casualty insurance products and services for recreational vehicles,

including RVs, boats, motorcycles and other power sport vehicles. AMC and RPI have combined annual net revenues of $1.6 million, according to the announcement. Brown & Brown’s Neal said the trans-

action allows his firm to strengthen its National RV Center’s operations throughout the Southeast and nationwide. Patriot Underwriters Inc., Holdren Insurance Group Inc. Fort Lauderdale, Fla.-based Patriot Underwriters Inc. has acquired the assets of Holdren Insurance Group Inc. in Bend, Ore. HIG, formed in 2010, is focused on the workers’ compensation needs of the shooting sports industry. Patriot sad it will build upon the assets of HIG and continue to expand this niche program. Holdren, founder of HIG, will now serve as senior vice president of program business development at Patriot Underwriters. In his new role, Holdren will oversee PUI’s current and new program business expansion. Patriot Underwriters produces, underwrites and administers alternative market and traditional workers’ comp insurance plans for insurance companies, segregated cell captives and reinsurers. Biglari Holdings, First Guard Insurance Biglari Holdings in San Antonio, Texas, acquired Venice, Florida-based First Guard Insurance Co. and its affiliate, 1st Guard Corp. The terms of the transaction were not disclosed. First Guard Insurance, licensed in 28 states, is a direct underwriter of commercial trucking insurance selling physical damage and non-trucking liability insurance to truckers. First Guard will continue to be operated by its current management team led by CEO Edmund B. Campbell, III. The ownership change will not have an impact on day-to-day operations, and First Guard will remain headquartered in Venice, Florida, according to the announcement. Biglari Holdings Inc. is a holding company owning subsidiaries engaged in a number of diverse business activities, including media, property/casualty insurance, and restaurants. Its subsidiary companies include Steak ‘n Shake Operations Inc. and Biglari Real Estate Development Corp.

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Idea Exchange Sun Sets on Sunshine State Insurance

n March 4, 2014, Demotech Inc. withdrew the Financial Stability Rating (FSR) assigned to Sunshine State Insurance Co. after being advised that the company would be unable to file its December 31, 2013 annual statement in a timely manner. Equally as important in the decision to withdraw the FSR was Insurance Commissioners, the signatories the rationale presented on the jurat page attested to the accuracy By Joseph Petrelli by management in their of the financial statement. Demotech also Demotech initial verbal commureviewed and analyzed documents prepared nication to Demotech by the independent third parties that that several years of independently audited prepare annual reports, such as the indefinancial statements would likely need to pendent auditors who opine on whether be materially revised due to previous reportthe financial statements of the company ing errors associated with reinsurance are fairly presented as well as the consultcontracts. ing actuary’s perspective on loss and loss On June 3, 2014, the company was adjustment expense reserves and certain ordered into liquidation. Although the reinsurance matters contained in the actucompany reported in excess of $7,000,000 ary’s report. of surplus in its March 31, 2014 financial From time to time, insurance carriers statement to regulators, the court deemed and their independent consultants may continued operation to be hazardous to polhave differences that need to be addressed, icyholders. reconciled and resolved; however, wholesale Recent articles have stated that Sunshine restatements of previous financial stateState would need to restate its 2008 and ments, particularly when necessary over a all subsequently number of consecFlorida has made it clear that issued indeutive years, as the pendently audited management, not policyholders, Sunshine State financial statesituation appears will be held responsible when ments in order to suggest, require restatements are required. to address the that Demotech errors. This would mean that nearly onemove quickly to withdraw or revise an FSR. third of its operating history could need to Financial information, whether presented be restated. Similarly, if the matter to be to a rating service issuing an opinion as addressed in this situation is reinsurance to the financial strength or financial starelated, the affirmative statements related bility of an insurer or a regulator such as to reinsurance that were presented in the the Florida Office of Insurance Regulation annual loss and loss adjustment expense (OIR), must be accurately presented and reviews prepared by a professional actuary indicative of the underlying financial condiwill likely need to be revised as well. tion of the insurer being reviewed. Demotech reviewed, analyzed and rated The reinsurance companies associated Sunshine State starting in 1997. Each time with the catastrophe reinsurance program the company filed a quarterly or annual are not required to monitor their client’s statement with the National Association of treatment of reinsurance. Once the reinsur18 | INSURANCE JOURNAL-FOCUS ON FLORIDA June 16, 2014

ance treaty is negotiated, executed and purchased, the responsibility of the reinsurer is to respond to a covered event. How the ceding company internally records and accounts for its reinsurance transactions is an internal matter for management. Guidance, procedures, processes and protocols for the proper recordation are outlined in the instructions from the NAIC, but again it is the responsibility of management to implement appropriate procedures and ensure that those procedures are subsequently followed. Assurance of such compliance is presented in the notes to financial statements and general interrogatories in the sworn quarterly and annual statements that are relied upon. In the Sunshine State case, it appears that by deciding to liquidate an insurance company despite a reported surplus of more than $7,000,000 at March 31, 2014 rather than giving the company additional time to raise capital, the Florida OIR has made it clear that the financial results reported to third parties must be accurate and consistent with the underlying financial condition of the carrier and that management, not policyholders, will be held responsible when restatements of prior period results are required. Petrelli is the president of Demotech, a financial analysis firm specializing in evaluating the financial stability of regional and specialty insurers. Since 1985, Demotech has been assigning Financial Stability Ratings® (FSRs) for property/casualty insurers and title underwriters. FSRs are a leading indicator of financial stability, providing an objective baseline of the future solvency of an insurer. Demotech reviews and evaluates insurers based on their area of focus and execution of their business model rather than solely on financial size. This philosophy was the catalyst for the Demotech Company Classification System, which was developed and published in Insurance Journal, in order to stratify and categorize insurers into operational categories. Visit www.demotech.com for more information. www.insurancejournal.com

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News & Markets FAIA’s Grady: Avoiding Political Controversy, Tackling Independent Agents’ Challenges

eff Grady, president, Florida Association of Insurance Agents, reviewed the recent legislative session and challenges facing independent agents with Insurance Journal’s Michael Adams. This is an edited version of his remarks. What is your impression of the recent legislative session? Grady: It is an election year and one of the industry’s most significant political opponents, former Governor Charlie Crist, will likely be on the ballot. The governor’s race is critically important to the future of Florida and certainly our state’s insurance market. Given that, industry representatives and agents preferred this year to allow recently enacted legislative reforms to work and avoid any new bills that could create controversy within the governor’s race. The industry is tamping down expectations about the new private flood legislation. How do you perceive its impact in creating such a market? Grady: I really think it is a lot to do about nothing. Recent revisions to Biggert-Waters deflated the need for private flood insurance and rightfully so. Still, I believe private flood insurance has its place around the National Flood Insurance Program, but when the need involves home mortgage financing or grandfathered rates, the NFIP should prevail. The Citizens’ clearingJeff Grady house is up and running and yet insurers are still looking to do multi-policy takeouts. How are those dynamics working out? Grady: The clearinghouse, which only applies to new business today, appears to be functioning well with the need for

small refinements along the way. It will start including renewal business as well in October. I’m not necessarily surprised to see additional take-out plans as there is still a significant number of policies within Citizens and insurers can assume them in bulk rather than writing them individually through the clearinghouse. Over time, however, we expect that to diminish. What are the major challenges facing agents today? Grady: Agency perpetuation and keeping pace with tomorrow’s insurance buyer who is more likely to shop on-line. The agency work force is aging and there is a challenge to perpetuate many agencies from within. Adding to that is the slow start independents have had in the digital era compared to the competition from direct writers.

20 | INSURANCE JOURNAL-FOCUS ON FLORIDA June 16, 2014

What are the growth opportunities you see for independent agents today? Grady: There is still a demand for expert advice and quality service. Agents who can develop a product specialty and deliver these through the Internet can expand well beyond their geographic limitations of yesterday. As an association what are your priorities in the coming year? Grady: We really want to move the needle on providing more qualified applicants to the insurance agent community. FAIA’s Good Works Fund is currently working with the Florida State University Risk Management and Insurance Department to expand an insurance curriculum throughout the state and community colleges. This will also take some legislation, but we believe when all that is in place, it will create a much needed pipeline of qualified applicants.

www.insurancejournal.com

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News & Markets Florida Court: Property Policy Doesn’t Cover ‘Exploding Corpse’ By Michael Adams

Florida circuit court recently found that a condominium owner’s property policy did not include coverage for the “explosion” of an advanced decomposed body since it did not fall under a named peril listed in the insured’s policy. Florida’s Fourth District Court of Appeals recently handed down the ruling in the case of Rodrigo v. State Farm Florida (No. 4D12-3410, April 23, 2014), which had its genesis in a 2009 incident involving the death of a woman whose body was not discovered for weeks. According to court records, the woman’s body had gone unnoticed until neighbors complained to the condominium’s maintenance men about the odor coming from her residence. By that time, the build-up of internal gases in the corpse had caused her abdomen to rupture, resulting in the leakage of bodily fluids into the walls and ceiling of Rodrigo’s condominium unit. The resulting odor eventually caused the condominium association to gut the deceased’s residence. Rodrigo, however, claimed that State Farm Florida still owed her monies to repair her unit and to compensate her for damage to her personal property and for living expenses. Rodrigo had argued the deceased woman’s ruptured corpse constituted an “explosion” and was covered under her policy. State Farm Florida, however, denied the claim, saying a decomposed body was not a covered peril. Judge Melanie May noted that Rodrigo’s policy did not define what constituted an explosion. However, she noted, that by precedent the courts have long held that a policy must be interpreted according to its most basic definition as understood by the “man-on-the-street.” As a result, May wrote, Rodrigo’s policy did not cover the damage caused by her neighbor’s death. “The plain meaning of the term “explo-

sion does not include a decomposing body’s cells explosively expanding, causing leakage of bodily fluids,” opined May. “In short, although novel in her attempt to do so, the insured could not establish that the decomposing body was tantamount to an explosion.” May also denied Rodrigo’s claim on the basis that she failed to provide a sworn proof of loss as required within 60 days of filing a claim. Rodrigo rejected the insurer’s offer and although she sent the insurer invoices

with a list of damages, she did not make a sworn proof of loss. She argued that since State Farm Florida did make an offer to repair her condo, the requirement for the sworn proof of loss did not apply. But the court said the failure to file the sworn proof of loss violated the terms of Rodrigo’s policy even if State Farm Florida had offered a settlement. “Because the insurer and insured never reached an agreement, no final judgment was entered, and no valid appraisal award existed, there was no coverage for the claims,” wrote May.

Florida Insurance Market News Heritage Insurance Holdings Inc. has launched an insurance program for commercial residential properties in Florida. The new line will be written by Heritage’s subsidiary, Heritage Property & Casualty Insurance Co. Randy Jones, commercial president, said it was developed after feedback from agents and helps to fill a market need. “Because of their size and overall complexity, many of these properties may not qualify under the typical eligibility guidelines established by other companies,” he said. The new commercial residential line will offer a range of commercial products, including coverage for condominium associations, homeowner associations, continuing care retirement communities, and apartment complexes. Based in Clearwater, Fla., Heritage Insurance offers home, condominium, rental, and commercial residential insurance through independent agents. American Integrity Insurance Group, a Florida residential and business property insurance company, will now

22 | INSURANCE JOURNAL-FOCUS ON FLORIDA June 16, 2014

offer a policy designed for Floridians with owner occupied, primary residences valued from $750,000 to $1.5 million. In addition to the coverage provided for the dwelling itself through an HO-3 policy form, policyholders can request specialized coverage for personal property such as jewelry, furs, fine art, musical instruments, silverware/goldware, coin/stamp collections, cameras, and guns working with their insurance agent to “schedule” these items according to certain guidelines. Other features of the policy include: • Replacement cost coverage that will pay the amount to rebuild the home and replace personal possessions at the current cost with no depreciation • Optional personal injury protection against lawsuits • Optional coverage in case of water backup with sewers and drains Based in Tampa Bay, American Integrity Insurance Co. offers coverage for vacant homes, manufactured homes and dwelling fire policies in addition to homeowners insurance. www.insurancejournal.com

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