E&S Then and Now

By Thomas P. Enright

It's hard to believe it has been 25 years since Florida Underwriter published its first issue. I can tell you, I have personally enjoyed reading each and every one of them. It should come as no surprise that I especially enjoy the articles by individual industry contributors — I've written more articles than I can remember. My only disappointment is that the magazine does not offer you remuneration for your efforts. Hint, hint!

However, on to the real purpose of this article: to give an overview of how our industry, and especially the excess and surplus lines market, has fared and evolved over the past two-plus decades.

In the last 25 years, we have witnessed four different changes of Florida insurance commissioners, all of whom we thought would be better than the last. In 1984, the Florida Department of Insurance was headed by an elected commissioner, Bill Gunter. At that time I was managing the Miami office of Dana Roehrig & Associates, a division of Swett & Crawford, and I remember a conversation Dana and I had about the upcoming election for insurance commissioner in which Tom Gallagher was running for the position. We both agreed that Gallagher had to be better than Gunter. I also remember another conversation Dana and I had a couple of years later when we admitted to each other just how wrong we had been.

Today that office hasn't changed much, with one critical exception: It is no longer an elected office. The insurance commissioner is appointed by the Chief Financial Officer. Well, guess who first appointed Kevin McCarty as insurance commissioner? That's right, Tom Gallagher!

In looking back over the last 25 years, my vote for the best commissioner would have to go to Bill Gunter. He was, by far, more understanding and sympathetic to the insurance industry than the other three, although that would not take much. I also would give credit to Bill Nelson for his efforts to depopulate the Florida Residential Property and Casualty Joint Underwriting Association, the state-run organization for writing residential property, which grew to major size following Hurriance Andrew. We have an additional problem these days because our governor Charlie Crist has joined the anti-insurance ranks of our commissioner in promoting the belief that the state should be the major insurance provider of property insurance for Florida residents. Their combined efforts have created a very negative image of Florida, which is now considered the absolute worst state in the union for insurance companies to conduct their business.

Florida's Ill Winds

Another constant in Florida over the last 25 years has been and will continue to be our least favorite companion, the hurricane.

During the last 25 years, Florida has experienced some 90 named hurricanes, over half of them since 2000. During the 1970s and 1980s hurricanes really did not seem to be a problem; we never had a hurricane that caused us any major damage. Believe it or not, in the 1980s, condominium associations were buying a package for their property and casualty insurance at a rate of ten cents per hundred of property value with the amazing deductible of just $100 on all perils. As you can imagine, the excess and surplus lines market was not a factor in writing coverage at this pricing.

The one storm that affected Floridians most drastically occurred in 1992. I went through it and will never forget it. Hurricane Andrew changed the property insurance market in Florida forever, and it certainly changed my office tremendously. Andrew introduced the E&S industry to property business in a big way. Approaches to property insurance such as, “first loss,” “excess property,” and “windstorm buy-back,” previously seldom used or for that matter even heard of, became common ways of placing property insurance. Areas of the market previously unavailable to E&S companies, most specifically homeowners, became a big new source of premium to E&S agents.

From 1992 to 2004, the industry handled the hurricane exposure quite well. Unfortunately, in 2004 and 2005 we were introduced to eight new friends: Charley, Frances, Ivan, Jeanne, Dennis, Ophelia, Katrina, and Wilma. The result was not only billions of dollars in losses, but two new experiences: premium assessments payable to Citizens Property Insurance Corp. and contributions to the Florida Hurricane Catastrophe Fund.

Besides the payment of large amounts of money to these entities, we also witnessed an aggressive expansion of both Citizens and the Cat Fund. What does that mean to us? It means that both organizations face serious unanswerable challenges not if, but when, the next tragic hurricane strikes. They will not have the money to pay the losses from the hurricane, or the ability to sell the bonds necessary to cover these losses, especially in our present economic situation. In the end it will be you and I, the consumer, who will pay the cost through increased assessments and fees.

Is this an effective strategy, or should we perhaps consider giving the insurance companies the rate and conditions they need to continue writing business in the state? Either way the consumer is going to pay more as a result. Wouldn't it better to pay more money to a “State Farm,” an experienced insurance company, rather than to write with Citizens, a state-run insurance organization that would not even be allowed to exist if measured by the same standards as corporate insurance companies?

Hurricanes and insurance commissioners were not the only two challenges faced by the E&S industry in the last 25 years. Let me list some others: personal auto physical damage (late 80s); homeowners' insurance (90s); increase in taxes (constant); fights for higher policy fees (constant); several changes to increase coverage available to the E&S market; and today's challenge presented to us by Essex v. Zota.

One Great Idea

Of all the changes experienced in the last 25 years, I believe the most significant and long lasting was the creation of the Florida Surplus Lines Service Office (FSLSO).

Anyone who ever had the privilege and honor of meeting Dana Roehrig would know about his desire, and in fact fixation, to start what we originally referred to as the Florida Stamping Office. Dana's dream came to fruition shortly before his death when the Florida Legislature passed the law forming the FSLSO.

In the ten years that FSLSO has been in existence it has become a major organization. It efficiently collects the taxes and fees owed on surplus lines business from the E&S agents who collect those funds on behalf of the state. It examines, supervises and regulates every licensed Florida surplus lines agent. It provides educational facilities to prospective E&S agents and continued education courses for licensed agents. In times of a hurricane disaster it dispatches its own mobile unit to assist individual hurricane victims in processing their insurance claims and to provide other assistance. The staff performs all these tasks with amazing professionalism and skill.

However, even though most everyone considers the FSLSO a significant success, I am confident in saying it has not lived up to the vision Dana had for his stamping office. Dana wanted an organization that would do everything it is doing now, plus much more. He wanted an agency made up of E&S agents (as the FSLSO is), which would promote and protect the interests of the excess and surplus lines agents of the state of Florida, in much the same way as the other association Dana was a major participant in (the Florida Surplus Lines Association), but with even greater financial capabilities. If you have ever had the chance to review the FSLSO's financial statements, you would know they have plenty of money. If they sold stock, I'd buy some. However, it is not used, and in fact some think because of its quasi-political nature, may not be used, to support the interests and desires of the E&S agents. The task of performing that function still falls to the FSLA, which continues to operate under the same financial restrictions it has in the past.

In closing let me say that one of the greatest qualities of the Florida Underwriter is the opportunity it provides to individual industry representatives like me. It allows me to speak out and address topics with total honesty and frankness. Please remember that these are my opinions, and I am fairly confident that not everyone agrees with all of them, nor should they. How boring life would be if they did.

Thank you, Joan, for asking me to contribute.

Thomas P. Enright, MBA, is a past president and a current director of the Florida Surplus Lines Association. He is executive vice president of Enright & Wilson, Inc., in Hollywood. He may be contacted at 954-962-0555 or by e-mail at [email protected]. www.enrightwilson.com.

P&C Then and Now

By Lynne McChristian

Ah, nostalgia. That daydream of a simpler time that teases your brain with hazy recollections of the good ol' days in the Sunshine State when you felt in control of your business and work life, your customers were happy and so were you. Pop! That bubble burst back in 1992, and you can point blame at Hurricane Andrew, which is now widely recognized as the point of no return. It was a wakeup call, a rude and necessary awakening that redefined the P&C business in Florida — and it was inevitable.

How best to explain Florida's property and casualty environment over the past 25 years? Maybe a simple math equation might work: Population growth + building boom + hurricanes = OMG!

A retrospective could end right there; however, the editor of this magazine insisted on a bit more context, which is equally uncomplicated and, perhaps, just as obvious.

Historically, Florida's economic engine has been fueled by population growth. For decades, the Sunshine State rolled out the welcome mat, and people were happy to walk right in, plant a stake in the sand and build a home around it. Average population growth between 1980 and 2005 was 2.3 percent, according to the U.S. Census Bureau. That was more than twice the national average. Although today's population growth has slowed slightly, Florida is still on track to break the 20-million population mark in 2014, surpassing New York as the third most populous state.

For decades, most people felt that growth was good, except maybe those stuck in traffic jams. Modest homes on the beach were sold, bulldozed and something more elaborate put in its place, either a high-rise condominium complex or a stately manor. Florida real estate was for sale 24/7 in advertisements appearing in publications everywhere in the country. Ads emphasized coastal living and luxury, and the public bought it. Florida posted the fastest growth of any Gulf Coast state since 1980, and the exposure to hurricane loss grew right alongside. More and more people had more and more expensive property in the most vulnerable areas of the state — and the math equation on that was stunning.

Total value of insured coastal property in Florida is now more than $2.4 trillion, a number that is expected to double by 2014. Nearly 80 percent of Florida's total insured exposure is considered coastal property. Facts like these were available prior to Andrew, but they were not widely used as the basis for projecting losses. Before Andrew blew off the rose-colored glasses, most insurers used actuarial data from their historical loss experience. It took an event the magnitude of Andrew to show how looking backward can make you ill prepared for what lies ahead.

Confronting the Future

In a way, Andrew was a great teacher. It told insurers they had seriously underestimated their exposure. It marked a transformation from looking only at the past to forcing the industry to confront the future, and confronting the future has been quite a challenge, not only because the future is always a moving target but also because legislative and regulatory mandates keep changing the target itself. Non-renewals and underwriting restrictions following Andrew have been well documented, as have the actions to bring stability to the marketplace. Briefly, the Residential Property Casualty Joint Underwriting Association (FRPCJUA) in 1993 was created to offer policies for the customers left without coverage from the private market. The Florida Hurricane Catastrophe Fund (Cat Fund) was created that same year to serve as the low-cost source of reinsurance to Florida insurers. Then in 2002, FRPCJUA and the Florida Windstorm Underwriting Association merged to become Citizens Property Insurance Corp.

In recent years, many new insurers have started writing business in the state, spurred by state-backed financing. The My Safe Florida Home program was introduced by the Legislature in 2006 to offer free wind inspections and matching grants to help Floridians strengthen their homes. Yes, the lessons of Andrew have brought a number of visionary endeavors. But have we made real progress?

Risk Remains

In a word, no. The current economy has stymied new construction, so the explosive growth that contributed to Florida's vulnerability has subsided. But the exposure to risk remains. Politicians, regulators and most Floridians still think we have an insurance problem in Florida, when the real culprit is hurricanes. The best way to deal with any problem is to solve it — and we haven't solved the problem of too many people spending too little of their hard-earned money on mitigation. While many innovative measures have been tried, few have the sticking power to bring about needed change. Florida remains vulnerable, and increasingly so, with state-run programs such as Citizens and the Cat Fund providing implicit subsidies by selling insurance at below-market prices, subjecting all policyholders to assessments that could last for years. Until we do what is rational, rather than popular, the instability of the insurance market is the “elephant in the room” that won't be ignored, as hard as we try.

A review of P&C over the past 25 years in Florida would not be complete without an assessment of the automobile side of the business. Here goes: It's not broken, so let's hope no one tries to fix it.

Lynne McChristian is the Florida representative for the Insurance Information Institute. She may be contacted at 813-480-6446, lynnem @iii.org. Also, see www.InsuringFlorida.org for her insurance blog “Straight Talk.”

Workers' Compensation, Then and Now

By James N. McConnaughhay

Florida first adopted its workers' compensation law in 1935. Since those early days — when compensation was limited to $18 per week for injured workers suffering from work-related injuries and medical costs were restricted to $250, with total costs involving surgery limited to $500 — Florida's workers' compensation system has evolved into a major industry with significant impact on the state's economy.

In reality, Florida's modest workers' compensation system “came of age” with the passage of the Federal Occupational Safety & Health Act and the creation of the National Commission on State Workers' Compensation Laws in the 1970s. That early commission was designed to determine the fairness and adequacy of state workers' compensation laws. Based on the commission's recommendations, the governor in 1974 appointed a task force to update proposed changes in the law, a pivotal development in the workers' compensation laws of Florida. Ultimately, the “Pappy Package” for legislative reform was signed into law. The changes seen as a result of these amendments can best be characterized as liberal, expansionistic, expensive, and unquestionably pro-labor.

Because of the rising costs in the workers' compensation system, in which premiums skyrocketed between 1974 and 1978, legislative reform took place in 1979 creating what was dubbed the “wage loss experiment” as a method of compensating the injured worker for permanent partial benefits. The developed system was supposedly designed to be fair to injured workers and more cost effective to employers. Ultimately, that experiment proved to be ineffective and a failure, primarily due to the judicial interpretations of the law from the Florida First District Court of Appeals, a new appellate process established as a result of the 1979 reforms.

Costs Prompt Actions

After an initial reduction in rates following the 1979 reforms, rates for workers' compensation insurance coverage spiraled upward again beginning in 1983. In an attempt to curtail these increased costs, dramatic changes in the law occurred in 1989 and 1990 primarily directed toward reducing benefits payable to injured workers, increasing the compliance provisions in the law to ensure the payment of appropriate premiums by employers, placing greater emphasis on safety and the prevention of fraud, cutting hospital and medical fees, and reducing attorney fees.

Even after these changes costs continued to escalate, and a special session of the Legislature was called in 1993 to address reforms in the workers' compensation system. As a result of that special session, a comprehensive plan for reform was signed into law by the governor effective Jan. 1, 1994. That 1993 special legislative session saw the end of wage loss after over fifteen years of proven ineffectiveness. A different method of compensating the permanently injured worker was developed, justifying a 16 percent actuarial rate reduction in costs.

Much like what was seen in the early 1980s, costs again began to trend downward, and there was a reluctance on the part of the Legislature to comprehensively address workers' compensation concerns. However, problems began to develop, and in 1997 workers' compensation again garnered considerable attention in the Legislature. Legislative changes that year and for several years following were directed toward trying to reduce costs in the workers' compensation system: The Special Disability Trust Fund was abolished; the Division of Safety and the Department of Labor and Employment Security were eliminated; attempts were made to make the Assigned Risk Pool financially self supporting; benefits payable to injured workers were reduced; managed care was mandated as an effort to reduce or control medical costs; new selection criteria was created for the workers' compensation judiciary; and caps were placed on costs associated with the regulation of workers' compensation matters. Still, rates continued upward.

Major Changes in 2003

With a backdrop of multi-year double-digit rate increases, the 2003 Legislature passed what could easily be characterized as the most drastic review of the workers' compensation law since inception in 1935. Every aspect of the workers' compensation law was addressed, with primary emphasis on reducing medical expenses and attorney involvement, and redefining permanent total disability, the major cost drivers in the workers' compensation system. No segment of the workers' compensation industry went untouched, and adjustments were made in such major areas as fraud and compliance. The reforms also addressed classification of benefits payable to injured workers; the correction of court decisions that interpreted the law in ways not otherwise contemplated; the construction industry, particularly in the area of exemptions; increased coverage opportunities at affordable rates by amending the provisions relating to the Assigned Risk Pool; litigation procedures to enhance an overburdened judicial process; timely benefit payments to injured workers, with increased penalties to employers/carriers for failure to do so; and miscellaneous other changes intended to reduce unneeded costs and expenses.

From 2003 to the current time period, Florida has experienced unprecedented rate reductions because of the many significant changes that were made in 2003. There has been over a 60 percent rate reduction for the Florida employer on a cumulative basis, a phenomena certainly contrary to what occurred in the early 1980s and the 1990s after those major reforms. There has been since 2003 a general lack of attention to workers' compensation from a legislative standpoint because of these significant cost reductions and rate decreases. The courts have generally interpreted the 2003 changes in a manner consistent with the intent of the 2003 legislative effort, except possibly in the area of attempting to control attorney fees.

Workers' compensation continues to be a very sensitive area of concern to the Florida economy. From an industry standpoint, certainly the Florida employer has benefited from the extensive amount of attention given to the workers' compensation system. In many ways the Florida Act has been the basis of reform in other states, particularly in regard to the employer community. However, medical costs continue to rise at rates far greater than that experienced in the general health industry, a problem that ultimately must be addressed.

Other areas of the workers' compensation system remain the subject of discussions and are continually being addressed either judicially or from an administrative standpoint, primarily by the Division of Workers' Compensation. While substantial savings have been realized thus far, only time will tell as to the ultimate effectiveness of the 2003 changes — and the changes that await us beyond that.

James N. McConnaughhay is the founding partner of McConnaughhay, Duffy, Coonrod, Pope & Weaver, P.A. The law firm has offices in Tallahassee, Pensacola, Panama City, Ocala, Jacksonville, Gainesville, Sarasota, Fort Lauderdale, and Miami. He may be contacted at 850-222-8121. Company information is available at www.mcconnaughhay.com.