Flood, Fraud & the Florida Market: McCarty Talks Hot Insurance Topics in 2015

It was another busy year for the Florida Office of Insurance Regulation (OIR). From conducting the annual property/casualty data call and subsequent stress test of Florida property insurers, to working on the depopulation efforts of Citizens, to calling out the National Flood Insurance Program on Florida’s “unfair” flood insurance rates, Florida Insurance Commissioner Kevin McCarty has addressed some important insurance issues facing his state in 2015.

In the middle of it all, McCarty overcame rumors of being replaced, testified before U.S. lawmakers on behalf of the National Association of Insurance Commissioners (NAIC), was recognized with a lifetime achievement award by the Florida Association for Insurance Reform (FAIR) in September, as well as honored with the Latin American Association of Insurance Agencies “Insurance Man of the Year” award in December.

In a wide-ranging interview with Insurance Journal in November, McCarty talked about how he approaches his position after all these years and shared his views on the important issues facing Florida.

Insurance Journal (IJ): How has your experience as the Florida Insurance Commissioner shaped your approach to the position now?

Kevin McCarty (KM): The way I approach my position is, first, I use three guiding principles. One is that government is here ultimately to serve the people. Number two is the government is to be transparent in its operation and treat its customers fairly and respectfully. That includes insurance companies who are also our customers. Lastly, that we promote a vibrant marketplace by protecting those who are unable to protect themselves.

My philosophy is you create a wide berth of competition. You want to put as much product in the common stream and support the profitability of the companies. Capital goes where capital is welcome. On the same side, you have to protect those who are unable to protect themselves. We think it’s important in situations that we respond and protect consumers and, at the same time, promote a vibrant marketplace.

You have to wear many hats as an insurance commissioner. I’m very proud to be part of the Florida team.

The Florida Insurance Market
IJ: OIR recently performed a reinsurance stress test on insurers in the state, and that seemed to have positive results for the state. Do you foresee the Florida insurance market growing?

KM: The insurance market is growing in Florida because Florida is growing. Eight hundred people move to Florida a day. Florida’s economy is strong and robust. We’ve probably been one of the strongest recovery states since the Great Recession. We’ve certainly had significant job growth, and we have a building boom鈥�

I would like to revisit on the stress test, because each stress test is very important鈥� I think one of the points I want to make is Florida has acted in a responsible manner, and most importantly, in the development of its own indigenous market.

When Hurricane Andrew hit, it devastated the national market. The national [insurers] leaving Florida after Hurricane Andrew, that didn’t start in 2004 and 2005. In fact, it just accelerated it at that time. The legislature responded by expanding and creating the residual market, and expanding our catastrophe fund, which provides low cost reinsurance to our companies.

We also provided loans, and provided surplus notes from the state to jump start an indigenous insurance market, which has grown tremendously. Many of these companies that have started out are now multi state companies doing business in several states, 15 to 20 states across the country.

Florida has been the real success story. It has encouraged national companies to come to Florida but the truth of the matter is the Florida marketplace is very different. There’s a higher risk than most other areas. Many of our companies have now branched out to other Gulf Coast states because they have an expertise from their experience in Florida in operating in high-risk areas.

The stress test was highlighted this year, primarily under the supervision and advice of our CFO, Jeff Atwater, with the purpose of helping build confidence in our marketplace. It was a very significant stress that we put the companies through.

鈥ll the companies passed. One company did not pass, and bought additional reinsurance in order to pass, so I think that’s important. It’s an important message. The [company info in] the stress test is confidential. Nothing is probably more of a trade secret than your plans in the event of a catastrophic event, what your risks are and how you manage your risks.

Some folks are disappointed that we didn’t name names and name companies, but we did array all the data on a chart. We did show how their capital and surplus would be affected鈥o that people can see what companies passed by a fairly significant margin.

We’re going to continue to refine and develop this test, augment it in the future, and hopefully bring more transparency to the process to instill confidence in the Florida marketplace.

The Florida marketplace is strong. Capital and surplus has doubled since 2010. That’s a remarkable feat. That’s a combination of the resurgence of our marketplace as the result of legislative reforms in the Senate Bill 408, where we address the sinkhole issue.

In addition, the cost of reinsurance has dropped dramatically, and that’s been reflected in both the bottom line and the lower rate.

IJ: All that being said, and obviously Florida’s been fairly lucky this hurricane season as well, would you say that Florida’s still a risky market?

KM: We’re a super peak when it comes to hurricanes in reinsurance parlance. You look at the only area that has probably more catastrophic risk damage is earthquake in Japan, so there’s no question that Florida is still at a very, very high risk.

But Florida has done a number of things to address those issues. We have reduced Citizens [the state insurer of last resort] from a 1.5 million to a just under 600,000 policy count. We’ve almost totally eliminated the risk of assessment from Citizens. We have created our own catastrophe sharing through the Cat Fund, which is fully funded. We can withstand a 125 to 150 year storm, so Florida is well positioned to address, and they did it themselves.

Not to mention that Florida bears the cost of most of the flood insurance program for the rest of the country. We pay 38 percent of the premium, and for every dollar we pay in, we get a quarter back. Rather than being the risky state, Florida’s been the responsible state, and has been a net donor to supporting other states in their program.

McCarty’s Quest for Fairness for Florida Flood Insurance
McCarty has been vocal about his feelings of what he calls “discriminatory” rating practices by the National Flood Insurance Program for Florida policyholders. In August, he requested the NFIP ratemaking data from the Federal Emergency Management Agency (FEMA) to review it based on Florida law. McCarty also requested the actuarial study including all data and models used to see if the rates would meet the Florida statutory requirements of not excessive, inadequate or unfairly discriminatory. McCarty discussed what he hopes will come out of his request and the efforts to improve the state’s private flood insurance market.

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IJ: Florida has the most flood policies in the country, with about 37 percent. So if they have the most, would it not seem that they should be paying more?

KM: No. We have taken the public policy position in our state to encourage people to buy flood insurance and Floridians do buy flood insurance. And yes, Florida has a lot of floods. But obviously, since the inception of the program, we’ve paid out far more than we’ve gotten in return.

That’s evidence that Floridians have been overpaying for their coverage considering how much debt the program is in. [When rates were developed in the 1940s] they took the rating territories, with different rating territories, and then charged them all the same premium – even though they were actuarially different from territory to territory. That, by definition, is unfairly discriminatory.

We demand an opportunity as Floridians to have an open and transparent process to see how rates are developed and how rates are being used – since we’re paying 37 percent of the premium.

We also think that if there is a vibrant marketplace, and since the federal flood program has not been managed, probably, as well as it could have been鈥hat perhaps it’s an opportunity with such a vibrant, robust marketplace, to move some of that and shift some into the private sector.

IJ: What is the plan of action or the goal of your request for the NFIP rating data?

KM: The preliminary claims data that we have certainly suggests that some insurers can make a profit selling primary flood insurance and enjoy some savings, under the right circumstances. And they might even write a product that is broader than the policy form that is currently being written in the NFIP.

The goal is, to first of all, not just trust whatever comes out of the federal government rate development process. We believe that there should be an open and transparent process so that we can challenge鈥nd help build confidence in the federal flood program. I think a lot of people have had their confidence shaken over the years of administration of that program.

We think that some of this risk can be borne in the private sector. We think that the only way we can do that is to get detailed information from the federal program and conduct our own rate analysis and share that information with a broader public. We also think we can take this information and use our Florida developed rate, our FIU public model to help us look at rates and develop rates.

As I’ve said to you before we believe the rates are unfairly discriminatory and would be under Florida law. We think that they also build in a contingency factor of 10 to 25 percent and we think Florida is paying disproportionately a higher rate than they should be paying in the rest of the country.

As long as we’re the biggest bill payer, we think it’s incumbent upon us to take that information and make sure that NFIP rates are not excessive or unfairly discriminatory.

As of the date of this interview, FEMA had not responded to McCarty’s request. However, Insurance Journal received the following statement from OIR on Dec. 16:
“The Office has not yet received a formal written response from FEMA. However, the Commissioner has been in discussions with officials at the National Flood Insurance Program (NFIP). They have expressed a willingness to cooperate with the request and have given their assurances that they want to work collaboratively with the Office to provide what information they can. We know that we have asked them for a significant amount of technical actuarial data, so we understand more time may be needed for a complete response. Overall, we are very encouraged by these discussions and look forward to working with them further on this important issue.”

Fighting Florida’s Fraud Problem

Florida has been trying to address personal injury protection problems (PIP) in the state for many years. In 2012 Florida legislators passed the Motor Vehicle Personal Injury Protection Insurance Act (House Bill 119) in an attempt to tackle this problem. At the recent Florida Chamber of Commerce Insurance Summit, McCarty spoke about the PIP fraud issue, saying one solution was to “fix it or flush it.” McCarty discussed his thoughts on PIP and how the reform is working.

IJ: You recently made a statement on ending Florida PIP. You said ‘Let’s just repeal PIP and do nothing.’ What would be the consequences of doing that?

KM: First of all, I just want to put this in context. The truth of the matter is we fought very hard and it’s a very important initiative to my governor [Gov. Rick Scott] and to my CFO [Jeff Atwater]. They were looking and said ‘OK, let’s try and fix the system if we can fix it.’ Now bear in mind, I think there have been six or seven legislative sessions since the inception of our PIP law, trying to ‘fix PIP’鈥�

As a result of HB 119, [insurance] rates have decreased significantly and it has made a significant change in the trajectory of trends. That said, the fact of the matter is in Florida and nationwide, rates are going up more and more. The question was presented to me as, ‘Should we replace PIP with something else?’ I see a total disconnect between PIP and [bodily injury coverage]鈥here’s no reason to say you have to replace [PIP] with something else.

As far as I’m concerned, there’s nothing more we can do to fix PIP, because it’s not effective to try to do more. It’s a $10,000 benefit. There is only so much a company’s going to invest in a $10,000 benefit to prevent additional fraud.

We did everything we could in House Bill 119. If we’re not satisfied with that, and we want something else, my idea is just get rid of PIP and not require any BI鈥�

The saying is that if there’s still a cottage industry that’s predicated on the PIP and PIP clinics and PIP fraud, then let’s eliminate that as a requirement鈥ake a couple years and get the fraud out of the system. You go through two years, all the fraud clinics will dry up, they’ll be gone. Then we can take a serious look at the determination of whether we want to make some modification of the PIP system or go to a mandatory BI. If we do, what will that cost. We’ve done a study already to show that in some cases, going to a mandatory BI will have minimal impact, but there’s no necessity to go immediately to a mandatory BI…

I’m not suggesting that we get rid of PIP. I’m not necessarily a big fan of PIP, but I think House Bill 119 is working. What we’re seeing is rates are going up for a number of factors that have really nothing to do with the PIP law. It has to do with more miles being driven, more senior drivers, more distracted drivers, more accidents, more traffic congestion, longer commute times. Those are all the things that are contributing to higher rates.

Another Florida insurance abuse that has been plaguing the state recently is assignment of benefits and the increase in water loss cases. The state-backed insurer Citizens has begun addressing this problem in particular parts of the state where it has seen a significant increase in claims. McCarty discussed how OIR is assisting with those efforts.

KM: We’ve done a data call. We’ve asked for information back from our companies. We recently had a case go before the court that upheld the right of a consumer to assign their benefits鈥e hope to look at the data and be in a better position to address [assignment of benefits] and the associated costs after our analysis and perhaps be able to come up with some legislation this year to address this cost driver. The last thing we need in a marketplace where we’re enjoying rates finally going down in Florida is some other cost driver in the system that’s a result of abuse of our current system.

IJ: Has there been much response from residents of Florida in regards to those efforts?

KM: It really hasn’t come to fruition because we’re just initially seeing it. So we’ll have to see more from the data call.

Number two, it’s been masked in part by the reduction in reinsurance so they haven’t seen an increase in their bill as a result of that. But hopefully we’ll be better able to address that issue as we receive the information and able to analyze the data from our data call.

Listen to the podcasts below to hear more from the McCarty interview, including his thoughts on NIMA and the state’s ridesharing insurance debate.