Florida's Four Walls of Insurance Reform
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BACKGROUNDER Florida’s Four Walls of Insurance Reform Practical Market-Based Solutions to Reduce Cost Drivers and Strengthen Florida’s Insurance Market Photo: iStockPhoto / Lisatop By Christian R. Cámara Senior Fellow and Co-Founder, R Street Institute Adjunct Scholar, The James Madison Institute Introduction ida's workers' compensation insurance rates had dropped by 60 percent.2 For many years, Floridians struggled to purchase insur- Just as the workers’ comp market began to stabilize, the ance coverage—whether it be for their properties, vehicles state’s property insurance market was thrown into a tailspin or employees—in ways that sometimes became a drag on when Florida was battered by seven back-to-back major the state’s economy. hurricanes in 2004 and 2005. By 2006, the rising cost to in- In the early 2000s, Florida's business community reeled sure property in Florida became the top political issue in from rising workers' compensation insurance rates, due in that year’s gubernatorial and legislative elections. no small part to a cottage industry of fraudsters and unscru- Knee-jerk insurance reforms undertaken by the Legisla- pulous individuals who exploited the state’s rules. The cost ture and newly-elected Gov. Charlie Crist in 2007 sought to of workers' compensation threatened job growth during suppress the rate increases artificially. In fact, these changes what was otherwise a period of economic growth nation- only exacerbated the state’s shaky property insurance mar- ally. The issue became the subject of a 2003 special session ket, as major property insurers scaled back or even exit- of the Legislature, during which lawmakers approved and ed the state market altogether. The state-backed Citizens then-Governor Jeb Bush signed a reform package1 that Property Insurance Corporation ballooned to become the successfully curtailed litigation and fraud. By 2008, Flor- www.jamesmadison.org | 1 largest homeowners insurer in the state and the Flori- gration of policies to private companies and to active da Hurricane Catastrophe Fund extended reinsurance depopulation efforts. Between 2014 and 2016, more promises that advisers warned it might not be able to than 758,000 Citizens policies were transferred to pri- keep. vate companies.10 Today, Citizens holds just slightly By the time Rick Scott was elected governor in 2010, more than 472,000 policies11 down from a high of 1.5 the Legislature had come to accept that their 2007 re- million in 2012.12 Additionally, Citizens itself has tak- forms were unsustainable. They ushered in positive, en advantage of low reinsurance rates to transfer some market-freeing reforms to liberalize insurance rates of its enormous hurricane risk to the private market, and shrink both Citizens and the Cat Fund. Combined allowing it to purchase more coverage for less13 and with a hurricane-free decade,3 these changes helped to eliminating its once-ominous threat of assessments on restore health to the state’s property insurance environ- state taxpayers.14 ment. Yet despite a remarkable streak of combined luck, The state’s unprecedented hurricane drought came to including: a decade free of hurricane activity, two un- an end Sept. 2, 2016, when Hurricane Hermine made remarkable storms last year and the lowest reinsurance landfall in St. Marks, just south of Tallahassee. The fol- rates in recent memory, average property-insurance lowing month, Hurricane Matthew skirted much of premiums are still on the rise in many parts of Flori- Florida’s eastern shoreline and eventually made land- da.15 Consumers and their representatives in Tallahas- fall in South Carolina. These two storms combined to see both have legitimate concerns when they ask why cause approximately $950 million in insured damag- this is the case, given the favorable weather and rein- es and 135,000 claims statewide.4 Things could have surance market conditions in recent years. been far more damaging for the Sunshine State. Had Human behavior, encouraged by Florida law, appears Matthew tracked just 20 or more miles to the west, the to be the culprit. The New York-based Insurance In- full force of a Category 4 hurricane would have raked formation Institute reports that non-catastrophe claims the region’s most densely populated shoreline. Instead, have increased roughly 17 percent per year over the losses were relatively small and Florida insurers and past decade16 in Florida and are growing rapidly both their reinsurers are fully expected to absorb and cov- in frequency and in severity. Separately, after more than er existing claims without much impact to the state’s a decade of rate reductions, workers’ compensation in- property insurance market. surance premiums are also on the rise, due to Florida In addition, Florida has in recent years caught anoth- Supreme Court rulings that reversed some key provi- er lucky break via the global capital markets. Given that sions of the 2003 reforms.17 hurricanes, earthquakes and other catastrophes strike High insurance rates are appropriate when they re- at random, uncorrelated with the ups and downs of the flect actual risks. Costs inherent to a particular indus- rest of the economy, capital has flooded into the rein- try or regional market may be impossible to remedy. surance and catastrophe bond markets ever since the However, it is apparent that the rate increases Florid- 2008 global economic crisis. This has resulted in new ians are being faced with in both the property and and innovative risk-transfer products and competition workers’ compensation insurance realms stem from among traditional reinsurers, which has helped pro- practices, behaviors and even cottage industries born duce historically-low reinsurance rates. Despite major out of vulnerabilities in the law exploited by bad actors. losses in Japan and elsewhere in recent years, experts In short, the cost drivers stem from the very laws that believe global reinsurance pricing will continue to soft- govern those insurance products. en.5 Indeed, reinsurance prices fell an additional 3.7 This should concern state lawmakers, as property percent in January 2017.6 insurance and workers’ compensation insurance are Florida has benefited handsomely from this buyers' both regulated at the state level. Nearly every Floridi- market. New insurers have entered the state to write an is affected by the cost of property insurance, since policies.7 The government-run insurer of last resort, mortgage lenders require property owners to carry Citizens Property Insurance Corp. (Citizens), has shed coverage, the cost of which is also usually passed on to more than 1 million policies since 20128 and lowered renters. Florida law also requires all employers to carry its overall exposure by more than 60 percent over the workers’ compensation coverage, but for very few ex- past four years.9 This is due both to the organic mi- ceptions.18 BACKGROUNDER | Insurance Reform The following paper describes how the Florida Legis- In response to this ever-growing crisis, the Legisla- lature could address vulnerabilities in the law to curtail ture passed and Gov. Jeb Bush signed Senate Bill 50-A cost drivers that needlessly and artificially inflate rates in 2003, overhauling the state’s workers’ compensation for these insurance products. Additionally, it will iden- system to increase affordability and availability of cov- tify ways to harness the benefits of a favorable global erage. The reform package contained several provisions reinsurance market to further strengthen the state’s aimed at tackling fraud. It also increased medical reim- property insurance market ahead of less sunny days. bursements for physicians and surgical procedures, as Throughout, the focus is on reforms that could reason- well as revised indemnity benefits and procedures for ably be implemented during the 2017 regular legislative claimants.22 session that would make a meaningful difference short- The provisions related to attorneys’ fees ultimately ly thereafter. are credited with reducing the costs in the system and, by extension, slashing workers’ compensation insur- Workers’ Compensation ance rates by 50 percent in just the first three years.23 Insurance Reform The reforms enacted a statutory formula that tied at- torney fees to the amount of benefits secured by the Under the workers’ compensation system in place in claimant,24 rather than an hourly rate that encouraged every state except Texas, all employers are responsible a protracted process. In response to a Florida Supreme to compensate employees for workplace-related inju- Court decision that the requirement to use the attor- ries or illnesses on a no-fault basis. Workers' comp in- ney fee formula was ambiguous in statute, the Florida surance is coverage that employers and businesses pur- Legislature passed House Bill 903 in 2009 to clarify that chase to transfer the risk of those costs to a third party. attorney fees are to be calculated solely on the statutory In 2000 and 2002—the two years in which there were fee schedule, except in certain medical-only cases.25 workers' comp insurance rate filings before the 2003 By 2014, Florida had just the 28th highest workers’ reforms—Florida had the highest and second-highest comp rates in the nation.26 In 2015, the Florida Office rates in the nation,19 respectively, with rates increas- of Insurance Regulation (OIR) issued a report finding ing by 21.5 percent in 2002 alone.20 By most accounts, the state's workers’ comp market to be “competitive, attorney fees were the leading cost drivers before the well-capitalized and robust” and that it was served by a reforms. Not only did the actual costs of the fees rise, “large number” of private market insurers. 27 but rising fees offered incentives for attorneys to pur- However, in April 2016, the Florida Supreme Court sue more litigation and to extend the timeframe for re- again addressed the issue of attorney fees in workers’ solving claims.