Florida property insurance bill explained: reinsurance costs
Gov. Scott signed the property insurance bill (SB 408) last week, and depending on what newspaper you read, the new law is either a “small reform” (according to the Wall Street Journal on May 21) or sweeping legislation (according to the Miami Herald on May 18). That just goes to show you how perspective plays into it – and, perhaps, it also means that we should read multiple newspapers!
One way to characterize the property insurance bill is to think of it as a correction, a fix for past legislative changes that had unintended consequences. The Florida Legislature this year recognized that some of the insurance reforms passed in 2007 were a mistake, and not correcting them would have been another mistake.
A change gaining the most attention is one that also has been incorrectly characterized. This is the measure that allows expedited filing for reinsurance costs. Reinsurance is insurance for insurance companies to share some of the costs of risk. Many news accounts you may have read or seen on TV make it sound like your insurance rates will be going up by 15% a year to cover the cost of reinsurance. This is not the way it will work. In fact, this is a very minor change to the way the law works now. Currently, insurers are allowed to have an expedited rate filing for up to 10% per policy, so the truth is that this change raises the ceiling by five percent. A small reform. And, more important, if reinsurance rates do not rise, then there is no change at all.
You may have also been led to believe that insurers can pass on this cost without the state’s insurance regulator approving it. That is not true. If a company says it needs to raise its rates because reinsurance costs have risen, regulators still have to provide a full review – and approve or disapprove an increase. Expediting rate filing reviews for reinsurance costs was part of a law passed in 2009, and it means that regulators approve or disapprove a rate increase in 45 days, rather than the 90 days they have for a regular rate increase request. This change enables insurers to account for fluctuating reinsurance prices, and there is an upside to consumers: If an insurance company is severely restricted in recouping the costs of doing business, it has to restrict how much business it can take on. In other words, an insurer cannot accept more customers and try to make it up on volume because the very nature of insurance demands that enough money is on hand in advance to pay anticipated claims.
Here’s another clarification about the 15% expedited rate filing for reinsurance: It does not equate to 15% of your entire premium because reinsurance costs are only a portion of your rate. For example, let’s say your insurance company has a rate formula where reinsurance is 30% of your premium. If reinsurance rates rise by 10%, then your rate increase would be three percent. Yes, it’s an increase and you don’t want one at all – but now you know how it works.