The Issue The issue in this case is whether Petitioner's two applications for continuing education course approval should be denied for the reasons set forth in the Florida Real Estate Commission's Notices of Intent to Deny, which were issued on February 19, 2009.
Findings Of Fact Petitioner Jon D. Tremper is a licensed real estate sales associate. In 1988, Petitioner established a home inspection company and has since performed several thousand inspections of properties in Florida. In 1999, Petitioner established The Home Inspection Academy, which he describes as a "private school providing training to the home inspection industry." Petitioner has developed and taught home inspection and construction-related courses to individuals and to groups including the Florida Association of Building Inspectors. Petitioner applied to the Department of Business and Professional Regulation, Division of Real Estate (Division) for continuing education credit for two courses that he developed and wished to present for credit to licensed real estate professionals: "Homeowner's Guide to Hurricane Protection & Insurance Discounts," and "Protecting Homes from Termites, Water Damage and Mold." The courses were placed on the FREC agenda for consideration at its January 20, 2009, meeting. The FREC denied both courses by way of Notices of Intent to Deny issued on February 19, 2009. The FREC's intent to deny was based on Subsection 475.182(1)(a), Florida Statutes (2008),1 the relevant portion of which provides: Approval or denial of a specialty course must be based on the extent to which the course content focuses on real estate issues relevant to the modern practice of real estate by a real estate licensee, including technology used in the real estate industry. Each Notice contained the following finding of fact: The Director of the Division of Real Estate suggested that the course could be denied due to the subject matter of the course not being related to the profession of real estate and not related to the nuts and bolts of real estate. "Homeowner's Guide to Hurricane Protection & Insurance Discounts" is a three-hour course. The learning objectives of the first hour are to understand the impact of recent hurricanes in Florida, which structures survived the storms and why they survived, and the wind resistance upgrades that are available to homeowners. The learning objectives of the second hour are to understand what insurance companies are looking for and how a homeowner can lower his premium, where to get help in determining cost-effective wind resistance upgrades, and the necessity of taking the initiative in dealing with insurance companies. The learning objectives of the third hour are to understand the "My Safe Florida Home" program offered by the State of Florida, the importance of and procedures for documentation of home improvements, and the best resources available for protecting a home from hurricanes. "Protecting Homes from Termites, Water Damage and Mold" is a three-hour course. The learning objectives of the first hour are to know the threats of termites, water damage and mold to Florida homes, where to get help when a problem is found, and the seven ways to ensure that a home stays termite free. The learning objectives of the second hour are to know and understand the unique elements of Florida climate, the importance of keeping water out of Florida homes, and the seven ways to prevent water damage. The learning objectives of the third hour are to know and understand the conditions for mold growth in Florida homes, why mold remediation is necessary, and the seven ways to keep mold out of Florida homes. Ralph McCoig, the chairman of the FREC, has been a real estate agent and broker for nearly 30 years. Since 1994, Mr. McCoig has been the owner and broker of Edita Realty in Rockledge. Mr. McCoig testified that Petitioner’s courses were of great interest to homeowners, but were not really relevant to a real estate licensee's practice. Mr. McCoig stated that a licensee's duties to a seller are to establish a price for the house based on the current market, to market the house, and to negotiate the contract of sale. A licensee's duties to a buyer are to find houses, show the properties, and assist the buyer in obtaining financing. Licensees do not give opinions on hurricane insurance requirements or on termite, water or mold damage. Mr. McCoig stated that home inspection companies, insurance agents, and licensed pest control companies are the professionals qualified to deal with the matters discussed in Petitioner's courses. A real estate licensee would be better served to retain these professionals on his client's behalf, because they are the best sources of relevant information and because the real estate professional does not want to incur liability for practicing beyond his area of expertise. Mr. McCoig testified that the FREC determined that Petitioner’s courses were not applicable to a real estate professional's job and not appropriate for continuing education credit. Petitioner testified that his courses were not designed to make a realtor an expert in hurricane protection or termite, water and mold damage, but to give the realtor the ability to offer common sense advice to his clients. Petitioner pointed out that the standard contract for sale and purchase of real property in Florida contains provisions regarding disclosure of wood-destroying organisms and mold, and that Section 627.711, Florida Statutes, requires insurers to take certain actions regarding discounts for hurricane reinforcements. Petitioner opined that realtors should be familiar with these matters in order to properly serve their clients. Petitioner also testified that the Department of Business and Professional Regulation, Bureau of Education and Testing's web site discloses "thousands" of approved courses, including some whose titles appear equivalent to Petitioner’s proposed courses and some of which appear frivolous, such as "Feng Shui for Realtors." In rebuttal, Mr. McCoig testified that the FREC has recently denied applications for courses related to Feng Shui concepts. Mr. McCoig stated more generally that the current FREC board has taken a more hands-on and restrictive approach to the approval of continuing education courses than had been the practice in previous years, when the Division had apparently been delegated authority to approve courses at the staff level. The FREC board intends to whittle the list of approved courses down to a manageable number directly related to the "nuts and bolts" of real estate practice in Florida.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Florida Real Estate Commission enter a final order denying Petitioner's applications for continuing education course credit for courses titled "Homeowner's Guide to Hurricane Protection & Insurance Discounts" and "Protecting Homes from Termites, Water Damage and Mold." DONE AND ENTERED this 19th day of June, 2009, in Tallahassee, Leon County, Florida. S LAWRENCE P. STEVENSON Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 19th day of June, 2009.
The Issue In this proceeding, pursuant to Section 120.56(4), Florida Statutes, Petitioner United Property & Casualty Insurance Company ("United") challenges several alleged "statements" of Respondent Department of Insurance (the "Department"), which United alleges are rules as defined in Section 120.52(15), Florida Statutes, that have not been adopted properly and therefore violate Section 120.54(1)(a), Florida Statutes. The statements at issue arise from the Department's interpretation and implementation of statutes that authorize insurers such as United to recoup reimbursement premiums paid to the Florida Hurricane Catastrophe Fund (the "CAT Fund"). United seeks a final order: (1) declaring that some or all of the above alleged statements, in whole or in part, violate Section 120.54(1)(a), Florida Statutes; (2) directing that the Department immediately stop relying on any illegal unadopted rule as a basis for agency action; and (3) awarding reasonable attorneys' fees and costs pursuant to Section 120.595(4)(a), Florida Statutes.
Findings Of Fact The evidence presented at final hearing established the facts that follow. The Parties United is a Florida domiciled property and casualty insurance company that received its Certificate of Authority to write homeowners and dwelling fire insurance in this state on April 2, 1999. As an insurer transacting business in this state, United operates within and subject to the regulatory jurisdiction of the Department, which is the executive branch agency responsible for administering and enforcing the Florida Insurance Code. Rates and Premiums United is required by law to establish rates for the lines of insurance it writes in this state. See Section 627.062, Florida Statutes. A "rate" is "the unit charge by which the measure of exposure or the amount of insurance specified in a policy of insurance or covered thereunder is multiplied to determine the premium." Section 627.041(1), Florida Statutes. The term "premium" means "the consideration paid or to be paid to an insurer for the issuance and delivery of any binder or policy of insurance." Section 627.041(2), Florida Statutes. Thus, simply put, the rate times the amount of coverage equals the cost of insurance, which may then be adjusted further to calculate the total premium to be charged a particular policyholder — by applicable discounts, credits, or surcharges included in the insurer's approved rating plan. See, e.g., Section 627.062(2)(d), (e)4, Florida Statutes. Rates and rating plans must be approved by the Department. See Section 627.062, Florida Statutes. The Department's duty is to disapprove rates that are "excessive, inadequate, or unfairly discriminatory." Id. An appropriate and adequate rate "is supposed to pay all the [insurer's costs]," T-222, and afford the insurer "a reasonable rate of return on [the] classes of insurance written [by that insurer] in this state." Section 627.062(2)(a), Florida Statutes. United's Initial Rate Filings and Take-Out Plan On March 3, 1999, United made two initial rate filings with the Department, one for homeowners insurance and the other for dwelling fire. As United explained in its cover letters to the Department, each line of business constituted a proposed "Take Out Program," meaning that United planned to remove homeowners and dwelling fire policies from the Florida Residential Property and Casualty Joint Underwriting Association ("FRPCJUA"). 5/ United also advised the Department that each Manual of Rates and Rules that it was filing was "basically that of the FRPCJUA with some modification to remove extraneous provisions and change names." The parties sometimes have called this type of rate filing a "me too" filing, a descriptive appellation that quickly, if colloquially, conveys the idea that the insurer is taking advantage of the FRPCJUA's already approved rates. On March 3, 1999, the Department's Bureau of Property and Casualty Forms and Rates accepted United's initial homeowners and dwelling fire insurance rates for use. Later, United's rates were approved with an effective date of April 19, 1999. On April 2, 1999, pursuant to a Consent Order with the Department which approved United's take-out plan, United removed approximately 11,500 policies from the FRPCJUA. Each of the policies that United removed from the FRPCJUA is a "covered policy" as defined in Section 215.555(2)(c), Florida Statutes. Consequently, United was required, as is every insurer that writes covered policies in this state, to enter into a "reimbursement contract" with the State Board of Administration, the agency that directs and controls the CAT Fund. Section 215.555(4), Florida Statutes. The CAT Fund and Reimbursement Premiums The legislature created the CAT Fund in November 1993 during a special session that was "called due to a potential crisis in the insurance industry in the aftermath of Hurricane Andrew." 6/ The CAT Fund's purpose was and remains to provide "a stable and ongoing source of reimbursement to insurers for a portion of their catastrophic hurricane losses." Section 215.555(1)(e), Florida Statutes. In consideration for the right to reimbursement from the CAT Fund in the event of a hurricane catastrophe, insurers are required, under their reimbursement contracts, annually to pay into the fund a reimbursement premium. Id.; see also Section 215.555(5), Florida Statutes. Recoupment of Reimbursement Premiums In 1995, the legislature passed a law allowing insurers to recoup reimbursement premiums paid into the CAT Fund. See Chapter 95-276, Laws of Florida. Effective June 14, 1995, this new law, codified as Section 627.062(5), Florida Statutes (Supp. 1996), provided: With respect to a rate filing involving coverage of the type for which the insurer is required to pay a reimbursement premium to the Florida Hurricane Catastrophe Fund, the insurer may recoup the actual amount of reimbursement premium by including in the insurer's rate filing an allowance for the reimbursement premium charged by the Florida Hurricane Catastrophe Fund. In the filing, the insurer must adjust its rates to remove that portion of the rates attributable to catastrophe losses expected to be covered by the Florida Hurricane Catastrophe Fund. In determining what portion of a rate is attributable to catastrophes covered by the Florida Hurricane Catastrophe Fund, the projected recovery from the fund shall be calculated according to the formula specified in s. 215.555(4)(c). During its next regular session, in 1996, the legislature enacted Chapter 96-194, Laws of Florida, which amended Section 627.062(5), Florida Statutes, effective January 1, 1997, to read: With respect to a rate filing involving coverage of the type for which the insurer is required to pay a reimbursement premium to the Florida Hurricane Catastrophe Fund, the insurer may fully recoup in its property insurance premiums any reimbursement premiums paid to the Florida Hurricane Catastrophe Fund, together with reasonable costs of other reinsurance, but may not recoup reinsurance costs that duplicate coverage provided by the Florida Hurricane Catastrophe Fund. Section 627.062(5), Florida Statutes (1997). This version of the section remains in effect today. In 1997, the legislature created yet another new statute addressing the subject of CAT Fund reimbursement premiums. See Chapter 97-55, Laws of Florida. Taking effect on May 9, 1997, Section 672.0629(10), Florida Statutes, provides: A property insurance rate filing that includes any adjustments related to premiums paid to the Florida Hurricane Catastrophe Fund must include a complete calculation of the insurer's catastrophe load, and the information in the filing may not be limited solely to recovery of moneys paid to the fund. The Department's Interpretation and Implementation of the Recoupment Statutes Douglas Hazeltine, an actuary employed by the Department, is the principal regulator regarding recoupment of CAT Fund reimbursement premiums. In that capacity, he is, and at all material times has been, responsible for interpreting and applying Sections 627.062(5) and 627.0629(10), Florida Statutes. Although he denied having a policy-making role at the Department, Mr. Hazeltine testified that his interpretation and application of these particular statutes consistently has been approved by his superiors, with whom (as well as with other colleagues) he has discussed these matters. Accordingly, great weight has been given to Mr. Hazeltine's testimony as an accurate expression of the Department's positions on the meaning and operation of Sections 627.062(5) and 627.0629(10), Florida Statutes (hereafter, collectively, the "Recoupment Statutes"). 7/ The Department takes the view that insurers may pass along the CAT Fund reimbursement premiums to their own policyholders in one of two ways. The first method — which, according to Mr. Hazeltine, is employed by most insurance companies — is to prospectively load the base rates with a CAT Fund Factor (that is, a factor attributable to catastrophic hurricane losses expected to be covered by the CAT Fund, see endnote 3). In the Department's eyes this is simply normal rate-making procedure; the exposure covered by the CAT Fund is built into the insurer's base rates, just as other risks are, as if the insurer itself (rather than the CAT Fund) would pay the portion of any catastrophic hurricane losses expected to be covered by the CAT Fund. The Department does not consider the Recoupment Statutes to either govern or proscribe the accepted practice of prospectively loading base rates with a CAT Fund Factor. The other method is to set base rates that are net of expected recoveries from the CAT Fund (i.e. are not loaded with a CAT Fund Factor) and thereafter to impose a recoupment charge on policyholders to recover for CAT Fund reimbursement premiums paid in the previous year. A recoupment charge is retrospective, in that the insurer is collecting funds to reimburse itself for an expense that it already has paid. As Mr. Hazeltine put it, "recouping refers to something that happened in the past." Transcript of Final Hearing ("T-") 152. That is the "essence of a recoupment." T-220. The term "Recoupment Surcharge" will be used hereafter to refer to a retrospective recoupment charge. The Department considers these two methods of making policyholders pay the CAT Fund reimbursement premiums to be mutually exclusive, in the sense that an insurer must elect to use one method or the other. Thus, according to the Department, an insurer may either prospectively load its base rates to collect in advance for reimbursement premiums that will be paid in the future, or impose a Recoupment Surcharge to recover for the reimbursement premiums after paying them, but it cannot include a CAT Fund Factor in its base rates one year (e.g. 1999) and then impose a Recoupment Surcharge the next (e.g. 2000), else the policyholders would pay twice for the same CAT Fund coverage. The Department's position logically dictates that if an insurer which has been prospectively loading its base rates with a CAT Fund Factor decides to switch to the recoupment method, it must experience a transitional year during which its base rates are reduced by the CAT Fund Factor (because it will recoup the transitional year's reimbursement premiums in the next year) and in which no Recoupment Surcharge is imposed (because the prior year's reimbursement premiums were collected prospectively in the prior year's base rates). 8/ This would have a negative effect on the insurer's cash flow during the transitional year, in relation to the preceding year, which may be one reason why "most companies don't recoup" — although that was not the explanation offered by Mr. Hazeltine. T. 172 (attributing insurers' preference for prospective loading to fact that CAT Fund is "cheap reinsurance"). 9/ The Department's interpretation and application of the Recoupment Statutes is informed by a presumption that every insurer's base rates are prospectively loaded with a CAT Fund Factor unless and until: (a) the insurer makes a recoupment filing pursuant to Section 627.0629(10), Florida Statutes, which demonstrates to the Department that the CAT Fund Factor has been stripped from its base rates, and (b) the Department approves the insurer's recoupment filing, allowing the insurer to impose a Recoupment Surcharge. This presumption is based on the premise that an insurer's rates on file, having already been approved, are adequate and "fully loaded in the Department's opinion." T-223-24; see also T-153, and 170 (Hazeltine: "Whenever a company makes an initial filing, we assume that the rates that are approved -- the Department, we believe the rates that they are charging are fully loaded for all costs and they would remain that way, fully loaded for all costs, until they made a filing to change in some way."). The presumption that an insurer which is not recouping must be prospectively collecting for reimbursement premiums with CAT Fund Factor-loaded base rates is irrebuttable and hence conclusive, as Mr. Hazeltine explained: THE COURT: Can the insurance company overcome that presumption? I mean, if evidence or information is presented, can the insurance company demonstrate inadequacy of its rates by showing, for example, that it isn't -- that it is not prospectively recovering for the CAT Fund premium? THE WITNESS: Well, no, because they have to be. They have to be because there's [sic: should be "they're"] not recouping. So the definition of their rate is that it's prospectively loaded. They somehow have to show -- to recoup, they would have to show that they have an inadequate rate otherwise, and that is why the CAT factor calculation is necessary because they have to show that, without this additional money, they have an inadequate rate. THE COURT: Could they show -- I mean, could they show inadequacy of the rate by demonstrating that there is no catastrophe load in their rate and therefore they're not collecting prospectively? THE WITNESS: No, because the only way there could not be a catastrophe load in their rate is if they had started recouping, if they had already started recouping. Otherwise, it's there, it's implicitly there. T-224-25. 10/ The Department's presumption leads it to the conclusion that any insurer which elects to begin recouping must first adjust its base rates to remove the CAT Fund Factor that is conclusively presumed to be in those rates. T-172 (Hazeltine: Insurers "can come in and recoup, that's allowed, but they have to adjust their base rates."). 11/ Consequently, the Department construes Section 627.0629(10), Florida Statutes which operates on rate filings that include "any adjustments related to" reimbursement premiums 12/ — as controlling for all first-time recoupment filings. 13/ While the Department interprets Section 627.0629(10), Florida Statutes, to be applicable to all insurers making their first recoupment filings, it also considers the statute to be applicable only to first-time filers. Mr. Hazeltine drew the distinction between first-time and repeat filers: Q Now, you just made reference to a filing like United's for a first-time [recoupment] filing. Is there different information required for a company like United that's a first-time company filing for recoupment as versus some other type of company? A Right. Once the filing has been made and the catastrophe factor has been submitted and the indicated rate has been shown in the filing, any subsequent filings we would just simply need to know that a prior filing had been made so that, if they were going to change the recoupment surcharge from say eight to nine percent, if we knew that they made a prior filing, then we would know that they had adjusted their bases rates, so there wouldn't need to be the laying out of the catastrophe factor. T-149; see also T-225 (Hazeltine: "[W]e get filings in where [insurers] are already recouping, and in that situation we know, when they've filed to change their recoupment, that their base rates are net of the coverage of the CAT Fund. We know that because we handled that in a previous filing."). Thus, in the Department's view as expressed by Mr. Hazeltine, Section 627.0629(10) does not apply to an insurer that seeks to adjust a previously approved Recoupment Surcharge because the Department's approval of the insurer's initial recoupment filing signifies that the CAT Fund Factor was removed from the insurer's base rates, which accordingly need not be adjusted again. 14/ The parties agree (or at least United does not dispute) that an insurer wanting to recoup reimbursement premiums must make a filing with the Department. Both parties refer to the necessary filing as a "recoupment filing." They part company, however, on whether a recoupment filing is a "rate filing." The Department says that a recoupment filing is "a type of rate filing." T-165. United says it is not. This particular dispute is not so much about labels as it is about whether the procedural and substantive requirements that rate filings entail should attach to recoupment filings as well. The Department's position that a recoupment filing is a rate filing matters because it leads to the conclusion that the Department is empowered, pursuant to Section 627.062(2)(b), Florida Statutes, to review a recoupment/rate filing to determine if the overall rate (including the Recoupment Surcharge) is excessive, inadequate, or unfairly discriminatory. This in turn means that the Department can disapprove a recoupment filing for failure to provide sufficient "justification" in support of a proposed Recoupment Surcharge, viewed in the context of the insurer's total rate. See T-169. In addition, if recoupment filings are rate filings as the Department maintains, then the procedural and informational requirements of Rule 4-170.014, Florida Administrative Code (governing all homeowners insurance rate filings), and Rule 4-170.0141, Florida Administrative Code (governing dwelling fire insurance rate filings), might apply to them as well. Indeed, on the premise that recoupment filings are rate filings, the Department believes that all of its requirements for recoupment filings are covered by existing statutes and rules. T-253. However, neither of the Recoupment Statutes, nor any other exiting statute or rule, clearly and unambiguously sets forth a requirement that, in order to exercise its right to fully recoup, an insurer must submit a filing — whether it be called a “rate filing,” “recoupment filing,” or something else — that fully complies with the statutes and rules governing rate filings generally. At bottom, the Department's position that recoupment filings are rate filings is an interpretation of the Recoupment Statutes that can be used, and is being used, as a bootstrap to impose filing requirements that are not specifically stated in either Section 627.062(5) or Section 627.0629(10), Florida Statutes. Moreover, the Department does not require recoupment filings to comply with all of the procedures controlling rate filings generally. As Mr. Hazeltine explained: "A retroactive recoupment is a fairly -- is a less involved filing in a sense because the base rate filing may go through a lot of justification for territorial rates or there may be a lot more detail in a base rate filing." T-172 (Emphasis added). Mr. Hazeltine further described the fundamental data indispensable to a first-time recoupment filing as follows: I think what's really needed is what Mr. Stuart said. In making a recoupment filing, you need simply to show the amount of a factor, which you get by dividing the premium into the -- into the amount to be recouped. That gave him the percentage to load the rate, and you need to show your catastrophe load or the calculation of your rate so that the policyholder doesn't wind up paying twice, because if you included it in your base rates and also as a recoupment, then the policyholder would be paying for the coverage of the Catastrophe Fund twice, both in the base rate and also in the factor. * * * . . . Like I said, all you really need to know and all you -- is the projected premium. You need to know how to compute -- how the company's going to compute its factors, and you need some justification or analysis showing the catastrophe load and the total indicated rate. T-136, 142. The truly essential requirements for an insurer's subsequent recoupment filings are fewer still, as previously discussed, because "there wouldn't need to be the laying out of the catastrophe factor." T-149. There are "many types" of rate filings, said Mr. Hazeltine, and the information required to be supplied depends on the type of filing involved. T-165. The Department's statement that recoupment filings are rate filings does not, in itself, inform would-be filers which of the requirements for rate filings generally must be followed — nor do the statutes or any promulgated rules. The Proposed Rule In 1996, the Department developed a proposed rule concerning the recoupment of reimbursement premiums. Initially published on July 26, 1996, in Volume 22, Number 30 of the Florida Administrative Weekly, page 4243, Proposed Rule 4-170.016 (the “Proposed Rule”) was designed to “provide a streamlined rate revision process for the approval of requests for rates which recoup payments to the Florida Hurricane Catastrophe Fund (FHCF) . . . .” Petitioner’s Exhibit 6. The summary description of the Proposed Rule explained that it provided “specified procedures for submitting rate filings to recoup payments made to the FHCF . . . , adopt[ed] forms by reference and provide[d] limitations on amounts recoverable in a given year.” Id. It is interesting to note that the Proposed Rule appeared in the Florida Law Weekly about two months after the legislature had amended Section 627.062(5), Florida Statutes, but some six months before that amendment would take effect. Thus, at the time the Proposed Rule was published, the law allowed an insurer to recoup the “actual amount of reimbursement premium” by making a rate filing which “adjust[ed] its rates to remove that portion of the rates attributable to catastrophe losses expected to be covered by the” CAT Fund. See Section 627.062(5), Florida Statutes (Supp. 1996). Come January 1, 1997, however, Section 627.062(5) would no longer contain the language just quoted; rather, insurers would be entitled to “fully recoup” any CAT Fund reimbursement premiums they had paid without being subject to an express requirement that base rates be adjusted concomitantly. See Section 627.062(5), Florida Statutes (1997). Perhaps to close this potential loophole, the Proposed Rule incorporated the “lame duck” statutory requirement that base rates be reduced in conjunction with a recoupment filing: “If an insurer chooses to apply a recoupment charge, the insurer’s next rate filing must exclude the portion of the rates attributable to catastrophic losses expected to be covered by the FHCF or must cease collecting and charge [sic ?] rates to cover expected losses.” Petitioner’s Exhibit 7 (Proposed Rule as amended by notice published November 15, 1996, in Volume 22, Number 46, Florida Administrative Weekly, page 6658). The Proposed Rule also contained a subsection on filing requirements which read: Filing Requirements. An insurer seeking approval of an FHCF reimbursement premium recoupment charge must submit three (3) copies of the following: Recoupment of FHCS Reimbursement Premium Worksheet, Form D14-1197(10/96) which is hereby incorporated by reference plus any supporting documentation for varying the charge by territory or class; final manual page(s) which include the recoupment factor and an explanation of how it will be applied; documentation of the FHCF reimbursement premium paid by the insurer; proposed declarations page; and copies of Forms D14-1102, D14-1103, and D14-1104 as incorporated in 4-170.014, or dwelling Forms D14-1193, D14-01194 and D14-1195, as incorporated in 4-170.0141. Petitioner’s Exhibit 7. The Proposed Rule was challenged in a Section 120.56(2), Florida Statutes, proceeding. The Department withdrew the Proposed Rule on February 21, 1997, apparently before the entry of a final order in the challenge (and after the present version of Section 627.062(5) took effect on January 1, 1997). Since then, the Department has not formally adopted, nor has it attempted to adopt through rulemaking, any rules that implement the Recoupment Statutes or otherwise specifically govern recoupment filings. The Memorandum and Worksheet The Proposed Rule may have been gone, but its provisions were not forgotten. On July 29, 1997, J. Steven Roddenberry, then the Bureau Chief of the Bureau of Property and Casualty Forms and Rates, issued a Memorandum and attached worksheet to “all insurance companies authorized to write property and casualty insurance in the State of Florida.” Petitioner’s Exhibit 8. The subjects of this Memorandum were “procedures for the filing of 1996 Florida Hurricane Catastrophe Fund recoupment; [and] filing deadline for 1995 Florida Hurricane Catastrophe Fund recoupment.” Id. Mr. Roddenberry testified that the purpose of this Memorandum was to provide guidance to insurers on how to make recoupment filings for CAT Fund premiums paid in 1996 and to notify them that recoupment filings for 1995 reimbursement premiums needed to be made by September 1, 1997. The July 29, 1997, Memorandum was sent to the approximately 400 insurers writing property and casualty insurance in this state at the time. United did not exist in 1997 and therefore was not an original recipient of the Memorandum. The timing of the Memorandum in relation to statutory developments is interesting. As of July 29, 1997, Section 627.0629(10), Florida Statutes, was a brand new law, having taken effect only a couple months earlier on May 9, 1997. Section 627.0629(10), with its reference to CAT Fund premium- related “adjustments” in a “rate filing,” faintly echoes language that was deleted from former Section 627.062(5), Florida Statutes, (“In the [rate] filing the insurer must adjust its rates to remove that portion . . . attributable to” CAT Fund coverage) (emphasis added). But Section 627.0629(10) does not expressly state, as did both former Section 627.062(5) and the Department’s withdrawn Proposed Rule, that an insurer electing to recoup must adjust its rates to remove the portion attributable to catastrophic losses expected to be covered by the CAT Fund. The Memorandum memorialized the Department’s interpretation of the Recoupment Statutes as requiring recouping insurers to reduce their base rates to make them net of expected CAT Fund recoveries. It stated: As in the past, an insurer may choose to either prospectively make rates sufficient to cover the costs of the FHCF assessment, while accounting for coverage provided by it, or impose a recoupment charge to recover the assessment payments made to the FHCF. If an insurer chooses to impose a recoupment charge, the insurer must exclude from its base rate calculation the expected recoveries covered by the FHCF. An insurer may not recoup 1996 premiums paid unless it has made, or concurrently makes, a base rate filing, the calculation of which excludes recoveries from the FHCF. Petitioner’s Exhibit 8 (emphasis added). The statutory interpretation reflected in the underlined sentence from the July 29, 1997, Memorandum remains current and continues to be followed by the Department. The Memorandum also enumerated certain filing requirements which bore a striking resemblance to the ones that the withdrawn Proposed Rule would have prescribed. It stated: An insurer intending to recoup the 1996 FHCF premiums paid in 1996 must file three copies of the following for each year being recouped: Recoupment of FHCF Reimbursement Premium Charge Worksheet (please see attached); Final manual page(s) which include the recoupment factor and an explanation of how it will be applied; Documentation of the FHCF reimbursement premium paid by the insurer for 1996; Proposed declaration page; A rate filing (if appropriate) containing actuarial support that shows the calculation of the catastrophe load; and Copies of homeowner forms: D14-1102, D14-1103, and D14-1104, as incorporated in 4-170.014, Florida Administrative Code, or dwelling forms D14-1193, D14-01194 and D14- 1195, as incorporated in 4-170.0141, Florida Administrative Code. The Recoupment of FHCF Reimbursement Premium Charge Worksheet (“Worksheet”), which was the subject of the Memorandum’s filing requirement lettered a, is substantially similar to the proposed Form D14-1197 that was the subject of the withdrawn Proposed Rule’s filing requirement lettered a. The filing requirements lettered b, c, and d, respectively, in the Memorandum and in the withdrawn Proposed Rule are substantially identical to one another. The filing requirement lettered f in the Memorandum is substantially identical to the one lettered e in the Proposed Rule. 15/ In short, the Memorandum listed the same five filing requirements that the Proposed Rule had spelled out and added a sixth, lettered e, which incorporated a new obligation imposed by the recently enacted Section 627.0629(10), Florida Statutes. Although written three and a half years ago for particular purposes that have passed into history, the July 29, 1997, Memorandum nevertheless sets forth the procedural and informational requirements for recoupment filings that the Department continues to enforce to this day, as Mr. Roddenberry testified: THE COURT: . . . Mr. Roddenberry, about the memorandum, July 29, 1997, memorandum, does that memorandum set forth what currently are the pieces of information required by the Department when a company submits a retro –- or a recoupment filing? THE WITNESS: If I may, when you say currently, do you mean like today? THE COURT: Like today. THE WITNESS: Yes, sir, I believe, if this information was submitted, it would be considered a complete file. I’m afraid that, if some of this was missing, that it would not be considered a complete file. * * * THE COURT: And they would need to make a complete filing in order to be subject to approval –- if the filing were incomplete, the request would be denied? THE WITNESS: Yes, sir, because if it’s incomplete, it probably doesn’t even get past the person that not literally opens the mail –- there’s two or three steps in there –- but the person that makes the assignments to the actuaries, they go through it, and if the filing is incomplete, if it doesn’t have what the statute and the rules require, then they send it back to the company. We do that now. The Inspector General told us we had to do that. T-250-52. The Worksheet form that must be submitted to comply with the Memorandum’s first-listed filing requirement (lettered a) contains 15 numbered lines of requested information, as follows: Year FHCF Assessment Paid Line(s) of Business: Prior Year’s FHCF Premium Paid $ Prior Year’s Carry-Forward? No / Yes –- If Yes, State Amount $ 5 (3) Plus (4) $ 6 Prior Year’s Florida Direct Written Premium Excluding Ex-Wind Policies $ 7 Ratio (3) / (6) x 100 8 Forecast (One Year’s) Direct Written Premium Excluding Ex-Wind Policies $ 9 Ratio (5) / (8) x 100 % Ratio (7) Plus 5% % Formula Recoupment Surcharge Lesser of (9) or (10) % Selected Surcharge Factor Effective Date AVERAGE IMPACT ON POLICYHOLDERS / / Average Premium at Current Rate Levels $ (11) Multiplied by (14) $ Petitioner’s Exhibit 8 (footnotes omitted). Mr. Roddenberry testified that the Worksheet per se is no longer required, but “the information that is requested on that form would have to be provided either in that format or some other format . . . .” T-253. Mr. Hazeltine asserted that certain items on the Worksheet are no longer required. According to Mr. Hazeltine, the items numbered 7, 10, and 11 all pertained to a limitation on amounts recoverable in a given year that was part of the Proposed Rule and which has since been abandoned; therefore, the information requested in these items is no longer required. Similarly, the information relating to the average impact on policyholders sought in the items numbered 14 and 15 is no longer required, according to Mr. Hazeltine. Line items 4 and 5 are not applicable to first-time filers such as United but might be required of repeat recoupment filers. As for item number 6, Mr. Hazeltine equivocated somewhat: on the one hand he said it was not a required item; on the other he stated that it was necessary to know last year’s premium, but “you could just figure it out if you wanted to.” T-144. And finally, Mr. Hazeltine testified that item number 9 was not necessary — although the information sought in number 9 is simply another way of expressing the Recoupment Surcharge required in number 12. 16/ While Mr. Roddenberry’s testimony contradicted Mr. Hazeltine’s in that he stated all of the information sought in the Worksheet is still required to be submitted, whereas Mr. Hazeltine dismissed many items as unnecessary, the conflict between the two is not as great as it seems at first blush. The items relating to the since-discarded limitation (numbers 7, 10, and 11) and policyholder impact (14 and 15) are essentially irrelevant to the determination of an insurer’s Recoupment Surcharge. The information sought in the remaining line items (with the possible exceptions of numbers 6 and 9, which are either irrelevant or cumulative questions) is fundamental and must be provided. What is clear is this: The Department continues to require that insurers submit all of the relevant information requested in the Worksheet, either on that form itself or in some other format. United's Recoupment Filings Under substantially identical cover letters to the Commissioner of Insurance dated June 5, 2000, United attempted, with regard to its homeowners and dwelling fire programs, respectively, to file for "recoupment of the Florida Hurricane Catastrophe Fund premiums for the period of June 1, 1999 through May 30, 2000 applicable to [United's] 'Take-out' of 'FRPCJUA assumption' business." United informed the Department that it would apply surcharges of 1.168 and 1.2803, respectively, to all homeowners and dwelling fire policies renewed on or after September 1, 2000. In addition to a cover letter, each of United's June 5, 2000, submissions consisted of a completed form entitled "Recoupment of The Florida Hurricane Catastrophe Fund Reimbursement Premium Charge Worksheet,” which was substantially similar to (and contained the same 15 line items as) the Department's Worksheet, together with an "Explanatory Memorandum" that provided additional information on items 1-4, 6, and 8. 17/ On June 13, 2000, The Department returned United's recoupment filings without action for failure to include pages 1 and 2 of Form D14-582 (a transmittal sheet and checklist, respectively), and a return envelope, as required by Rule 4-170.013, Florida Administrative Code, which provides procedures applicable to all rate, rule, underwriting guidelines, and form filings for property and casualty insurance. United re-submitted its recoupment filings, together with the requested information, on June 20, 2000. Mr. Hazeltine acknowledged the Department's receipt of these "recent rate filing[s]" by letter dated June 27. 2000. On August 4, 2000, Mr. Hazeltine notified United that the following additional information was required to complete United's recoupment filings: (1) documentation supporting the amounts intended to be recouped; (2) an explanation as to how those amounts were allocated to line of insurance and program; (3) documentation supporting an explanation as to how United intended to adjust the catastrophe provision in its base rates; and (4) the HRCS diskette for homeowners and the DRCS diskette for dwelling. United responded with a letter from its president, Mr. Stuart, dated August 21, 2000. Included with Mr. Stuart's letter were documents substantiating the fact that United had paid about $1.68 million in reimbursement premiums for 1999 and showing an allocation of this premium expense between homeowners and dwelling. Apparently attempting to satisfy the Department's request for an explanation as to how United intended to adjust the catastrophe provision in its base rates, Mr. Stuart wrote: My understanding is that [United's consultant] Mr. Trafton was advised by Steve Roddenberry, via telephone, that United would have to base the ["me-too" takeout] filing upon the 7/97 FRPCJUA filing rather than use the 1998 filing which included the JUA recoupment within the base rates. Therefore, our ["me-too" takeout] filing has the identical base rates, as does the 7/97 FRPCJUA filing. This appeared logical since United would not incur a FHCF premium charge until late in 1999 for the June 1, 1999 FHCF period. Joint Exhibit 1. Translation: United did not intend to adjust its base rates because it believed those rates were not loaded to account for the CAT Fund reimbursement premiums. Finally, Mr. Stuart informed Mr. Hazeltine that United was "preparing the diskettes as referenced in your letter of August 4th and should provide these within the next two weeks." Id. After receiving Mr. Stuart's letter, Mr. Hazeltine attempted to contact Mr. Stuart, who was on vacation and therefore unavailable, and then reached a consultant for United named Terry Godbold, whom he advised that the Department would disapprove United's recoupment filings unless the requested diskettes were received, as well as information on the adjustment of United's catastrophe load. United, however, submitted no further information. As a result, by letter dated September 7, 2000, the Department notified United of its intent to disapprove United's recoupment filings on the ground that United had failed to justify its proposed rates or rate changes. The Department found United's filings to be deficient in the following areas: The rates originally filed were not excessive, inadequate, or unfairly discriminatory. No information, or supporting data, has been supplied in support of this filing to justify changing those rates. Section 627.062(5), Florida Statutes, provides that insurers may recoup reimbursement premiums paid to the Florida Hurricane Catastrophe Fund. However, Section 627.0629(10), Florida Statutes, requires a complete calculation of the insurer's catastrophe load and that the information in the filing not be limited solely to recovery of reimbursement premiums paid to the fund. This filing contains information relating solely to the recovery of moneys paid to the fund. The lack of information provided has been discussed thoroughly with the company during the course of this filing. The HPCS [sic] and DRCS diskettes have not been provided as requested. Joint Exhibit 1. At hearing, Mr. Hazeltine testified that United's failure to provide the diskettes, by itself, (probably) would not have resulted in the disapproval of United's filings. T-189. Are United's Base Rates Net of Expected CAT Fund Recoveries? The question whether United’s base rates are net of recoveries expected from the CAT Fund in the event of a hurricane catastrophe, as the Department has presumed, lies at the heart of United’s claim to be entitled to recoup reimbursement premiums previously paid. It is, therefore, a key question that must be answered in Case No. 00-4212, the Section 120.57 proceeding brought by United to obtain a determination of its substantial interests in recouping premiums paid to the CAT Fund. However, because the merits of United’s claim for recoupment are not directly at issue in this proceeding to challenge alleged unadopted rules, 18/ the dispute regarding the composition of United’s base rates need not be resolved here, except insofar as may be necessary to decide the Department’s attack on United’s standing. The Department contends that United lacks standing to maintain this action because it has not been injured by operation of the alleged unadopted rules, even assuming for argument’s sake that the alleged agency statements are rules by definition, which the Department denies. This argument will be addressed in the legal conclusions below. For the moment, it is sufficient to note that the Department’s position fails to persuade if, as United contends, United’s base rates in fact are not prospectively loaded with a CAT Fund Factor. If United is correct about the composition of its base rates, then it has suffered a substantial injury-in-fact as a result of the Department’s irrebuttable presumption that, unless an insurer is already recouping, its base rates are prospectively loaded. The Department’s standing argument thus implicates, at least to a limited extent, the merits of United’s claim to be entitled to recoup fully the reimbursement premiums it has paid. In view of the need to address this issue without foreclosing or encroaching upon the parties’ respective rights to a full hearing on the merits of United's alleged injury in the appropriate forum, the findings of fact herein on this particular subject are expressly limited so as not to reach beyond the standing issue at hand. Except as specifically decided here, the question whether United’s base rates are prospectively loaded with a CAT Fund Factor is left for, and will need to be litigated fully in, Case No. 4212, which is the proper vehicle for its ultimate resolution on the merits. That said, there is and can be no dispute that United's base rates, as established in its initial rate filings, include a Recoupment Surcharge — of zero. The Premium Calculation Worksheet that United submitted for its homeowners rate filing, in the section dealing with "mandatory additional charges," expressly provides that the CAT Fund Recoupment Surcharge shall be "0." Petitioner’s Exhibit 1. So, too, does the Premium Calculation Worksheet for United's dwelling fire rate filing. Respondent's Exhibit 1. 19/ In his March 3, 1999, cover letter to the Commissioner of Insurance regarding United's homeowners rate filing, United's consultant Mr. Trafton pointed this fact out, explaining: "This [premium calculation] worksheet has been revised to remove, for now, any Assessments for FHCF . . . ." Respondent's Exhibit 1. Mr. Trafton made a similar comment in his cover letter of the same date regarding United's dwelling fire rate filing. Respondent’s Exhibit 1. That United's initial rate filings set a Recoupment Surcharge of zero is consistent with its position that its base rates are not prospectively loaded with a CAT Fund Factor. At the time United made these rate filings, after all, it had paid zero in reimbursement premiums and had nothing to recoup; thus, zero was the most accurate (indeed the only true) number to submit in connection with a Recoupment Surcharge calculation. For that reason, United's representation, in its initial base rate filings, that the amounts to be recouped initially equaled zero cannot be considered the equivalent of a declination of the right to use the recoupment method of recovering CAT Fund premiums. At a minimum, United's filing can reasonably be interpreted as having left the door open to adjusting the stated surcharge of zero to a positive number after reimbursement premiums had been paid, when there would be something to recoup. While not establishing the fact directly, this does raise an inference that United's rates are net of expected CAT Fund recoveries. 20/ This inference was supported by other evidence. Mr. Stuart testified that United had removed the "recoupment charge" from its initial rate filings at the direction of the Department, on the ground that United had not yet paid any reimbursement premiums to the CAT Fund. He also stated that at the time of United's initial rate filings, the company believed that reimbursement for CAT Fund premiums would be achieved on a retrospective basis, using a surcharge to base rates. It was Mr. Stuart's understanding that United's base rates did not include a "CAT Fund recoupment." T-67. Mr. Trafton testified that Mr. Roddenberry had told him in late 1998 that United could not use the "catastrophe protection surcharge that was in the 1998 FRPC JUA rates." T-86. To Mr. Trafton, this meant that United was required to use the FRPCJUA's 1997 base rates because "it goes without saying, if . . . you can't use the catastrophe protection surcharge, you're not using the '98 rates, you're using the '97 rates." T-86. Mr. Trafton testified that as far as he could recall, United's base rates did not "include any credit or factors for expected premiums to be paid to the Catastrophe Fund." T-94. The testimony of Mr. Stuart and Mr. Trafton on the issue of whether United's base rates are prospectively loaded was not rebutted by the Department at hearing (perhaps because the Department conclusively presumes that United's rates are prospectively loaded). But at the same time, their testimony did not directly answer the question whether the 1997 FRPCJUA rates that United adopted were prospectively loaded — a proposition that does not follow necessarily from the premise (which is undisputed) that United's Recoupment Surcharge, as filed, was zero. 21/ Mr. Trafton in particular left the impression that the FRPCJUA's 1997 rates were net of expected CAT Fund recoveries, but he did not say so unambiguously. The conclusion can be deduced from his testimony, but not without difficulty. When Mr. Trafton said that United could not use the "catastrophe protection surcharge" that was "in" the 1998 rates, he might have been referring to a charge that was "built into" (i.e. prospectively loaded in) those rates. 22/ If so, then Mr. Trafton appears to have said (by making it clear that he and the Department perceived a material difference between the two years) that the 1997 rates were not prospectively loaded. (This raises the interesting possibility, not addressed in this record, that the FRPCJUA needed to impose a Recoupment Surcharge in 1998 to recover the past year's reimbursement premiums at the same time it was prospectively loading its base rates to recover in advance for the reimbursement premiums yet to be paid. See endnote 9.) If, on the other hand, Mr. Trafton meant that the FRPCJUA's 1998 rates included a "catastrophe protection surcharge" in addition to the base rates (as a retrospective means of collecting for reimbursement premiums paid), then the implication would be that the 1997 rates were net of expected CAT Fund recoveries, because otherwise the FRPCJUA's recoupment in 1998 would amount to a double recovery. But if this were the case, it is not clear why United could not have used the FRPCJUA's 1998 base rates, which presumably would have been net of expected CAT Fund recoveries, too — unless in 1998 the FRPCJUA were recouping for 1997 reimbursement premiums and also collecting prospectively for 1999 reimbursement premiums, in transition from the recoupment method to the prospective method of recovery. If the assumption is made for argument's sake that the FRPCJUA's 1997 rates were prospectively loaded (from which would follow the conclusion that United's “me-too” rates are prospectively loaded), then it becomes difficult to make sense of Mr. Trafton's and Mr. Stuart's testimony. In that event, the FRPCJUA's 1998 rates could not have included a Recoupment Surcharge (or at least not a full one, see endnote 8). The 1998 rates would have been either net of expected CAT Fund recoveries (in transition from the prospective method to the recoupment method) or prospectively loaded as in 1997. Consequently, the 1997 base rates would have been, respectively, either higher or approximately the same as the 1998 base rates. Not only would either possibility seem to leave no plausible reason for the Department to have directed United to use the 1997 base rates, but also these scenarios contradict the testimony of both Mr. Stuart and Mr. Trafton, each of whom suggested that the 1997 base rates were less generous than the rates in effect in 1998. In sum, the present record establishes that, more likely than not, the FRPCJUA's 1997 base rates were, and therefore United's base rates are, net of expected CAT Fund recoveries. In other words, United's rates are probably not prospectively loaded with a CAT Fund Factor, contrary to the Department's presumption. As explained above, however, the resolution of this case does not demand that a definitive finding of fact be made on this issue. It is enough, for now, to find that United has proved by a preponderance of evidence a reasonable likelihood that, given the opportunity (which it will have in Case No. 00-4212), it can successfully demonstrate that its rates are not prospectively loaded. No more than that is being found at this time. Whether United will succeed on the merits of its claim to be entitled to recoup reimbursement premiums paid to the CAT Fund remains to be seen; nothing decided here is intended to pre-determine the outcome of Case No. 00-4212.
The Issue Whether Petitioners' proposed rates are justified pursuant to the requirements of Section 627.062, Florida Statutes, or whether the Department of Financial Services, Office of Insurance Regulation (OIR) was correct in denying the requested rate increases.
Findings Of Fact The Hartford companies are property and casualty insurers transacting insurance in the State of Florida pursuant to valid certificates of authority and the Florida Insurance Code. Two types of personal lines insurance filings submitted by Hartford to the OIR are at issue in this proceeding: two filings for homeowners insurance (Case Nos. 07-5185 and 07-5186) and two filings for dwelling fire insurance (Case Nos. 07-5187 and 07- 5188). Hartford's substantial interests are affected by the notices disapproving the filings in this case. Homeowners insurance includes coverage for a variety of perils in and around a home, is usually purchased by a homeowner, and covers both the structure and the contents of a home. Dwelling/fire insurance is usually purchased by the owners of properties that are leased or rented to others, and provides coverage for the structure only. Both types of insurance cover damage caused by hurricanes. The New Legislation and its Requirements In a special session held in January 2007, the Florida Legislature enacted changes to the Florida Hurricane Catastrophe Fund (CAT Fund), as reflected in Chapter 2007-1, Laws of Florida. The special session was precipitated by a perceived crisis regarding the cost and availability of homeowners insurance after the 2004 and 2005 hurricane seasons. As a result of the substantial number of claims incurred after multiple severe hurricanes each of these years, changes in the insurance marketplace resulted in some insurance companies withdrawing from the Florida market, others non-renewing policies, one company becoming insolvent, and the cost for reinsurance available to all insurers rising dramatically. One of the primary features of the legislation was an expansion of the CAT Fund. The CAT Fund was established in 1993 after Hurricane Andrew to provide reinsurance to insurers for property insurance written in Florida at a price significantly less than the private market. The CAT Fund is a non-profit entity and is tax exempt. Prior to the enactment of Chapter 2007-1, the CAT Fund had an industry-wide capacity of approximately $16 million. The purpose of the changes enacted by the Legislature was to reduce the cost of reinsurance and thereby reduce the cost of property insurance in the state. As a result of Chapter 2007-1, the industry-wide capacity of the CAT Fund was increased to $28 billion, and insurers were given an opportunity to purchase an additional layer of reinsurance, referred to as the TICL layer (temporary increase in coverage limit), from the CAT Fund. Section 3 of Chapter 2007-1 required insurers to submit a filing to the OIR for policies written after June 1, 2007, that took into account a "presumed factor" calculated by OIR and that purported to reflect savings created by the law. The new law delegated to the OIR the duty to specify by Order the date such filings, referred to as "presumed factor filings" had to be made. On February 19, 2007, the OIR issued Order No. 89321-07. The Order required insurers to make a filing by March 15, 2007, which either adopted presumed factors published by the OIR or used the presumed factors and reflected a rate decrease taking the presumed factors into account. The presumed factors were the amounts the OIR calculated as the average savings created by Chapter 2007-1, and insurers were required to reduce their rates by an amount equal to the impact of the presumed factors. The OIR published the presumed factors on March 1, 2007. In its March 15, 2007, filings, Hartford adopted the presumed factors published by OIR. As a result, Hartford reduced its rates, effective June 1, 2007, on the products at issue in these filings by the following percentages: Case No. 07-5185 homeowners product: 17.7% Case No. 07-5186 homeowners product: 21.9% Case No. 07-5187 dwelling/fire product: 8.7% Case No. 07-5188 dwelling/fire product: 6.2% The Order also required that insurers submit a "True-Up Filing" pursuant to Section 627.026(2)(a)1., Florida Statutes. The filing was to be a complete rate filing that included the company's actual reinsurance costs and programs. Hartford's filings at issue in these proceedings are its True-Up Filings. The True-Up Filings Hartford submitted its True-Up filings June 15, 2007. The rate filings were certified as required by Section 627.062(9), Florida Statutes. The filings were amended August 8, 2007. Hartford's True Up Filings, as amended, request the following increases in rates over those reflected in the March 15, 2007, presumed factor filings: Case No. 07-5185 homeowners product: 22.0% Case No. 07-5186 homeowners product: 31.6% Case No. 07-5187 dwelling and fire product: 69.0% Case No. 07-5188 dwelling and fire product: 35.9% The net effects of Hartford's proposed rate filings result in the following increases over the rates in place before the Presumed Factor Filings: Case No. 07-5185 homeowners product: .4% Case No. 07-5186 homeowners product: 2.8% Case No. 07-5187 dwelling/fire product: 54.3% Case No. 07-5188 dwelling/fire product: 27.5% Case Nos. 07-5185 and 07-5186 (homeowners) affect approximately 92,000 insurance policies. Case Nos. 07-5187 and 07-5188 (dwelling/fire) affect approximately 2,550 policies. A public hearing was conducted on the filings August 16, 2007. Representatives from Hartford were not notified prior to the public hearing what concerns the OIR might have with the filings. Following the hearing, on August 20, 2007, Petitioners provided by letter and supporting documentation additional information related to the filings in an effort to address questions raised at the public hearing. The OIR did not issue clarification letters to Hartford concerning any of the information provided or any deficiencies in the filings before issuing its Notices of Intent to Disapprove the True-Up Filings. All four filings were reviewed on behalf of the OIR by Allan Schwartz. Mr. Schwartz reviewed only the True-Up Filings and did not review any previous filings submitted by Hartford with respect to the four product lines. On September 10, 2007, the OIR issued Notices of Intent to Disapprove each of the filings at issue in this case. The reasons give for disapproving the two homeowners filings are identical and are as follows: Having reviewed the information submitted, the Office finds that this filing does not provide sufficient documentation or justification to demonstrate that the proposed rate(s) comply with the standards of the appropriate statute(s) and rules(s) including demonstrating that the proposed rates are not excessive, inadequate, or unfairly discriminatory. The deficiencies include but are not limited to: The premium trends are too low and are not reflective of the historical pattern of premium trends. The loss trends are too high and are not reflective of the historical pattern of loss trends. The loss trends are based on an unexplained and undocumented method using "modeled" frequency and severity as opposed to actual frequency and severity. The loss trends are excessive and inconsistent compared to other sources of loss trends such as Fast Track data. The catastrophe hurricane losses, ALAE and ULAE amounts are excessive and not supported. The catastrophe non-hurricane losses, ALAE and ULAE amounts are excessive and not supported. The particular time period from 1992 to 2006 used to calculate these values has not been justified. There has been no explanation of why the extraordinarily high reported losses for 1992 and 1993 should be expected to occur in the future. The underwriting profit and contingency factors are excessive and not supported. Various components underlying the calculation of the underwriting profit and contingency factors, including but not limited to the return on surplus, premium to surplus ratio, investment income and tax rate are not supported or justified. The underwriting expenses and other expenses are excessive and not supported. The non-FHCF reinsurance costs are excessive and not supported. The FHCF reinsurance costs are excessive and not supported. The fact that no new business is being written has not been taken into account. No explanation has been provided as too [sic] Hartford believes it is reasonable to return such a low percentage of premium in the form of loss payments to policyholders. For example, for the building policy forms, only about 40% of the premium requested by Hartford is expected to be returned to policyholders in the form of loss payments. As a result of the deficiencies set forth above, the Office finds that the proposed rate(s) are not justified, and must be deemed excessive and therefore, the Office intends to disapprove the above-referenced filing. The Notices of Intent to Disapprove the two dwelling/fire filings each list nine deficiencies. Seven of the nine (numbers 1-6 and 8) are the same as deficiencies listed for the homeowners filings. The remaining deficiencies named for Case No. 07-5187 are as follows: 7. The credibility standard and credibility value are not supported. 9. No explanation has been provided as too (sic) why Hartford believes it needs such a large rate increase currently, when the cumulative rate change implemented by Hartford for this program from 2001 to 2006 was an increase of only about 10%. The deficiencies listed for Case No. 07-5188 are the same as those listed for Case No. 07-5187, with the exception that with respect to deficiency number 9, the rate change implemented for the program in Case No. 07-5188 from 2001 to 2006 was a decrease of about -3%. Documentation Required for the Filings Florida's regulatory framework, consistent with most states, requires that insurance rates not be inadequate, excessive, or unfairly discriminatory. In making a determination concerning whether a proposed rate complies with this standard, the OIR is charged with considering certain enumerated factors in accordance with generally accepted and reasonable actuarial techniques. Chapter 2007-1 also amended Section 627.062, Florida Statutes, to add a certification requirement. The amendment requires the chief executive officer or chief financial officer and chief actuary of a property insurer to certify under oath that they have reviewed the rate filing; that to their knowledge, the rate filing does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which the statements were made, not misleading; that based on their knowledge, the information in the filing fairly presents the basis of the rate filing for the period presented; and that the rate filing reflects all premium savings reasonably expected to result from legislative enactments and are in accordance with generally accepted and reasonable actuarial techniques. § 627.062(9)(a), Fla. Stat. (2007). Actuarial Standards of Practice 9 and 41 govern documentation by an actuary. Relevant sections of Standard of Practice 9 provide: Extent of documentation - . . . Appropriate records, worksheets, and other documentation of the actuary's work should be maintained by the actuary and retained for a reasonable length of time. Documentation should be sufficient for another actuary practicing in the same field to evaluate the work. The documentation should describe clearly the sources of data, material assumptions, and methods. Any material changes in sources of data, assumptions, or methods from the last analysis should be documented. The actuary should explain the reason(s) for and describe the impact of the changes. Prevention of misuse - . . . The actuary should take reasonable steps to ensure that an actuarial work product is presented fairly, that the presentation as a whole is clear in its actuarial aspects, and that the actuary is identified as the source of the actuarial aspects, and that the actuary is available to answer questions.. . . . * * * 5.5 Availability of documentation- Documentation should be available to the actuary's client or employer, and it should be made available to other persons when the client or employer so requests, assuming appropriate compensation, and provided such availability is not otherwise improper. . . . In determining the appropriate level of documentation for the proposed rate filings, Petitioner relied on its communications with OIR, as well as its understanding of what has been required in the past. This reliance is reasonable and is consistent with both the statutory and rule provisions governing the filings. Use of the RMS Catastrophic Loss Projection Model In order to estimate future losses in a rate filing, an insurer must estimate catastrophic and non-catastrophic losses. Hartford's projected catastrophic losses in the filings are based upon information provided from the Risk Management Solutions (RMS) catastrophic loss projection model, version 5.1a. Hartford's actuaries rely on this model, consistent with the standards governing actuarial practice, and their reliance is reasonable. Catastrophe loss projection models may be used in the preparation of insurance filings, if they have been considered by and accepted by the Florida Commission on Hurricane Loss Projection Methodology (the Hurricane Commission). The Hurricane Commission determined that the RMS model, version 5.1a was acceptable for projecting hurricane loss costs for personal residential rate filings on May 17, 2006. In addition to approval by the Hurricane Commission, use of the model is appropriate "only if the office and the consumer advocate appointed pursuant to s. 627.0613 have access to all of the assumptions and factors that were used in developing the actuarial methods, principles, standards, models, or output ranges, and are not precluded from disclosing such information in a rate proceeding." §627.0628(3)(c), Fla. Stat. Both the Consumer Advocate and a staff person from the OIR are members of the Hurricane Commission. In that context, both have the ability to make on-site visits to the modeling companies, and to ask any questions they choose regarding the models. Both OIR's representative and the Consumer Advocate participated in the meetings and had the same opportunity as other commissioners to ask any question they wished about RMS 5.1a. The Hurricane Commission members, including the Consumer Advocate, clearly have access to the information identified in Section 627.0628(3)(c). However, there are restrictions on the Hurricane Commission members' ability to share the information received regarding trade secrets disclosed by the modeling companies. For that reason, the Commission's deliberations are not, standing alone, sufficient to determine that the Office of Insurance Regulation has access. In this case, credible evidence was submitted to show that RMS officials met with staff from the Office in July and October 2006 to discuss the model. RMS offered to provide any of its trade secret information to the OIR, subject to a non- disclosure agreement to protect its dissemination to competitors. RMS also opened an office in Tallahassee and invited OIR staff to examine any parts of the model they wished. In addition, both RMS and Hartford have answered extensive questionnaires prepared by OIR regarding the RMS model, and Hartford has offered to assist OIR in gathering any additional information it requires. Most of the questions posed by OIR involve the same areas reviewed by the Commission. RMS' representative also testified at hearing that RMS would not object to disclosure of the assumptions during the hearing itself if necessary. Finally, OIR Exhibit 1 is the Florida Hurricane Catastrophe Fund 2007 Ratemaking Formula Report. The Executive Summary from the report explains how rates were recommended for the Florida Hurricane Catastrophic Fund (CAT Fund) for the 2007- 2008 contract year. The report stated that the RMS model, as well as three other models accepted by the Hurricane Commission, were used for determining expected aggregate losses to the CAT Fund reinsurance layer. Three models, including the RMS model, were also used for analysis of detailed allocation to type of business, territory, construction and deductible, as well as special coverage questions. The models were compared in detail and given equal weight. The report notes that these three models were also used in 1999-2006 ratemaking. The report is prepared by Paragon Strategic Solutions, Inc., an independent consultant selected by the State Board of Administration, in accordance with Section 215.555(5), Florida Statutes. While OIR did not prepare the report, they show no hesitation in accepting and relying on the report and the modeled information it contains in these proceedings. Indeed, one of OIR's criticisms is Hartford's failure to use the report with respect to CAT Fund loss recovery estimates. Based upon the evidence presented at hearing, it is found that the OIR and Consumer Advocate were provided access to the factors and assumptions used in the RMS model, as contemplated by Section 627.0628. The Alleged Deficiencies in the Homeowners Filings1/ A rate is an estimate of the expected value of future costs. It provides for all costs associated with the transfer of risk. A rate is reasonable and not excessive, inadequate or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer. In preparing a filing, an actuary identifies the time period that its proposed rates are expected to be in effect. Because ratemaking is prospective, it involves determining the financial value of future contingent events. For the rate filings in question, actuaries for Hartford developed their rate indications by first considering trended premium, which reflects changes in premium revenue based on a variety of factors, including construction costs and the value of the buildings insured. Trended premium is the best estimate of the premium revenue that will be collected if the current rates remain in effect for the time period the filing is expected to be in place. Expenses associated with writing and servicing the business, the reinsurance costs to support the business and an allowance for profit are subtracted from the trended premium. The remainder is what would be available to pay losses. This approach to ratemaking, which is used by Hartford, is a standard actuarial approach to present the information for a rate indication. As part of the process, expected claims and the cost to service and settle those claims is also projected. These calculations show the amount of money that would be available to pay claims if no changes are made in the rates and how much increased premium is necessary to cover claims. The additional amount of premium reflects not only claims payments but also taxes, licenses and fees that are tied to the amount of premium. The first deficiency identified by OIR is that "the premium trends are too low and are not reflective of the historical pattern of premium trends." In determining the premium trend in each filing, Hartford used data from the previous five years and fit an exponential trend to the historical pattern, which is a standard actuarial technique. Hartford also looked at the factors affecting the more recent years, which were higher. For example, the peak in premium trend in 2006 was a result of the cost increases driven by the 2004 and 2005 hurricanes, and the peak in demand for labor and construction supplies not matched by supply. Costs were coming down going into 2007, and Hartford believed that 2006 was out of pattern from what they could anticipate seeing in the future. The premium trends reflected in Hartford's filings are reasonable, reflective of historical patterns, and based on standard actuarial techniques. The second identified deficiency with respect to the homeowner filings was that the loss trends are too high and are not reflective of the historical pattern of loss trends. A loss trend reflects the amount an insurance company expects the cost of claims to change. It consists of a frequency trend, which is the number of claims the insurance company expects to receive, and a severity trend, which is the average cost per claim. The loss trend compares historical data used in the filing with the future time period when the new rates are expected to be in effect. Hartford's loss trends were estimated using a generalized linear model, projecting frequency and severity separately. The model was based on 20 quarters of historical information. The more credible testimony presented indicates that the loss trends were actuarially appropriate. The third identified deficiency is that the loss trends are based on an unexplained and undocumented method using "modeled" frequency and severity as opposed to actual frequency and severity. As noted above, the generalized linear model uses actual, historical data. Sufficient documentation was provided in the filing, coupled with Hartford's August 20, 2007, letter. The method used to determine loss trends is reasonable and is consistent with standard actuarial practice. The fourth identified deficiency is that loss trends are excessive and inconsistent compared to other sources of loss trends, such as Fast Track data. Saying that the loss trends are excessive is a reiteration of the claim that they are too high, already addressed with respect to deficiency number two. Fast Track data is data provided by the Insurance Services Office. It uses unaudited information and is prepared on a "quick turnaround" basis. Fast Track data is based on paid claims rather than incurred claims data, and upon a broad number of companies with different claims settlement practices. Because it relies on paid claims, there is a time lag in the information provided. Hartford did not rely on Fast Track data, but instead relied upon its own data for calculating loss trends. Given the volume of business involved, Hartford had enough data to rely on for projecting future losses. Moreover, Respondents point to no statutory or rule requirement to use Fast Track data. The filings are not deficient on this basis. The fifth identified deficiency in the Notice of Intent to Disapprove is that catastrophe hurricane losses, ALAE and ULAE amounts are excessive and not supported. ALAE stands for "allocated loss adjustment expenses," and represents the costs the company incurs to settle a claim and that can be attributed to that particular claim, such as legal bills, court costs, experts and engineering reports. By contrast, ULAE stands for "unallocated loss adjustment expense" and represents the remainder of claims settlement costs that cannot be linked to a specific claim, such as office space, salaries and general overhead. Part of the OIR's objection with respect to this deficiency relates to the use of the RMS model. As stated above at paragraphs 25-33, the use of the RMS model is reasonable. With respect to ALAE, Hartford analyzed both nationwide data (4.4%) and Florida data (4.8%) and selected an ALAE load between the two (4.6%). This choice benefits Florida policyholders. It is reasonable to select between the national and Florida historical figures, given the amount of actual hurricane data available during the period used. With respect to ULAE, the factors used were based upon directions received from Ken Ritzenthaler, an actuary with OIR, in a previous filing. The prior discussions with Mr. Ritzenthaler are referenced in the exhibits to the filing. The more credible evidence demonstrates that the ALAE and ULAE expenses with respect to catastrophic hurricane losses are sufficiently documented in Hartford's filings and are based on reasonable actuarial judgment. The sixth identified deficiency is that the catastrophe non-hurricane losses, ALAE and ULAE amounts are excessive and not supported. According to OIR, the particular time period from 1992 to 2006 used to calculate these values has not been justified, and there has been no explanation of why the extraordinarily high reported losses for 1992 and 1993 should be expected to occur in the future. OIR's complaint with respect to non-hurricane losses is based upon the number of years of data included. While the RMS model was used for hurricane losses, there is no model for non- hurricane losses, so Hartford used its historical data. This becomes important because in both 1992 and 1993, there were unusual storms that caused significant losses. Hartford's data begins with 1992 and goes through 2006, which means approximately fifteen years worth of data is used. Hartford's explanation for choosing that time period is that hurricane models were first used in 1992, and it was at that time that non-hurricane losses had to be separated from hurricane losses. Thus, it was the first year that Hartford had the data in the right form and sufficient detail to use in a rate filing. Petitioners have submitted rate filings in the past that begin non-hurricane, ALAE and ULAE losses with 1992, increasing the number of years included in the data with each filing. Prior filings using this data have been approved by OIR. It is preferable to use thirty years of experience for this calculation. However, there was no testimony that such a time-frame is actuarially or statutorily required, and OIR's suggestion that these two high-loss years should be ignored is not based upon any identified actuarial standard. Hartford attempted to mitigate the effect of the severe losses in 1992 and 1993 by capping the losses for those years, as opposed to relying on the actual losses.2/ The methodology used by Hartford was reasonable and appropriate. No other basis was identified by the OIR to support this stated deficiency. The seventh identified deficiency is that the underwriting profit and contingency factors are excessive and not supported. The underwriting profit factor is the amount of income, expressed as a percentage of premium, that an insurance company needs from premium in excess of losses, settlement costs and other expenses in order to generate a fair rate of return on its capital necessary to support its Florida exposures for the applicable line of business. Hartford's proposed underwriting profit factor for its largest homeowners filing is 15.3%. Section 627.062(2)(b), Florida Statutes, contemplates the allowance of a reasonable rate of return, commensurate with the risk to which the insurance company exposes its capital and surplus. Section 627.062(2)(b)4., Florida Statutes, authorizes the adoption of rules to specify the manner in which insurers shall calculate investment income attributable to classes of insurance written in Florida, and the manner in which investment income shall be used in the calculation of insurance rates. The subsection specifically indicates that the manner in which investment income shall be used in the calculation of insurance rates shall contemplate allowances for an underwriting profit factor. Florida Administrative Code Rule 69O-170.003 is entitled "Calculation of Investment Income," and the stated purpose of this rule is as follows: (1) The purpose of this rule is to specify the manner in which insurers shall calculate investment income attributable to insurance policies in Florida and the manner in which such investment income is used in the calculation of insurance rates by the development of an underwriting profit and contingency factor compatible with a reasonable rate of return. (Emphasis supplied). Mr. Schwartz relied on the contents of this rule in determining that the underwriting profit factor in Hartford's filings was too high, in that Florida Administrative Code Rule 69O-170.003(6)(a) and (7) specifies that: (6)(a) . . . An underwriting profit and contingency factor greater than the quantity 5% is prima facie evidence of an excessive expected rate of return and unacceptable, unless supporting evidence is presented demonstrating that an underwriting profit and contingency factor included in the filing that is greater than this quantity is necessary for the insurer to earn a reasonable rate of return. In such case, the criteria presented as determined by criteria in subsection (7) shall be used by the Office of Insurance Regulation in evaluating this supporting evidence. * * * An underwriting profit and contingency factor calculated in accordance with this rule is considered to be compatible with a reasonable expected rate of return on net worth. If a determination must be made as to whether an expected rate of return is reasonable, the following criteria shall be used in that determination. An expected rate of return for Florida business is to be considered reasonable if, when sustained by the insurer for its business during the period for which the rates under scrutiny are in effect, it neither threatens the insurer's solvency nor makes the insurer more attractive to policyholders or investors from a corporate financial perspective than the same insurer would be had this rule not been implemented, all other variables being equal; or Alternatively, the expected rate of return for Florida business is to be considered reasonable if it is commensurate with the rate of return anticipated for other industries having corresponding risk and it is sufficient to assure confidence in the financial integrity of the insurer so as to maintain its credit and, if a stock insurer, to attract capital, or if a mutual or reciprocal insurer, to accumulate surplus reasonably necessary to support growth in Florida premium volume reasonably expected during the time the rates under scrutiny are in effect. Mr. Schwartz also testified that the last published underwriting profit and contingency factor published by OIR was 3.7%, well below what is identified in Hartford's filings. Hartford counters that reliance on the rule is a misapplication of the rule (with no explanation why), is inconsistent with OIR's treatment of the profit factors in their previous filings, and ignores the language of Section 627.062(2)(b)11., Florida Statutes. No evidence was presented to show whether the expected rate of return threatens Hartford's solvency or makes them more attractive to policyholders or investors from a corporate financial perspective than they would have been if Rule 69O- 170.003 was not implemented. Likewise, it was not demonstrated that the expected rate of return for Florida business is commensurate with the rate of return for other industries having corresponding risk and is necessary to assure confidence in the financial integrity of the insurer in order to maintain its credit and to attract capital. While the position taken by OIR with respect to Hartford's filings may be inconsistent with the position taken in past filings, that cannot be determined on this record. The prior filings, and the communications Hartford had with OIR with regard to those filings, are not included in the exhibits in this case. There is no way to determine whether Petitioners chose to present evidence in the context of prior filings consistent with the criteria in Rule 69O-170.003, or whether OIR approved the underwriting profit and contingency factor despite Rule 69O- 170.003. Having an underwriting profit factor that is considered excessive will result in a higher rate indication. Therefore, it is found that the seventh identified deficiency in the Notices of Intent to Disapprove for the homeowners filings and the second identified deficiency in the Notices of Intent to Disapprove for the dwelling/fire filings is sustained. The eighth identified deficiency is that various components underlying the calculation of the underwriting profit and contingency factors, including but not limited to the return on surplus, premium to surplus ratio, investment income and tax rate are not supported or justified. Return on surplus is the total net income that would result from the underwriting income and the investment income contributions relative to the amount of capital that is exposed. Surplus is necessary in addition to income expected from premium, to insure that claims will be paid should losses in a particular year exceed premium and income earned on premium. Hartford's expected return on surplus in these filings is 15%. The return on surplus is clearly tied to the underwriting profit factor, although the percentages are not necessarily the same. It follows, however, that if the underwriting income and contingency factor is excessive, then the return on surplus may also be too high. Hartford has not demonstrated that the return on surplus can stand, independent of a finding that the underwriting profit and contingency factor is excessive. Premium-to-surplus ratio is a measure of the number of dollars of premium Hartford writes relative to the amount of surplus that is supporting that exposure. Hartford's premium-to- surplus ratio in the AARP homeowners filing is 1.08, which means that if Hartford wrote $108 of premium, it would allocate $100 of surplus to support that premium.3/ The premium-to-surplus ratio is reasonable, given the amount of risk associated with homeowners insurance in Florida. The OIR's position regarding investment income and tax rates are related. The criticism is that the filing used a low- risk investment rate based on a LIBOR (London Interbank Offering Rate), which is a standard in the investment community for risk- free or low-risk yield calculations. The filing also used a full 35% income tax rate applied to the yield. Evidence was presented to show that, if the actual portfolio numbers and corresponding lower tax rate were used in the filings, the rate after taxes would be the same. The problem, however, is that Section 627.062(2)(b)4., Florida Statutes, requires the OIR to consider investment income reasonably expected by the insurer, "consistent with the insurer's investment practices," which assumes actual practices. While the evidence at hearing regarding Hartford's investments using its actual portfolio yield may result in a similar bottom line, the assumptions used in the filing are not based on Petitioner's actual investment practices. As a result, the tax rate identified in the filing is also not the actual tax rate that has been paid by Hartford. The greater weight of the evidence indicates the data used is not consistent with the requirements of Section 627.062(2)(b)4., Florida Statutes. Therefore, the eighth deficiency is sustained to the extent that the filing does not adequately support the return on surplus, investment income and tax rate. The ninth identified deficiency is that the underwriting expenses and other expenses are excessive and not supported. Hartford used the most recent three years of actual expense data, analyzed them and made expense selections based on actuarial judgment. The use of the three-year time frame was both reasonable and consistent with common ratemaking practices. Likewise, the commission rates reflected in the agency filings are also reasonable. The tenth identified deficiency is that the non-FHCF (or private) reinsurance costs are excessive and not supported. The criticism regarding private reinsurance purchases is three- fold: 1) that Hartford paid too much for their reinsurance coverage; 2) that Hartford purchases their reinsurance coverage on a nationwide basis as opposed to purchasing coverage for Florida only; and 3) that the percentage of the reinsurance coverage allocated to Florida is too high. Hartford buys private reinsurance in order to write business in areas that are exposed to catastrophes. It buys reinsurance from approximately 40 different reinsurers in a competitive, arm's-length process and does not buy reinsurance from corporate affiliates. Hartford used the "net cost" of insurance in its filings, an approach that is appropriate and consistent with standard actuarial practices. Hartford also used the RMS model to estimate the expected reinsurance recoveries, which are subtracted from the premium costs. Hartford buys private catastrophic reinsurance on a nationwide basis to protect against losses from hurricanes, earthquakes and terrorism, and allocates a portion of those costs to Florida. Testimony was presented, and is accepted as credible, that attempting to purchase reinsurance from private vendors for Florida alone would not be cost-effective. The cost of reinsurance, excluding a layer of reinsurance that covers only the Northeast region of the country and is not reflected in calculating costs for Florida, is approximately $113 million. Hartford retains the first $250 million in catastrophe risk for any single event, which means losses from an event must exceed that amount before the company recovers from any reinsurer. In 2006, Hartford raised its retention of losses from $175 million to $250 million in an effort to reduce the cost of reinsurance. Hartford purchases reinsurance in "layers," which cover losses based on the amount of total losses Hartford incurs in various events. Hartford allocates approximately 65% of the private reinsurance costs (excluding the Northeast layer) to Florida in the AARP homeowners filing. Only 6-7% of Hartford's homeowners policies are written in Florida. The amount Hartford paid for reinsurance from private vendors is reasonable, given the market climate in which the insurance was purchased. Hartford has demonstrated that the process by which the reinsurance was purchased resulted in a price that was clearly the result of an arms-length transaction with the aim of securing the best price possible. Likewise, the determination to purchase reinsurance on a nationwide basis as opposed to a state-by-state program allows Hartford to purchase reinsurance at a better rate, and is more cost-effective. Purchasing reinsurance in this manner, and then allocating an appropriate percentage to Florida, is a reasonable approach. With respect to the allocation of a percentage of reinsurance cost to Florida, OIR argues that, given that Florida represents only 6-7% of Hartford's homeowner insurance business, allocation of 65% of the reinsurance costs to Florida is per se unreasonable. However, the more logical approach is to examine what percentage of the overall catastrophic loss is attributable to Florida, and allocate reinsurance costs accordingly. After carefully examining both the testimony of all of the witnesses and the exhibits presented in this case, the undersigned cannot conclude that the allocation of 65% of the private reinsurance costs is reasonable, and will not result in an excessive rate.4/ The eleventh identified deficiency is that the FHCF (or CAT Fund) reinsurance costs are excessive and not supported. Hartford purchases both the traditional layer of CAT Fund coverage, which is addressed in a separate filing and not reflected in these filings, and the TICL layer made available pursuant to Chapter 2007-1, Laws of Florida. Hartford removed the costs of its previously purchased private reinsurance that overlapped with the TICL layer and those costs are not reflected in these filings and have not been passed on to Florida policyholders. In estimating the amount of premium Hartford would pay for the TICL coverage, it relied on information provided by Paragon, a consulting firm that calculates the rates for the CAT Fund. As noted in finding of fact number 31, the RMS model, along with three other models accepted by the Hurricane Commission, were used by Paragon for determining expected aggregate losses to the CAT Fund reinsurance layer, clearly a crucial factor in determining the rate for the CAT fund. Hartford did not use the loss recoveries calculated by Paragon, but instead estimated the total amount of premium it would pay for the TICL coverage and subtracted the expected loss recoveries based on the RMS model alone. The expected loss recoveries under the RMS model standing alone were 60% of the loss recovery estimate calculated by Paragon when using all four models. Hartford claimed that its use of the RMS model was necessary for consistency. However, it pointed to no actuarial standard that would support its position with respect to this particular issue. Moreover, given that the premium used as calculated by Paragon used all four models, it is actually inconsistent to use one number which was determined based on all four models (the Paragon-based premium estimate) for one half of this particular calculation and then subtract another number using only one model for the other half (the loss recoveries rate) in order to determine the net premium. To do so fails to take into account the unique nature of the CAT fund, in terms of its low expenses and tax-exempt status. Accordingly, it is found that the CAT-Fund reinsurance costs for the TICL layer are excessive. The twelfth identified deficiency is that Hartford did not consider in the filing that no new business is being written. OIR's explanation of this asserted deficiency is that the costs associated with writing new business are generally higher than that associated with writing renewals. Therefore, according to OIR, failure to make adjustments to their historical experience to reflect the current mix of business, means that the costs included in the filing would be excessive. Hartford began restricting the writing of new business for these filings in 2002. Ultimately, no new business for the AARP program was written after November 2006 and no new business was written for the agency program after June 2006. Credible evidence was presented to demonstrate that a very low percentage of new business has been written over the period of time used for demonstrating Hartford's historical losses. As a result, the effect of no longer writing new business is already reflected in the data used to determine expenses. No additional adjustment in the filing was necessary in this regard. The thirteenth identified deficiency is that no explanation has been provided as to why Hartford believes it is reasonable to return such a low percentage of premium in the form of loss payments to policyholders. For example, for the building policy forms, OIR states that only about 40% of the premium requested by Hartford is expected to be returned to policyholders in the form of loss payments. OIR pointed to no actuarial standard that would require a specific explanation regarding how much of the premium should be returned to policyholders. Nor was any statutory or rule reference supplied to support the contention that such an explanation was required. Finally, the more credible evidence presented indicates that the correct percentage is 44%. In any event, this criticism is not a basis for finding a deficiency in the filing. Alleged Deficiencies in the Dwelling/Fire Filings The seventh deficiency identified in the dwelling/fire filings, not reflected in the homeowner filings, is that the credibility standard and credibility values are not supported. Credibility is the concept of identifying how much weight to put on a particular set of information relative to other potential information. Credibility value is determined by applying the "square root rule" to the credibility value, a commonly used actuarial approach to credibility. Hartford used the credibility standard of 40,000 earned house years in these filings. This credibility standard has been the standard within the industry for personal property filings for over forty years and has been used in prior filings submitted to OIR. Mr. Schwartz testified that his criticism with respect to the credibility standard and credibility values is that Hartford did not explain why they used that particular standard. However, Florida Administrative Code Rule 69O-170.0135 discusses those items that must be included in the Actuarial Memorandum for a filing. With respect to credibility standards and values, Rule 69O-170.0135(2)(e)5., provides that the basis need only be explained when the standard has changed from the previous filing. Given that no change has been made in these filings with respect to the credibility standard, this criticism is not a valid basis for issuing a Notice of Intent to Disapprove. The ninth deficiency in the Notice relating to the dwelling/fire filing in Case No. 07-5187 provides: "No explanation has been provided as too (sic) why Hartford believes it needs such a large rate increase currently, when the cumulative rate change implemented by Hartford for this program from 2001 to 2006 was an increase of only about 10%." With respect to Case No. 07-5188, the deficiency is essentially the same, except the cumulative rate change identified for the same period of time is a decrease of about -3%. Testimony established that the dwelling/fire rate increases were larger than those identified for the homeowners filings because Hartford did not seek rate increases for these lines for several years. The decision not to seek increases was not based on the adequacy of current rates. Rather, the decision was based on an internal determination that, based on the relatively small number of policies involved in these two filings, the amount of increased premium reflected in a rate increase was not sufficient to incur the costs associated with preparing the filings. Mr. Schwartz pointed to no authority, either in statute, rule, or Actuarial Standard, that requires the explanation he desired. He acknowledged that he understood the basis of how Hartford reached the rate increase they are requesting. The failure to provide the explanation Mr. Schwartz was seeking is not a valid basis for a Notice of Intent to Disapprove.
Recommendation Upon consideration of the facts found and conclusions of law reached, it is RECOMMENDED: That a final order be entered that disapproves the rate filings in Case Nos. 07-5185 and 07-5186 based upon the deficiencies numbered 7,8,10 and 11 in the Notices of Intent to Disapprove, and that disapproves the rate filings in Case Nos. 07-5187 and 07-5188 based on the deficiencies numbered 2,3,5 and in the Notices of Intent to Disapprove. DONE AND ENTERED this 28th day of March 2008, in Tallahassee, Leon County, Florida. S LISA SHEARER NELSON Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 28th day of March, 2008.
The Issue The issue in this case is whether Petitioners' rate filing numbered FCP 07-08928 should be approved.
Findings Of Fact FFB Casualty and FFB General are both stock insurance companies which are domiciled in Florida. FFB General is a wholly-owned subsidiary of FFB Casualty, which in turn is a wholly-owned subsidiary of Southern Farm Bureau Casualty Insurance Company of Jackson, Mississippi (SFB Casualty). FFB is headquartered in Gainesville, Florida, and its insurance products are sold exclusively in Florida. FFB only insures members of the Florida Farm Bureau Federation, a non-profit organization. On June 8, 2006, FFB made a rate filing for their homeowners' line of business seeking a significant rate increase with an effective date of December 1, 2006, in OIR file number 06-07515. Due to the size of the requested rate increase a public hearing was held on August 16, 2006, in Gainesville, Florida, in accordance with the requirement of Section 627.0629, Florida Statutes (2006), which provides that "[a]ny rate filing that is based in whole or in part on data from a computer model may not exceed 15 percent unless there is a public hearing." § 627.0629(7), Fla. Stat. (2006). At the public hearing, Burt Gindy, FFB's vice president of Government Affairs and Compliance, commenced the presentation of FFB by stating: "Okay, then, simply put, this filing is all about catastrophe reinsurance cost." Later in the public hearing, Mr. Gindy stated: "The homeowners' rate filings before you, FCP 06-07515, seeks to recognize the increase in profit catastrophe reinsurance costs that have escalated due to increasing hurricane activity." Mr. Gindy talked about the typical amount of reinsurance sought by FFB, stating: "We typically insure to a 250 year event, this year we've only been able to insure capacity and cost wise to about 160 year capacity. We know AM Best looks at that and we want to keep our AM Best ratings." Insurers, including FFB, generally measure and evaluate their potential losses from hurricanes and other extreme events in terms of probable maximum loss (PML), an estimate of the dollar amount of losses that an insurer will experience at a given probability. For example, a one-percent probability of experiencing a loss greater than a certain amount equals a 100 year or one-in-100 year PML. This does not mean that the insurer is expected to incur the 100 year PML only once every 100 years; it means that in any given year there is a one-percent chance of the insurer incurring a loss of that magnitude. When Mr. Gindy indicated that FFB had typically insured to a 250 year event, he meant that FFB insured for a 0.25 percent chance of loss of a certain magnitude occurring in any given year. On September 25, 2006, the Office approved a rate increase for FFB of +43.8 percent with an effective date of December 1, 2006. Because rate filings are prospective, the rate increase, with an effective date of December 1, 2006, appeared calculated to pay for FFB's 2007 reinsurance program. Since the mid-1990's, FFB has purchased a portion of its reinsurance coverage from the Florida Hurricane Catastrophe Fund (CAT Fund), as required by law.1/ The CAT Fund is a public entity which provides a statutorily specified layer of reinsurance at a substantially lower cost than the private market because of the CAT Fund's non-profit structure and tax exempt status. The effective date of CAT Fund coverage is June 1. FFB normally purchased the remainder of its reinsurance from private reinsurers for one-year terms, which are generally effective on January 1. Through 2006, FFB purchased a significant portion of its reinsurance from its parent company, SFB Casualty, and purchased other layers of coverage from American Ag. Starting in 2007, SFB Casualty no longer provided reinsurance for FFB, and FFB purchased coverage in the global market with the assistance of AON with whom FFB had worked for many years as SFB Casualty's broker. FFB generally begins planning in the summer for its purchase of reinsurance to be effective for the next January 1 by gathering FFB's exposure date (i.e., how many houses FFB insured, where they are located and how much they cost, etc.), which data FFB runs through its own and Alliance Insurance Research (AIR) computer models to estimate FFB's anticipated hurricane losses and PML's. FFB then determines its desired reinsurance structure, including its retention (i.e., amount of losses that could be absorbed by FFB), and sends this information to reinsurance markets in the Fall. After receiving and vetting quotes seeking the most advantageous terms, FFB negotiates its reinsurance program, and most of its reinsurance agreements are bound by December for a January 1 effective date. FFB sometimes makes adjustments to its reinsurance program after January 1 to obtain additional coverage at more favorable prices, subject to market conditions, or to make adjustments due to changes in the CAT Fund. However, the general goal of the company is to always place the lion's share of the reinsurance program by the beginning of the year. By January 1, 2007, FFB had placed the majority of its reinsurance program for 2007. The cost for FFB private reinsurance in January 2007 was $65,984,426. Recognizing a crisis in homeowners' insurance premiums, on January 9, 2007, the Florida Legislature issued a Joint Proclamation to convene a special session pursuant to Article III, Section (3)(c), Florida Constitution, and Section 11.011, Florida Statutes (2006), to commence on January 16, 2007, for the "sole and exclusive purpose" to consider the following: Legislation to reduce current property insurance premiums in Florida; Legislation to reduce the future growth of property insurance premiums in Florida; Legislation to improve availability and stability of property insurance in Florida; Legislation relating to building codes in Florida. The special session convened on January 16, 2007, and on January 22, 2007, the Legislature enacted Chapter 2007, Laws of Florida (Chapter 2007-1), which was signed into law by the Governor on January 25, 2007. One of the primary features of the legislation was a massive expansion of the CAT Fund. Prior to the enactment of Chapter 2007-1, the CAT Fund had an industry-wide capacity of approximately $16 billion for those carriers writing property insurance in the State of Florida. As a result of the enactment of Chapter 2007-1 and the expansion of the CAT Fund, industry-wide coverage went from approximately $16 billion to approximately $28 billion. It was the intent of the Legislature that the expansion of the CAT Fund would result in a rate filing that reflected "savings or reduction in loss exposure to the insurer." Chapter 2007-1 required the Office to issue an order specifying the date or dates on which the required rate filings were to be made and be effective "in order to provide rate relief to policyholders as soon as practicable." By March 15, 2007, the Office was required to calculate a presumed factor or factors to be used in the rate filings required by Chapter 2007-1 to reflect the impact to rates based on the changes to the CAT Fund. The Office issued Informational Memorandum OIR-07-06M, which describes the procedure for the rate filings required by Chapter 2007-1 and provides in relevant part: The purpose of this memorandum is to provide guidance regarding filing procedures for the "Presumed Factors" filing and the subsequent "True-Up" filing. During the 2007 Special Session, the Florida Legislature passed House Bill 1A (HB 1A) requiring every residential property insurer to make a filing with the Office of Insurance Regulation (Office) to reflect the savings or reduction in loss exposure to the insurer. On February 19, the Office issued an order advising residential insurers to make rate filings to include the new discount factors mandated by HB 1A. The new discount factors required in HB 1A have been calculated by the Office and all residential property insurers must make a rate filing incorporating the new savings on or before March 15, 2007. Information related to the presumed factors can be found at http://www.floir.com/HotTopics.htm. The procedure for submitting the "Presumed Factors" filing as prescribed in Section 3 of HB 1A and the True-Up" filing as prescribed in the Office's "Presumed Factors" order can be found in the applicable attachments and are summarized below. A filing adopting the Office's "Presumed Factors" (Short Form). This filing shall reflect the effects of the "Presumed Factors" on the rates currently in effect and shall be made on a "file and use" basis. The filing shall be limited to the effects of the "Presumed Factors" on rates currently in effect, and the elimination of the 25% rapid cash buildup portion of the insurer's Florida Hurricane Catastrophe Fund premium.[2/] The procedures for submitting this type of "Presumed Factors" filing can be found in Attachment A. A filing that uses, but does not strictly adopt the "Presumed Factors" (Long Form). A "Presumed Factors" filing that uses the factors to reflect a rate decrease to take into account the "Presumed Factors" shall be made on a "use and file" basis and shall provide all the information used in preparing the filing including copies of all reinsurance treaties. Such a filing is subject to credits and refunds if the rate reductions are determined inadequate. This type of filing shall also be limited to the effects of the "Presumed Factors" on the rates currently in effect and the elimination of the 25% rapid cash buildup portion of the insurer's Florida Hurricane Catastrophe Fund premium and must be accompanied by a sworn statement from the chief executive officer or chief financial officer and actuary responsible for preparing the filing. The procedures for submitting this type of "Presumed Factors" filing can be found in Attachment B. A "True-Up" Filing as required by the Office's "Presumed Factors" order. After making the "Presumed Factors" filing, insurers shall make a "True-Up" filing pursuant to the "file and use" provisions of s. 627.062(2)(a)1, Florida Statutes, that is a complete rate filing to reflect the savings or reductions in loss exposure to the insurer due to all the provisions of HB 1A and the anticipated 2007 reinsurance program. The procedure for submitting the "True Up" filing is identical to the annual rate filing procedures in I-file, except the appropriate selections now read as "Rates Only Including 'True Up' Filings Pursuant to the 'Presumed Factors' Order" or "Rate & Rule Including 'True Up' Filings Pursuant to the 'Presumed Factors' Order." On March 1, 2007, the Office issued its "Presumed Rating Factors" report, which estimated an overall statewide savings of 24.3 percent attributed to the changes to the CAT Fund made in Section 2 of Chapter 2007-1. The Presumed Factors included the savings from the new reinsurance made available to insurers under Chapter 2007-1 and the savings due to the elimination of the 25 percent rapid cash buildup provision of prior law. On March 15, 2007, FFB made their Presumed Factors filing using the "short form" process described in Informational Memorandum OIR-07-06M. FFB requested and received approval of an overall homeowners' insurance rate decrease of -24.5 percent. The effective date of the filings was to be June 1, 2007. On May 9, 2007, FFB made their "True Up" filing, which is at issue in this case. The first filing sought a rate increase of +26.8 percent, which when combined with the Presumed Factor filing would have resulted in a rate decrease for their policyholders of -3.6 percent. The effective date selected by FFB for their "True-Up" filing was October 1, 2007. On May 14, 2007, the Office acknowledged receipt of FFB's rate filing. In return, the Office asked 51 questions seeking catastrophe model support information in accordance with Section 627.0628, Florida Statutes (2006). The Office also requested that FFB update its statewide rate indications. On May 21, 2007, FFB responded to the Office's May 14, 2007, request by providing a document prepared by Applied Insurance Research (AIR) concerning the AIR model, which FFB had used in its calculations supporting its rate filing. On May 25, 2007, FFB updated the statewide indications and further amended their filing to divide the HO forms and the HXL Form 9. On June 22, 2007, FFB revised the May 9, 2007, filing, claiming that the revision had resulted from the "delay of Florida Farm Bureau Filing 07-15 (OIR Filing FCP 07-03807), the renegotiation of [their] 2007 reinsurance program, a systems restraint not previously accounted for, and to follow up after the March 15, 2004, effective rate filing." The effect of the amendment was that FFB was now seeking a +30.3 percent rate increase, which when combined with their Presumed Factor filing would have resulted in a rate decrease for their policyholders of -1.6 percent. Following its review of the amended filing, the Office asked a number of questions on July 2, 2007. FFB provided additional information in response to the questions on July 8, 2007. On July 10, 2007, a public hearing was held in Tallahassee, Florida, in accordance with Section 627.0629, Florida Statutes (2007),3/ to discuss the rate increase requested by FFB. By letter dated July 17, 2007, and forwarded to FFB on July 19, 2007, the Office issued its Notice of Intent to Disapprove the filing of FFB. The Office listed 12 deficiencies as its grounds for denying the rate filing. The parties have stipulated that items 7, 8, 11, and 12 of the NOI are no longer in issue. The remaining reasons for denial are listed below: The rate filing and requested rate fail to reflect a reduction in policyholder premiums consistent with the expansion of the Florida Hurricane Catastrophe Fund coverage contrary to the intent and requirements of HB1A. Company has not provided sufficient support that the reinsurance cost in the filing reflecting coverage levels, reinsurance premium amounts and expected recoveries does not result in excessive reinsurance cost related to services rendered not permitted per Section 627.062, F.S. Company has not provided sufficient support that Florida Hurricane Catastrophe Fund cost filing is consistent with tax exempt status of the fund. Company failed to completely respond to the Office questions for required disclosure of all assumptions and factors used by the Hurricane model as required by Section 627.0628, F.S. Company has failed to support use of model for Catastrophe losses other than hurricane. Company has failed to support that loss trend is not excessive. * * * Company has failed to support the trend procedure used to adjust hurricane model losses is appropriate and consistent with premium trending in the indications. Company has failed to support the allocation of reinsurance cost to territory in their territorial indications. DEFICIENCY 1: FAILURE TO REFLECT A REDUCTION IN POLICYHOLDER PREMIUMS CONSISTENT WITH THE EXPANSION OF THE CAT FUND FFB received a healthy rate increase in December 2006, ostensibly to alleviate the industry-wide increase in the reinsurance premiums. FFB had the majority of its reinsurance coverage in place by January 2007, and the reinsurance placed FFB at a one-in-190 year PML. FFB had intended to purchase additional reinsurance during 2007 in order to get the PML level closer to the one-in-250 year PML, which had been its goal in previous years. In January 2007, FFB had reinsurance with the CAT Fund, American Ag, and other private reinsurance providers brokered through AON. Chapter 2007-1 provided that the rate change had to consider the available coverage options provided by the expansion of the CAT Fund and provided that any additional cost for private reinsurance that duplicates the coverages offered by the CAT Fund could not be factored in determining the change in the rate. FFB estimates that $25,127,526 of its January 1, 2007, reinsurance premium duplicated the less expensive coverage available from the newly expanded CAT Fund. The estimated premiums for the CAT Fund coverage available after the enactment of Chapter 2007-1 were $7,555,058. The reinsurance treaty between FFB and American Ag contained a provision which allowed FFB to essentially cancel coverage which was duplicative of coverage provided by the CAT Fund as a result of legislative changes. FFB did not have such a provision in its treaties with its other private reinsurers. FFB's Third Master layer of reinsurance was placed with American Ag who, in turn, reinsured that coverage in the private reinsurance market. FFB was able to renegotiate the Third Master layer to remove the CAT Fund overlap because the contract required American Ag's reinsurers to amend the contract if the CAT Fund was amended. The First High reinsurance layer was placed through FFB's broker, AON, with a number of other private reinsurers. Since the treaties with these private reinsurers did not contain a provision similar to the American Ag treaty, these private insurers were unwilling to reduce the coverage with FFB to eliminate duplication from the CAT Fund. FFB had contracted to pay $15,750,000 for it First High coverage. The CAT Fund coverage would have eliminated all but $1.75 million of that premium. FFB had already paid a portion of the $15.75-million premium to it private insurers, and the reinsurers were resisting refunding the premium. FFB offered to purchase a third event coverage for the First High and to add a new top layer of $50 million coverage in return for a reduction of First High premium of several million dollars. The effective date of the renegotiated First High and the new Third High reinsurance contracts were made retroactive to January 1, 2007. FFB purchased a $30 million aggregate following the enactment of Chapter 2007-1 and the renegotiation of their reinsurance program. The increased reinsurance coverage resulting from the renegotiations with the private reinsurers brought FFB's PML more in line with its one-in-250 year goal. In order to determine the amount of reinsurance to purchase to bring it to its one-in-250 year goal, FFB used a near term sensitivity analyses on the AIR model "as a benchmark for its PML determinations and reinsurance program purchases." The near term sensitivity analysis was used in "response to requirements from rating agencies, such as A.M. Best." According to FFB, the use of the near sensitivity analyses "exceeds that of the normal '10K standard' event set and is used in preparation for A.M. Best's annual rating agency review, as required." FFB "believe[d] the version 8.2 representation of near term sensitivity to be overstated, but use[d] this analysis as required by A.M. Best." The use of the near term sensitivity model would result in an increase of the amount of reinsurance needed to reach the one-in-250 year PML. The increase in reinsurance coverage is being borne by the policyholders. As stated by Mark Crawshaw, FFB's expert witness: Generally, the more reinsurance FFB buys, the greater financial security FFB offers its policyholders. However, this greater security comes at a cost of greater reinsurance premiums which are passed on to the policyholders. In other words, there is a trade-off between the level of financial security and the cost of that security to policyholders. The Best's Financial Strength Ratings provide an objective basis for quantifying and evaluating this trade- off. FFB has failed to comply with the intent of the Legislature in Chapter 2007-1. It has failed to reflect in its rate filing the savings in the form of reduction in premiums to the policyholders that would be realized from the expansion of the CAT Fund and the reduction in CAT Fund premiums. DEFICIENCY 2: FAILURE TO PROVIDE SUPPORT THAT REINSURANCE COSTS DOES NOT RESULT IN EXCESSIVE REINSURANCE COST Item 2 addresses the Office's assertion that FFB has not provided sufficient support that the reinsurance cost in the rate filing reflecting coverage levels, premium amounts and expected recoveries does not result in excessive reinsurance cost related to services rendered. In reviewing the rate filing of FFB, the Office determined that FFB's reinsurance costs were significantly higher than the rest of the market. More significantly, the amount of catastrophe recoveries was both unsupported and understated. FFB's support for recoveries in the filing was reliance upon the AIR model, with the only information based on FFB's data for one month. Although believing that a recovery percentage of less than ten percent was an inadequate return given the cost of the reinsurance, the actuary for the Office was unable to independently verify the recoveries. FFB has failed to demonstrate that its reinsurance costs are not excessive related to the services rendered by the reinsurers. DEFICIENCY 3: FAILURE TO PROVIDE SUPPORT THAT THE CAT FUND COST IN THE FILING IS CONSISTENT WITH THE TAX EXEMPT STATUS OF THE CAT FUND Item 3 addresses the Office's assertion that FFB has not provided sufficient support to show that the CAT Fund cost is consistent with the tax exempt status of the CAT Fund. The CAT Fund makes no profit and as a tax exempt entity, has a very large investment income credit. The result is that the CAT Fund will basically pay more for losses to the insurance companies than they will collect in reinsurance premiums. In its rate filing, FFB did not consider the larger recoveries from the CAT Fund that would result from the CAT Fund's tax exempt status and did not provide sufficient support why the tax exempt status of the CAT Fund was not considered. DEFICIENCY 4: FAILURE TO DISCLOSE ALL ASSUMPTIONS AND FACTORS RELATING TO THE USE OF THE AIR MODEL Item 4 addresses the Office's assertion that FFB failed to provide access to all assumptions and factors in the AIR model which FFB used in its rate filing. Section 627.0628, Florida Statutes, provides that an insurer may use a model in a rating filing to determine hurricane loss factors when the model has been determined by the Florida Commission on Hurricane Loss Projection Methodology (Commission) to be accurate and reliable to determine hurricane loss factors, and the Office and the Consumer Advocate appointed, pursuant to Section 627.0613, Florida Statutes, have "access to all the assumptions and factors that were used in developing the . . . model . . . and are not precluded from disclosing such information in a rate proceeding." The AIR model 8.0 used by FFB has been determined acceptable by the Commission for projecting hurricane loss costs in rate filings. Thus, the issue remaining is whether the Office and the Consumer Advocate had access to the assumptions and factors used in developing the model. On May 14, 2007, after the Office received FFB's initial rate filing, the Office sent FFB a standard questionnaire consisting of 51 questions concerning the AIR model which FFB utilized. The same questionnaire is sent to all insurers who use models in their rate filings. As of the final hearing, no insurer has ever answered all the questions to the satisfaction of the Office. In other words, no insurer has physically given the Office all the assumptions and factors that were used in developing the model. This information is proprietary and is not given to the insurer by the company providing the model. The information is available only from the company providing the model. FFB asked AIR to respond to the questions. FFB provided the response prepared by AIR to the Office on May 24, 2007. Some of the responses provided that AIR would make the information available to the Office for review and would work with the Office to provide the information in an acceptable format. Because much of the information is proprietary and confidential, AIR was not willing to relinquish possession of the information to the Office. AIR has an office in Tallahassee, and staff of the Office could review the materials at the Tallahassee Office. By letter dated July 3, 2007, the Office advised FFB that the responses to the catastrophe model questionnaire were incomplete. On July 9, 2007, FFB provided the following response concerning the catastrophe model information requested: Florida Farm Bureau has provided the Office with all the formulas and functions available to us by AIR Worldwide, Inc. The catastrophe models are proprietary by their very nature and require extreme care in disclosure. The AIR model used in this filing was reviewed and accepted by the Florida Commission on Hurricane Loss Projection Methodology (Commission). Additionally, the AIR models are widely used and accepted in the insurance, reinsurance, and capital markets. Reasonability measures are taken and maintained by AIR and Florida Farm Bureau as explained in the IFILE Catastrophe Model Questionnaire. AIR Worldwide, Inc. has worked with and will continue to work with and will continue to be available to the Office regarding their catastrophe models. In complete cooperation with the Office, AIR has extended the availability of their personnel and models to the Office for review, including all formulas and functions, at their Tallahassee office. It is not the intent of AIR or Florida Farm Bureau to conceal any relevant or necessary information from the Office; the proprietary nature of the information simply demands that all protections are in place to keep trade secret information inside the AIR office and out of the public domain. Florida Farm Bureau has submitted its exposure data as requested by the Office to run in the public hurricane model. Although we do not have access to the inner workings of this model and cannot validate its results or methodologies, the Office seems comfortable with its results and has used its results as a reasonability check versus our results in past filings. The Office takes the position that making the information available at the Tallahassee office of AIR is not sufficient and does not provide access to the assumptions and factors requested by the Office. Thus, the Office did not avail itself of the opportunity to go to the AIR office in Tallahassee and review the information. The Office takes the position that FFB did not provide to the Consumer Advocate access to the assumptions and factors used in developing the AIR model. There was no evidence presented that the Consumer Advocate requested such information. In past filings, where no insurer has supplied the requested proprietary information concerning the catastrophe models used, the Office has used the Public Model to test the reasonability of the losses projected by the insurer using a vendor model such as AIR. In the instant case, the Office did submit the data provided by FFB to be inputted in the Public Model. The results of the Public Model showed approximately $5 million more in potential losses than FFB indicated in its rate filing based on the AIR Model. DEFICIENCY 5: FAILURE TO SUPPORT USE OF MODEL FOR CATASTROPHE LOSSES OTHER THAN HURRICANE The Office objected to the modeled figures used by FFB as support for its non-hurricane losses. The expert for FFB provided an analysis for non-hurricane catastrophe losses using FFB's actual historical losses without relying on the results of the model. The actuary for the Office conceded that FFB's expert used a reasonable analysis and the more common method of supporting the non-hurricane catastrophe losses. FFB has provided support through its expert at final hearing for the non-hurricane catastrophe losses. Therefore, the fifth deficiency is not viable and cannot serve as a basis for disapproving the rate filing. DEFICIENCY 6: FAILURE TO SUPPORT THAT LOSS TREND IS NOT EXCESSIVE In its Proposed Recommended Order the Office conceded that the methodology used by FFB's expert at the final hearing with respect to the loss trend was appropriate. Therefore, FFB has provided support that its loss trend is not excessive. DEFICIENCY 9: FAILURE TO SUPPORT THAT THE TREND PROCEDURE USED TO ADJUST HURRICANE MODEL LOSSES IS APPROPRIATE AND CONSISTENT WITH PREMIUM TRENDING IN INDICATIONS In its Proposed Recommended Order, the Office conceded that the methodology used by FFB's expert at the final hearing with respect to premium trending was appropriate. Therefore, FFB has provided support for a zero-percent loss ratio trend by assuming that the hurricane loss trend and the reinsurance premium trend were equal. DEFICIENCY 10: FAILURE TO SUPPORT THE ALLOCATION OF REINSURANCE COST TO TERRITORY IN TERRITORIAL INDICATIONS The tenth deficiency deals with FFB's allocation of the cost of reinsurance on a county-by-county basis. FFB allocated their cost of reinsurance by using the largest 200 storms in their model, rather than the entire 10,000 storm set. The 200 largest storms would invariably be in the more coastal counties and could lead to the coastal counties subsidizing the inland counties, which would be unfair discrimination. The use of the 200 largest storms as opposed to the 10,000 storm set does not support FFB's allocation of reinsurance cost to territory in their indications. In its Amended Petition, FFB alleges that the Office relied on an unadopted rule as a basis to support the NOI. Specifically, FFB alleges that the Office is interpreting Chapter 2007-1 [T]o essentially freeze insurers' reinsurance coverage levels and costs at whatever was already filed and approved for such insurers at the time HB 1A became effective (essentially the reinsurance coverage levels and costs for 2006), unless the change in 2007 reinsurance coverage levels or costs would result in a rate decrease. The Office does not interpret Chapter 2007-1 in the manner asserted by FFB. Chapter 2007-1 does not prohibit an insurer from having a greater amount of reinsurance in 2007 than it did in 2006, but Chapter 2007-1 does require that any savings that resulted from the expansion of the CAT Fund and reduced premiums of the CAT Fund be passed along to the policyholders.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that a final order be entered disapproving FFB's rate filing. DONE AND ENTERED this 1st day of April, 2008, in Tallahassee, Leon County, Florida. S SUSAN B. HARRELL Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 1st day of April, 2008.
