Property Insurance Challenges in Florida – No Kidding!! May 2, 2011 Sam Miller Executive Vice President Florida Insurance Council

FIC President Cecil Pearce  Cecil Pearce returned as FIC President after eight years with AIA in Atlanta.

Crist Agenda  Rate Rollbacks – Citizens & Private Insurers  Three-Year Rate Freeze  Citizens Aggressively Competing with Private Insurers

Crist Legacy  Insolvencies  Inadequate Surplus Growth During 5 Years Without Hurricanes  Citizens Growing from 1 M to 1.3 M in 2010  As Wall Street Journal Put it: Looming Hurricane Charlie Disaster

Governor Rick Scott

AG Bondi, Ag. Comm. Putnam, Gov. Scott, CFO Atwater

DEM Director Koon, Senate President Haridopolis, House Speaker Cannon

Haridolopis & Cannon in House Chamber

Legislators Sworn in

Florida Senate

CSB 408/HB 803 – Florida Property Insurance Cost Drivers Bill  Insurance Commissioner McCarty:  New challenges are emerging in our system that are affecting insurance rates, and the underlying insurer costs. These cost-drivers include: Increased Reinsurance Costs (from the phasing-out of the TICL layer) Replacement Cost Methodology Fraud Premium Reductions from Mitigation Discounts; and Reported Sinkhole Claims

CSB 408/HB 803 – Florida Property Insurance Cost Drivers Bill  Insurance Commissioner McCarty “Sinkhole claims and other cost-drivers are affecting rate filings in Florida. During 2010, the Office approved rate increases for several companies ranging up to a 28.8 percent statewide average for personal residential policies and up to 11.3% statewide for commercial residential policies…If we do not address these underlying cost drivers, I am concerned that our state could potentially experience more rate increase requests in the future, which will stress the housing market, impact our economy, and increase the burden on Florida’s families.”

CSB 408/HB 803 – Florida Property Insurance Cost Drivers Bill  Provides a claims filing deadline for new/reopened claims of 3 years from the date of the hurricane  Allows all reinsurance costs, financing costs, or the costs of the price increase Cat Fund coverage to be included in an expedited rate filing to a maximum of 15 percent per policy.  Notice of Nonrenewal, Cancellation or Termination. Shortens the time for insurers to send out nonrenewal notices from 100 to 90 days; deletes the requirement to give 180 days notice if policyholder has been an insured for at least 5 years.

CSB 408/HB 803 – Florida Property Insurance Cost Drivers Bill  Allows an insurer provide a “Notice” of change in coverages as opposed to non-renewing.  ACV RCV Dwelling. Allows the insurer to pay ACV, less the deductible, and hold back RCV until there is a contract to perform repairs. Prohibits contractor from requiring advance payment.  ACV RCV Contents. Requires insurers to offer coverage where RCV is paid without holdback; coverage where RCV is paid, but initial payment is limited to ACV.

CSB 408/HB 803 – Florida Property Insurance Cost Drivers Bill  Claims Payment Deadline. Requires a property insurance claim to be paid or denied by the insurer the later of 90 days after receiving notice of the claim unless there are factors beyond the insurer’s control that prevent payment; or 15 days after there are no longer factors beyond the control of the insurer that reasonably prevented payment.  Uniform Mitigation Verification Form. Provides that an insurer may verify a uniform mitigation inspection form submitted by the policyholder or policyholder’s agent.

Public Adjuster Reforms  Public Adjuster Fees. Limits PA fees on reopened claims to 20%.  Public Adjuster Reform. Prohibits certain statements on a PA advertisement or solicitation and requires a disclaimer; requires the PA to give the insurer prompt notice of a property insurance claim; requires the PA to give the insurer receives a copy of the PA contract, that the property is available for the insurer’s inspection, and that the insurer may interview the insured; prohibits a licensed contractor or subcontractor from adjusting claims without a PA license.

Public Adjuster Reforms  Public Adjuster Contracts. Requires certain disclosures on PA contracts. Requires PA to forward unaltered contract to insurers within 30 days.  Citizens PA Prohibition. Prohibits Citizens policyholders from using a PA until after Citizens has made an offer on the claim; limits PA fees to 10% on Citizens claims. (Senate)

Sinkhole Insurance Crisis

 Rate Certification. Allows an insurer to provide additional information in a rate filing without having to withdraw the filing and refile.  Rates for Sinkhole Coverage. Rates for sinkhole peril deregulated.  Citizens Rates on Sinkholes. Provides that rates for sinkhole coverage provided by Citizens are not subject to the 10% cap.  Requires Citizens to offer sinkhole coverage for dwelling only; requires any payment be used to repair the loss.

Sinkhole Insurance Crisis  Sinkhole Coverage: Senate - Provides that sinkhole coverage is not required to be offered by a private insurer, and restricts the coverage to the principal building only. (senate) House - Requires insurer to offer sinkhole coverage, but allows insurers to restrict coverage for sinkhole and catastrophic ground cover collapse to the principal building only.  Expands the sinkhole provision to apply to all property insurers, including commercial property insurers. (Senate)

Sinkhole Insurance Crisis  Allows an insurer to inspect a property prior to issuing a policy covering sinkhole loss. (House)  Expanded Definitions of “Professional Engineer” and Professional Geologist”  Definition of “Structural Damage”. “A covered building suffers foundation movement outside an acceptable variance under the applicable building code; damage to a covered building, including the foundation, that prevents the primary structural members and/or primary structural systems from supporting the loads and forces they are designed to support; and the loss meets any additional conditions contained in the insurance policy.

Sinkhole Insurance Crisis  Sinkhole Claim Deadline Senate: Two Years House: Four years  Costs of Sinkhole Testing. Requires policyholders to reimburse the insurer for up to 50 percent of the cost of a professional test if there is no sinkhole loss found not to exceed $2,500. (Senate)

Sinkhole Insurance Crisis  Burden of Proof. Clarifies that findings, opinions, and recommendations of the insurer’s professional engineer and geologist are presumed correct and that presumption shifts the burden of proof. (Senate)  Neutral Evaluation. Specifies minimum requirements for neutral evaluation findings; allows for the use of appraisal in sinkhole claims; and implements conflict of interest requirements for neutral evaluators.

Sinkhole Insurance Crisis  Allows neutral evaluators to have reasonable access to the insured structure; prohibits a party from requiring insurers to pay for extraordinary costs not required by neutral evaluation.  Sinkhole Coverage. Requires that Citizens must offer sinkhole coverage and for new and renewal business issued on or after 2/1/12, with SH coverage, that it not cover appurtenant structures, sidewalks, driveways, decks or patios.

CPIC Returned to Last Resort Insurer  Restoring Citizens to Insurer of Last Resort (SB 1714 and HB 1243)  Insurance Commissioner McCarty: “Another concern is the role of Citizens in the marketplace..In 2009, the Legislature lifted the rate freeze, and allowed Citizens’ rates to be on a glide path of no more than a 10% rate increase every year. However, there are still concerns that Citizens rates are anti- competitive relative to the private sector. … Let me be perfectly clear about this issue: until systematic and fundamental changes are made to the role and function of Citizens Property Insurance Corporation – Florida’s property insurance marketplace will never function properly as a competitive marketplace. Florida’s policymakers need to make overhauling

CPIC Returned to Last Resort Insurer  Citizens PA Prohibition. Prohibits Citizens policyholders from using a PA until after Citizens has made an offer on the claim; limits PA fees to 10% on Citizens claims. (Senate)  HRA Boundaries. Removes the requirement that the boundaries of the High Risk Account be reduced.

CPIC Returned to Last Resort Insurer CS/SB 1714CS/HB 1243 Reduces the eligibility threshold to $1 million (HRA impacted since PLA is already there) Same As of 1/1/2014 risks with insured value in the PLA at or above $750,000 are ineligible Expands this provision to Include policies in HRA in the coverage reduction Deems ineligible any structure for which a permit for construction is obtained on or after 6/1/2011 seaward of the coastal construction control line. Does not address

CPIC Returned to Last Resort Insurer CS/SB 1714CS/HB 1243 Changes 15% eligibility rule to 25% and sunsets it on 1/1/15. Same Repeals the language allowing a policyholder to opt out of a takeout. Same Prohibits CPIC from issuing new CNR policies. Same Requires that new and renewal business issued on or after 2/1/2012 not include attached or detached screen enclosures. Same with 1/1/12 due date

CPIC Returned to Last Resort Insurer CS/SB 1714CS/HB 1243 Requires the coverage offered by the corporation, as of 1/1/13, not provide coverage for detached structures. Does not address Requires that coverage offered by the corporation, as of 1/1/13, not include coverage for jewelry, furs, watercraft, handguns and other items. Does not address Provides for the use of an industry expense equalization factor in ratemaking. Same

CPIC Returned to Last Resort Insurer CS/SB 1714CS/HB 1243 Provides for a rate glide-path for residential lines of business which is no more than 20% per territory or 25% per policyholder. Excludes coverage changes, surcharges, SH coverage and the cost of private reinsurance, if purchased. Provides for a rate glide-path for all lines of business which is no more than 15% per policyholder. Excludes coverage changes, surcharges, SH coverage and the cost of private reinsurance, if purchased. Prohibits CPIC from reducing rates.Does not address Provides circumstances under which a surplus lines company may do a takeout. Same Requires CPIC policies located in Special Flood Hazard Areas to carry flood insurance. Same

Citizens PLA grew approximately 20% in Over the last three years premium revenue has also been driven down by wind mitigation credits. –Citizens recognizes the value of hardening properties against the impact of wind. –The annual premium collected from policyholders is reduced by an estimated $974 million due to wind mitigation credits, of which approximately $540 million is attributed to the 2008 requirement to double wind mitigation credits. The reduction in premium dollars collected has resulted in an increased reliance on assessments should a storm strike Florida. –Bringing additional premium dollars in for the risk assumed will allow Citizens to build surplus and have the opportunity to transfer risk outside of Florida. –Having additional surplus and engaging in risk transfer reduces the need for pre-event liquidity and reduces Citizens’ reliance on assessments to provide post-event funding. Citizens’ non-catastrophe loss ratio has escalated in the last two years. –This relates to both the impact of wind mitigation credits, non cat losses and sinkhole claims. Citizens’ Unique Role and Challenges (continued) 32

33 Florida Residential Property Admitted Market Breakdown As of June 30, 2010 The Florida Residential Property Insurance Admitted Market is divided into 4 major parts divided among: (1) Citizens; (2) the Florida only subsidiaries “pups” of the major national writers; (3) the Florida-only domestic companies; and (4) non-domestic nationwide property writers, such as USAA, etc. Source: Florida Office of Insurance Regulation, Quarterly Supplemental Report (QUASR). Includes licensed carriers only. Surplus lines companies are not included. Based on insured value for policies with and without wind coverage.

34 Personal Residential Insured Value Market Share As of June 30, 2010 Source: Florida Office of Insurance Regulation, Quarterly Supplemental Report (QUASR). Includes licensed carriers only. Surplus lines companies are not included in the market share calculation. Based on insured value for policies with and without wind coverage.

35 Commercial Residential Insured Value Market Share As of June 30, 2010 Source: Florida Office of Insurance Regulation, Quarterly Supplemental Report (QUASR). Includes licensed carriers only. Surplus lines companies are not included in the market share calculation. Based on insured value for policies with and without wind coverage.

36 Citizens’ Financial Snapshot Citizens’ surplus is $4.6 billion. Cash and Invested Assets amount to $11.3 billion Coverage from the FHCF is estimated at $6.35 billion. The 1-in-100 year storm would cost $22.2 billion. The remaining $11 billion to fund a 1-in-100 year storm scenario would be covered by assessments. While Citizens is in its best financial position ever, with projected combined surplus, FHCF reimbursements, and pre-event liquidity of over $14.6 billion, we continue to rely on assessments to fund catastrophe losses in the event of a large storm or several smaller storms. Surplus, invested assets, and modeling estimates statistics as of 9/30/10. FHCF coverage estimated projected for 2011.

37 Citizens’ Estimated Claims Paying Ability 2011 Hurricane Season (Projected) Notes: 1)Pre-Event Liquidity reflects current liquidity for PLA/CLA and HRA. This does not represent risk transfer and any monies drawn must be repaid. 2)FHCF recoveries are based on preliminary 2011 retention and payment multiples, but the actual retention and limits may be significantly different from these estimates.

Property Insurance Challenges in Florida – No Kidding!! May 2, 2011 Sam Miller Executive Vice President Florida Insurance Council