MITIGATION

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					       MITIGATION
                A Report Card on

      Florida’s Quest to Harden Homes




                     Prepared by

The Florida Association of Insurance Agents
                      PO Box 12129
               Tallahassee FL 32317-2129
      Telephone: 850-893-4155  Fax: 850-668-2852
                 Website: www.faia.com
                        Mitigation: A Report Card on Florida’s Quest to Harden Homes



                                         ABSTRACT

In 1992, the Miami-Dade County Building Code was among the strongest in America.
In the wake of Hurricane Andrew’s 170 mph winds, however, its vulnerabilities were so
pronounced they triggered a series of enactments lasting almost two decades. These
government reactions fall into two categories: one, issues dealing with new construction,
mostly the stringency and enforcement of building codes; and two, issues dealing with
retrofitting of existing structures. The two taken together constitute “mitigation” within the
meaning of this document.

It isn’t our intention here to bring new data or science to these issues. Rather it is to bring
to light the issues themselves—shortcomings of the current system—so policymakers
can learn whether legislation designed to harden Florida homes is working as intended.
This paper will imply, therefore, whether mitigation credits are appropriate and correctly
applied and whether consumers are receiving accurate information regarding the storm-
worthiness of their homes. It is our general conclusion that much is left to be done in both
regards.

This document is divided into the following sections:


       I.     HISTORY AND BACKGROUND

       II.    INAPPROPRIATE PREMIUM CREDITS

       III.   A FLAWED HOME INSPECTION SYSTEM

       IV.    CONCLUSION

       V.     SOURCES




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                       Mitigation: A Report Card on Florida’s Quest to Harden Homes



                  I. HISTORY AND BACKGROUND
Building Codes
Florida’s growing population and hurricanes from 1940 to 1960 began the debate on the
need for a statewide building code. A law was finally enacted in 1974 requiring local gov-
ernments to adopt and enforce “a” building code, but allowing each to do so by choosing
from one of four minimum standard models approved by the state. Under the 1974 enact-
ment, the state’s role was merely to promulgate minimum standards and revise the four
model codes, leaving adoption, enforcement, and amendment up to each municipality.

After Hurricane Andrew, Miami-Dade began an in depth review of its building code and
its enforcement, making significant changes in both respects. Outside of Dade County,
the Board of Building Codes and Standards (later the Florida Building Commission) em-
braced important enhancements to the four models and began licensing local enforce-
ment personnel. Then, in 1996, a study commission recommended revisions to the 1974
law, including a single statewide code with state oversight. For the most part, those rec-
ommendations were adopted by the 1998 Legislature.

Later, effective March 1, 2002, lawmakers implemented the first statewide building code
(SBC) in the entire United States, which supplanted all local codes (with one exception
cited below). The Florida Building Commission (FBC) is charged with annually reviewing
the code and its application, as well as national code enhancements and innovations,
so that new editions can be promulgated at least every three years. The first update oc-
curred in 2004 and included the following improvements:

         Increased design practices for homes from 100 mph to 110 mph;
         Higher standards to limit water intrusion through walls;
         Requirements for identifying pressure rating for windows on building plans and
          on window labels;
         Requirement for pressure ratings for garage and entry doors; and,
         Higher standards for roof covering wind ratings and testing.

Legislation enacted in 2006 (SB 1774) removed a lingering exemption from the state
code for the Northwest Florida Region, penned the Panhandle exemption.

Mitigation Premium Credits
Encouraged both by regulatory authorities and the insurance industry, lawmakers began
to recognize the important role that insurance premium credits could play in motivating
owners of existing structures to retrofit their properties. This included inspecting their
structures—owner and non-owner occupied dwellings, apartments, and individual units
and common areas of condominiums—in order to take corrective measures.




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                       Mitigation: A Report Card on Florida’s Quest to Harden Homes


One of the early and persistent challenges was for premium payers to understand that
home hardening was as much about protecting the lives and property inside the structure
as it was about achieving savings on an insurance policy. And, to a slightly lesser extent,
it was also about reducing the burdens of temporarily relocating people and possessions
in a storm’s aftermath. Much effort was (and is) expended explaining that wind mitigation
discounts apply only to the wind portion of the premium and that dollar discounts vary
according to the base premium of the carrier and the overall vulnerability of its book of
business.

While legislation regarding mitigation premium credits began as early as June 1, 2002
(§627.0629, F.S.), much of the current debate emerged a few months later with a 294-
page report commissioned by the Florida Department of Community Affairs (DCA) based
on research conducted by Applied Research Associates, Inc. (ARA). Its “relativity chart,”
outlining various mitigation factors and their impact on premium discounts, indicated a
level of credit that, even to casual observers, appeared elevated. Further, the report did
not have the benefit of empirical data that would soon be available from the eight storms
of 2004 and 2005.

The political climate prior to the 2004/2005 storms was markedly different than today.
Then, there was a focus on Citizens Property Insurance Corporation (Citizens) and its
depopulation—the process of keeping out and taking out policies. This was at a time
when consumer access to Citizens was only granted if no other voluntary market op-
tion was available, creating an incentive to make the writing of business more attractive
to voluntary carriers. In 2007 a foundation was laid for inflated premium credits when
lawmakers made Citizens a “competitive alternative.” This and the public quest for lower
premiums at any cost, perhaps, was the predicate for the Office of Insurance Regulation
(OIR) to move the “base” home in the ARA 2002 study to the “worst” case home, allowing
only credits to apply without any debits for poorly mitigated structures. Mathematically the
results so skewed premiums that later the discounts were reduced by half and the OIR
asked carriers to voluntarily adopt them as part of a continuing data-gathering record.
Some companies responded.

The Building Code Enforcement Grade
It should be noted that one of the first credits available soon after Hurricane Andrew, and
thus one of the first problems unearthed, was the result of lax code enforcement revealed
in the wake of Hurricane Andrew. The Florida Home Builders, insurers, regulators, and
policymakers felt lax enforcement was reducing the effectiveness of Florida’s building
codes. Ultimately, it was decided to give premium discounts based on enforcement levels
of a local code, known as the Building Code Enforcement Grade (BCEG). Later, when
mitigation credits became mandatory, the inconsistency of annually applying the BCEG
credit to homes already built under “enforced” building codes in addition to discounts
that usually flowed from an “enforced” code emerged as a persistent example of double
credits and a flawed implementation process as discussed in more detail below (see II.
Inappropriate Premium Credits).

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                        Mitigation: A Report Card on Florida’s Quest to Harden Homes


Consumer Information & Agent Education
Few deny a major component of mitigation is public information—that is…educating con-
sumers on the true value of home hardening and how to earn premium credits by improv-
ing their structures. Initially, insurance agents, who would be the front line for any public
information campaign, were only slightly more informed than consumers. Thus, two en-
actments occurred.

First, in 2005, lawmakers implemented CS/SB 1486 creating a new §627.711, F.S., which
required insurers to notify each policyholder at the time of policy issuance, and each
renewal thereafter, of all construction options and the cost impact of each. The form pre-
scribed by the OIR was to also explain the actions needed to obtain the discount. The
form and the range of discounts offered by each insurer would then be placed on the web-
sites of both the OIR and the Department of Financial Services (DFS). On December 8,
2005, the OIR issued Informational Memorandum OIR-05-22M, directing insurers to send
the completed form to all new and renewal policies beginning February 1, 2006. This
form, known today as the OIR-B1-1655, accompanies every residential policy, detailing
every mitigation credit available, how much can be saved, whether the homeowner has
the credit applied, its dollar and percentage impact, and how to obtain the credit if it is not
currently available.

When combined with another requirement for agents to allocate at least one hour of
mandatory continuing education to the subject of mitigation, the OIR-B1-1655 form virtu-
ally eradicated allegations as to any lack of knowledge by consumers and agents. Just
as important, the tandem enactments eliminated misplaced concern that agents were
withholding information about credits to keep from losing commissions. In fact, with such
complete “state designed” disclosure accompanying every policy and renewal, agents,
fearful of losing customers, were more often pushed to give undeserved credits. As dis-
cussed below, this phenomenon, which is the exact opposite of public pronouncements
by the governor and other public figures, would grow into a major problem undermining
Florida’s mitigation framework and is discussed in more detail below (see III. A Flawed
Home Inspection System).

Inspections and Inspectors
It became obvious early on that construction factors giving rise to mitigation credits need-
ed examination by qualified experts. Homes needed to be site visited, access to attics
obtained, and the quality of construction analyzed to determine if full credit was available.
Neither homeowners, agents, or company employees were qualified or inclined to per-
form such analysis, and…with millions of homes in need, there wasn’t sufficient time or
money to perform the inspections.

Thus was born a program of inspections and grants called My Safe Florida Home (MSFH).
The MSFH program provided inspections of site-built, single family, residential properties
at no cost to the homeowner. The inspections were conducted by state-trained certified
inspectors and were used to determine what mitigation measures were present or were

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                       Mitigation: A Report Card on Florida’s Quest to Harden Homes


needed to reduce the property’s risk of hurricane damage. By February 2008, the MSFH
program had processed over 200,000 home inspection applications and conducted over
167,000 free inspections in all 67 counties. It had also trained and certified over 2,100
hurricane mitigation inspectors and provided matching grants of up to $5,000 to qualified
homeowners for hardening their homes against hurricane wind damage. By all accounts
the MSFH program was a success.

At the conclusion of the 2009 legislative session, the MSFH program was allowed to ex-
pire effective June 30, 2009. Thus, the state no longer certifies wind inspectors. A list of
inactive inspectors associated with the program is provided on the DFS website at www.
mysafefloridahome.com, along with the dates they were active, to assist with verifying
the Uniform Mitigation Verification Inspection Forms (Form 1802). Form 1802 is in effect
today and used by carriers in determining premium credits. Unfortunately, the oversight
and incentives to mitigate and other benefits of the MSFH project have been terminated.

History of Mitigation Credits
In November 2006, at the request of Insurance Commissioner Kevin McCarty, the Finan-
cial Services Commission (FSC, basically the governor and Cabinet) doubled all mitiga-
tion discounts across the board, restoring them to levels in the original 2002 ARA study—
previously cut in half by OIR fiat. But, it was done with no allowance for the surcharges
contemplated for the “base” in the original study recommendations and in tandem with a
temporary moratorium on rate increases imposed by the “presumed factor” and subse-
quent “true up” filings implemented by the 2007 special session (HB 1A).

Also during the 2007 Special Session lawmakers created the Windstorm Mitigation Study
Commission. It was to investigate mitigation’s affect on hurricane losses and make a
report to the governor and Legislature by March 6, 2007, which it did in a report contain-
ing 55 recommendations divided into eight separate categories. Finally, the bill charged
the FSC with adopting a uniform home grading scale to measure the ability of a home to
withstand a hurricane. They were to work with the DCA and adopt the scale no later than
June 30, 2007; however, this provision was later repealed.

During the 2007 Regular Session, the Legislature passed CS/HB 7057, which required
the OIR, the DCA, and the Florida Building Commission (FBC) to conduct a study to as-
sure the validity of windstorm mitigation premium discounts. It also required the FBC to
develop recognized mitigation techniques for the building code by October 1, 2007, and
the OIR issued a contract to have the study completed by April 1, 2008.




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                                Mitigation: A Report Card on Florida’s Quest to Harden Homes



                                                    TIMELINE

                                                          1974            Building Code adopted by county.


                                                         August
Hurricane Andrew.
                                                          1992

                                                          1993            Building Code by county, four models only.

Commission recommends revisions to 1974 law.              1996


                                                          1998            Revisions adopted.


Applied Research Associates (ARA) Conducts                2002
Mitigation Credits Study.
March 1, Statewide Building Code (SBC) adopted.
                                                          2003            January 23, Informational Memorandum 03-001M
June 1, First legislated Mitigation Premium Cred-                         issued.
its implemented.
                                                          2004            SBC updated.


June 1, CS/SB 1486 Signed.                                2005

December 8, Informational Memorandum OIR-05-
22M issued.
                                                          2006            Property & Casualty Insurance Reform Committee
                                                                          February 1, Form OIR-B1-1655 Implemented.
January 25, CS/HB 1A Signed.                              2007            May 15, CS/CS/SB 1980 Signed.

February, OIR Disapproves ISO Advisory Rate                               July 1, Panhandle exemption to the SBC removed
System.                                                                   (CS/CS/SB 1774).
                                                                          November, Mitigation Credits Doubled.
February 27, Informational Memorandum 07-03M
issued.

June 12, CS/HB 7057 Passes
    My Safe Florida Home (MSFH) Program
    Created
    Windstorm Mitigation Study Commission                 2008            ARA Conducts Second Mitigation Credits Study.
    Created



                                                          2009            June 30, MSFH Program allowed to expire.




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                       Mitigation: A Report Card on Florida’s Quest to Harden Homes



            II. INAPPROPRIATE PREMIUM CREDITS

FAIA’s interviews and investigations have revealed that systemic problems with mitigation
can be summed with two questions. They are:

   1.     Based on legislative mandates and available scientific data, have the respon-
          sible regulatory agencies ordered or approved the implementation of mitigation
          credits consistent with lawmakers’ intent?

   And,

   2.     Is each available discount bestowed only on those who deserve it?

While a negative answer to either question might mean Florida’s mitigation scheme is
missing the mark by a wide margin, a negative answer to both questions means it most
assuredly is. Unfortunately we found the answer to both of these very important questions
to be a resounding “NO!”

Based on interviews with experts and review of available data from the OIR, DFS, and
other sources, we consistently found a strong belief that implementation of indicated miti-
gation credits was not done properly by the OIR. Even ARA’s 2008 study, commissioned
by the OIR, stated as much (see below).

Research for the second question above, dealing with whether those receiving the credits
deserve them, is a bit more anecdotal, but also less obscured by scientific terminology
and mathematics and is fully discussed below (see III. A Flawed Home Inspection Sys-
tem).

Flawed Implementation by the OIR
With respect to the OIR’s oversight and implementation of mitigation credits, there ap-
pear to be two studies of relevance, both conducted by ARA (Applied Research Associ-
ates). The first, referenced above, was the original 2002 study which prompted the OIR
to reduce the credits by half and then later double them. It should also be noted that the
second report was on a bid basis from an OIR RFP and that, despite AIR underbidding
by $100,000, it was “scored” higher by the OIR and ARA was awarded the opportunity
to do a second study. The second ARA study was critical of the OIR’s interpretation and
implementation of its first report. One of its more telling conclusions regarding the imple-
mentation of its first study was:

   Wind mitigation rate differentials should be implemented as part of a multi-
   faceted program that:




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                       Mitigation: A Report Card on Florida’s Quest to Harden Homes


   1.     Requires accurate determination of the presence/absence of wind mit-
          igation features.

   2.     Encourages building owners to invest in cost-effective mitigation to
          achieve lower rates.

   3.     Encourages insurance companies to collect wind mitigation data
          on their portfolio of buildings so that rates can be accurately deter-
          mined.

   4.     Provides for adequate and fair rates for insurance companies. The
          implementation of rate differentials should be a “win-win” situation for
          the insurance companies and the building owner.

   5.	    Encourages	reinsurance	programs	to	reflect	the	actual	distribution	of	
          wind mitigation features within an insurance company portfolio.

   6.     Promotes continued improvements to the Florida Building Code.

   7.	    Promotes	validation,	updates,	and	refinements	to	loss	mitigation	mod-
          eling, building ratings, and rate differentials.


Since the ARA’s second report has not received much public exposure and we are not
aware of any plans for implementation, we produce here two of ARA’s more telling com-
ments about the implementation of its first study:

         “A program that neglects one or more of these facets will underper-
          form. Florida’s implementation of its wind mitigation program needs
          significant	improvement.”

         “We do not think implementation has been very successful in Florida,
          since it is viewed as an “insurance credit program” and the empha-
          sis has been on getting “credits” vs. cost-effective mitigation with the
          mitigation costs largely offset by reduced insurance premiums over
          time.”

Ten Basic Questions
Persistent complaints from carriers, data showing generous credits awarded without the
necessity of an upgrade, conclusions by ARA regarding OIR implementation, and calcula-
tions that yielded “negative” premiums are the foundation for the following set of ten ques-
tions of the OIR regarding its implementation of credits. Hopefully, the answers will give
rise to appropriate discounts and surcharges, so that Florida’s quest to harden its homes
can move forward as intended.

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                 Mitigation: A Report Card on Florida’s Quest to Harden Homes


1.   The Florida Building Code Mitigation Credits Statute, §627.0629, F.S., led to
     the OIR’s commissioning of the 2002 ARA study. Since the Florida Commission
     at that time had accepted multiple catastrophe models (AIR, RMS, EQE) from
     firms whose models all had the capability to perform similar studies, and those
     models were commonly used to set the hurricane loss costs underlying most
     insurers’ base rates, why was only one alternative firm chosen to perform the
     study?

2.   The 2002 ARA report did not study mitigation benefits for apartments or condo-
     miniums, yet the OIR required the resulting premium modifiers to be applied to
     HO-4 and HO-6 policies. Why, and upon what basis, was this done?

3.   The 2002 ARA report did not study mitigation of non-hurricane losses (e.g.
     “other wind” or tornado/hail), yet the OIR required the resulting premium modi-
     fiers to be applied to the entire wind portion of premiums. Why? (Note that
     hurricane premiums were already separately reported due to another section
     of §627.0629, F.S., and so could have easily been separated from other wind
     premiums.)

4.   OIR Memo 03-001M ordered that the premium modifier tables from the 2002
     ARA study be converted to tables of credits only by re-scaling the tables so
     that the weakest home—which in Terrain Category B (urban/suburban) carried
     a modifier of 2.37 or +137 percent from base premium—was the base. This
     resulted in significant enlargement of all premium credits, such as the most fa-
     vorable modifier of 0.41, or a -59 percent premium credit, re-scaling to 0.19 or
     an 81 percent premium credit. In its discussion and tables, ARA explicitly noted
     what type of home (which combination of construction and mitigation features)
     should be considered the “average” underlying current base rates. Why did the
     OIR not adhere to this conclusion in the study?

5.   Despite the fact that mitigation credits reflect building code quality, as do the
     BCEGS credits required by statute, rather than allow the BCEGS credits to be
     superseded by the mitigation credits, the OIR allowed them to be tempered
     by only 25 percent. In other words, both a BCEGS credit and an overlapping
     mitigation credit were required. This tempering survives to this day in insurers’
     approved rating plans. What was the rationale for the limitation to a 25 percent
     reduction in the existing BCEGS credits?

6.   Having not followed the ARA recommendations scaling the credits to the weak-
     est homes instead, the OIR ultimately conceded that credits could be imple-
     mented at one-half of the OIR’s converted amounts, but required that insurers
     did not adjust their base rates upward to reflect the weakest home as the base
     to which the credits should be applied. An alternative would have been simply
     allowing normal rate filings under existing laws and rules, which would have


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                   Mitigation: A Report Card on Florida’s Quest to Harden Homes


      actuarially rebalanced the base rate to the credits. Why was this “quid pro quo”
      approach necessary?

7.    In 2006, the Legislature enacted SB 1980, which added a section to §627.0629,
      F.S., requiring the OIR to “re-evaluate” the existing mitigation credits “based on
      actual experience or any other loss relativity studies.” The OIR chose to simply
      require that the full ARA credits be adopted in drafting Rule 69O-170.017. Un-
      der what logic did this qualify as a “re-evaluation” per the statute?

8.    Rule 69O-170.017 noted that base rates could be actuarially rebalanced when
      the full credits were adopted and required filings by March 15, 2007. However,
      after HB 1A was enacted in Jan. 2007, the OIR issued an Emergency Order,
      which prohibited any rate increases. Then, in Memo 07-03M, the OIR required
      that the mitigation credit filings proceed anyway with no adjustment to base
      rates. It follows that the resulting rates without actuarial rebalancing, for any
      insurer, would be inadequate even if they were adequate prior to the filing. How
      would this combination of requirements square with the general requirement in
      §627.062, F.S., that rates be adequate, not excessive, and not unfairly discrimi-
      natory?

9.    Rule 69O-170.017 also noted that alternative systems of mitigation modifiers
      could be used as long as actuarial justification was provided. A long-standing
      alternative system of modifiers had been adopted by the Insurance Service Of-
      fice, Inc. (ISO), since the 2003 statutory implementation, based on the AIR hur-
      ricane model. The OIR had approved this system in ISO’s advisory rate filings
      every year since 2003. In Feb. 2007, the OIR disapproved the same system
      of credits despite the fact it had been ruled acceptable for several years. What
      made a previously acceptable system unacceptable?

10.   The OIR re-commissioned a study of residential mitigation modifiers in Dec.
      2007 after receiving an appropriation of $700,000 from the Legislature in
      2007’s regular session. Despite a bid lower by $100,000 by AIR, the OIR chose
      to award the study to ARA again. The study was completed in late summer of
      2008. What are the OIR’s plans, if any, for implementing the results of the 2008
      ARA study?




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                       Mitigation: A Report Card on Florida’s Quest to Harden Homes



         III. A FLAWED HOME INSPECTION SYSTEM
Of course, even if all premium credits were based on valid science and applied appropri-
ately to actuarially sound insurance premiums, if they are bestowed on those who do not
deserve them, the system is still undermined. The purpose of credits, to incentivize the
hardening of homes, can’t have full impact when those who receive the credits don’t have
to perform the upgrades. A resulting tragedy is also that many homeowners are lead to
believe their homes are safer than they really are.

At the macro level, one consequence is that Florida’s housing stock is not being upgraded
as it could, or should be. This not only means carriers are more exposed, but over time,
reinsurance is more expensive than it otherwise would have been. This places upward
pressure on the base premiums of all Floridians, even those with hardened homes. The
following statement, taken from the 2008 OIR commissioned study by ARA, speaks vol-
umes about the broader negative effects of flawed implementation:

   “We note that a 1% reduction in average annual residential loss in Florida
   would amount to an annual statewide loss reduction savings of about $50
   million in 2008 dollars. Each 1% loss reduction that we can wring out of
   new construction (through FBC improvements) and existing construction
   (through mitigation) will result in long-term exponential reductions in state-
   wide losses.”

Fraud at the Retail Level
There appears to be both “active” and “passive” fraud occurring at the retail level, the
latter being the most prevalent and contingent upon competitive factors and lack of any
government oversight.

One scenario--An inspector or inspection company hungry for business does drive-by in-
spections or otherwise short circuits the process, resulting in credits being awarded where
credits are not due (active fraud). Rumors of how to get lower premiums spread around
the neighborhood, inducing those nearby to get the same inspectors. This phenomenon
implodes around agents who can only keep (or attract) customers with the lower price
that comes from recommending the same inspectors who gave rise to the problem in the
first place (passive fraud). And, as usual, everybody’s happy until the wind blows. The
carrier didn’t collect enough premium and the homeowner is upset because his fully cred-
ited roof is in his neighbor’s front yard and his family is living at a Motel 6.

Our investigations, based on field reports from agents, underwriters, and inspectors, are
mostly anecdotal and don’t address frequency. However, reinspection programs by carri-
ers, as explained below, confirm the fraud problem appears to be broad, and is even more
pronounced in some geographic areas.




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                        Mitigation: A Report Card on Florida’s Quest to Harden Homes


Some Examples
Often a homeowner is promised that the inspection fee, which may run around $150
(sometimes more or less), is “guaranteed” to be offset by premium savings resulting from
the inspection. This is partially why the average premium savings of “getting your home
inspected” is purported to be 16 percent “without incurring the cost of any upgrades.” And,
on rare occasions we found an agent was paid a “finders” fee for referring customers to
inspectors with a reputation for either being intentionally generous (active fraud) or fre-
quently careless (passive fraud).

There have been a few reported instances where insurance agents, urged by a client
complaint about an accurate inspection report, recommended another, alternate, inspec-
tion from a firm allegedly more likely to give an undeserved credit. Sometimes, clients
show up at an agent’s office saying they want to get the same credits that their neighbors
have and “why don’t you use that inspection company?” Another report we received re-
vealed that one or more inspection companies were giving agents $25 gift cards for every
inspection of $125 or more.

There are, of course, a few unfortunate examples of blatant, perhaps felonious, fraud.
In at least one instance, an inspector and an agent were cooperating with each other to
give false inspection reports and undeserved credits. In another, the parties had actually
preprinted uniform mitigation forms, so they only needed to change the name and ad-
dress of the homeowner when submitting it to companies. One inspection company was
pre-signing blank reports for a fee.

Inspections and Re-inspections
Perhaps the best information on the extent of fraud at the retail level can come from re-
inspection reports. This is, essentially, a second opinion request prompted by an insur-
ance underwriter who receives an inspection report that appears suspicious—maybe it
doesn’t match the location or area of the home concerned, or perhaps is signed by an
unqualified inspector. A second opinion inspection is normally carried out by an insurer-
approved inspection company at the time of underwriting.

A re-inspection program is a more broad application of the same concept. Carriers become
more proactive and conduct studies via re-inspections of a portion or all of their policies or
applications. Some have already done pilot studies and some are in the process. Mitiga-
tion credits that do not appear correct are red flagged and bundled for re-inspection. For
example, comprehensive hurricane protection on a home in Orange or Marion Counties
would naturally generate attention of an underwriter.

The concept of re-inspections, then, is not only testament to the existence of mitigation
fraud, it’s an example of how fraud is adding another avoidable cost to the system.

Our interviews reveal re-inspection reports showing error ranges from 55–80 percent,
depending on the region. While only one section of the report needs to be incorrect to

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                        Mitigation: A Report Card on Florida’s Quest to Harden Homes


constitute “erroneous,” the highest error ratio from a re-inspection was almost 82 percent
erroneous. It was interesting, for example, that the Wind Borne Debris regions appear to
be more prone to errors allegedly due to the size and value of the discounts.

One company underwriter reported that 90 percent of “independent” inspector reports
will give credits to the homeowner for the Florida Code compliance, whereas the same
percentage of the Wind Certification Entities (WCEs) through the MSFH program will not
grant the same credit. This is likely a result of MSFH holding the WCEs to strict compli-
ance and quality assurance requirements. The statutes were definitive on one hand as to
which individuals can certify an 1802 form, but on the other hand stated the WCEs had to
comply with strict Quality Assurance guidelines under their state contract. It seems logical
to require everyone who can complete a mitigation verification form to comply with the
highest possible standards and the most comprehensive levels of quality assurance.

Insurer Inspection Fraud
It should be noted that even though an insurance company will collect less premium and
still have greater exposure to loss by extending a false credit, the incentive still exists for
an insurer to acquire policies and premiums in the short run by granting false credits. This
can occur through an insurer’s tolerance of false inspection reports or construction char-
acteristics (passive fraud) or the promotion and encouragement of such reports by either
consumers or inspectors (active fraud).

In one instance, a direct response Internet insurer was discovered applying false credits
to virtually all new applicants, in part by encouraging them to request, or to state, that their
homes had construction characteristics which they did not have.

In this instance, the Building Code Enforcement Credit (BCEG), only available to homes
built after 1992, was granted to homes built in 1952 (or any date for that matter) with the
conflict clearly present on the face (dec page) of every policy. This same carrier was not
requiring inspections (in violation of its certificate of authority) and was granting hip-roof
credits to homes clearly identifiable as gabled. This attempt to capture short-term market
share would eventually, in all likelihood, lead to sticker shock at a future renewal, when
the bait and switch nature of the scheme would come to roost.

Within short order, over 35,000 new policies were written under these false pretenses.
Regrettably, to keep from losing business, competitors were pushed to do likewise for,
what may have been thousands more policies, thus creating perhaps the perfect example
of how lax enforcement can very quickly undermine Florida’s entire mitigation system.
We also discovered at least one report of “kickbacks” being requested by an insurance
company for referring customers to a specific inspection company.

Whether an insurer, agent, inspector, or consumer, one consistent theme we uncovered
is that a public message emphasizing only premium savings appears to justify fraud in



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                        Mitigation: A Report Card on Florida’s Quest to Harden Homes


the minds of those committing it, especially when, as in this instance, there is little or no
oversight or enforcement.

Potential Solutions to Retail Fraud
The following are just some initial recommendations that could be considered in an at-
tempt to prohibit retail level fraud:

   1.     Prohibit any corporate affiliation between entities in the mitigation inspection
          chain—i.e. agents and inspectors or insurers and inspectors.

   2.     License and regulate those who perform inspections and establish penalties for
          false reports based on the “knew or should have known” standard.

   3.     Prohibit any exchange of value between any homeowner, agent, inspector, in-
          surer or inspection company for referrals, fee splitting, advertising, etc.

   4.     Prohibit the tying of an inspection fee to anything else of value, particularly an
          insurance premium.

   5.     Create and properly fund a bureau within the appropriate regulatory office dedi-
          cated to mitigation fraud, inspector licensing and quality assurance.

   6.     Require independent reinspection programs for carriers utilizing employee
          CSRs and/or agents and an annual report to the OIR of the results.




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                       Mitigation: A Report Card on Florida’s Quest to Harden Homes



                                 IV. CONCLUSION
Often forgotten is the tremendous cost if we do not implement the full multifaceted miti-
gation scheme referenced in the 2008 ARA study. When opportunities to achieve a fully
hardened stock of homes are squandered in favor of “improper,” short term premium
savings, it may create a favorable public response, but…Florida’s future is mortgaged in
exchange.

Consider that the unregulated, global reinsurance market, charges carriers based on
scientific models (AIR, RMS, EQE, etc.) that make no allowance for local politics or mis-
applied mitigation credits. Surplus accumulation for future storms is impossible when car-
riers are sandwiched between higher reinsurance costs and inadequate retail premiums.
Overall rate suppression, combined with inflated mitigation credits, is the deadly combi-
nation discouraging new capital from coming to Florida and causing existing capital to
leave—even after three and a half seasons without a single storm.

And…when carriers are less able to profit by insuring mitigated homes, they insure those
less mitigated. This puts the more hardened structures in Citizens. Over time, the result
is a complete perversion of Florida’s “market of last resort” concept.

Finally, and most disastrous, is that homeowners are lead to believe their homes are safer
than they really are. Lives that could’ve been saved will be lost. Families that could’ve
remained intact will be disrupted or torn apart. And…Florida’s long-term capacity to self-
sustain in the face of a major storm is entirely defeated.

The crisis of availability and affordability in Florida and its causes can be debated by all
concerned, but…if Florida’s housing stock was entirely built to withstand hurricane force
winds, we would have no crisis at all. If nothing else is accomplished from this paper
but the creation of dialogue that might lead to a more effective mitigation system, it has
achieved its purpose.

Those who can change Florida’s policies, regulations, and laws need to examine the
questions herein carefully and react accordingly. We believe if that is done, the harm of
the current system will become apparent and the case for reform will be so compelling it
cannot be ignored.


The Florida Association of Insurance Agents




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                       Mitigation: A Report Card on Florida’s Quest to Harden Homes



                                      V. SOURCES
Written by Scott Johnson, AAI, CAE, executive vice president of the Florida Association
of Insurance Agents (FAIA), this document drew from existing reports, research papers,
and studies available and indentified below. In addition, interviews were conducted with
experts in mitigation and underwriting, including: insurer executives and underwriters,
independent actuaries, insurance consultants, attorneys representing insurers, represen-
tatives of insurer trade groups, representatives of Florida’s top inspection firms and state
certified inspectors and WCEs, insurance agents, employees of Citizens, and academi-
cians, including those with the Florida Catastrophic Storm Risk Management Center at
Florida State University.


Published Studies and Research Papers

2007 Windstorm Mitigation Study Committee. Report to the Florida Legislature. March 6,
2007.

Applied Research Associates, Inc. Final Report: Evaluation and Report on the Insurability
  of Attached and Free Standing Structures. May 1, 2007.

———. 2002 Development of Loss Relativities for Wind Resistive Features of Residential
  Structures. ARA, 2002a.

———. 2002 Development of Loss Relativities for Wind Resistive Features of Residential
  Buildings with Five or More Units. ARA, 2002b.

———. 2008 Florida Residential Wind Loss Mitigation Study.

Florida Department of Financial Services; Alex Sink, chief financial officer. My Safe Flori-
   da Home 2008 Annual Report. <http://www.MySafeFloridaHome.com>.

Property and Casualty Insurance Reform Committee, Lt. Governor Toni Jennings, chair.
   2006 Final Report. November 15, 2006.


Presentations

Torres, Tami. My Safe Florida Home Presentation to Senate Government Operations Ap-
   propriations Committee. February 3, 2009.

Risk Management Services, Inc. Hurricane Mitigation Analysis Presentation. November
   13, 2008.



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                      Mitigation: A Report Card on Florida’s Quest to Harden Homes


Relevant Rules and Memoranda

69O-170-017. Windstorm Mitigation Discounts.

69OER07-3. Transition Provisions for the use of the Uniform Mitigation Verification In-
  spection Form by the “My Safe Florida Home” Program. June 2007.

Informational Memorandum OIR-07-03M. Premium Discounts for Hurricane Loss Mitiga-
    tion. Office of Insurance Regulation. February 27, 2007

Informational Memorandum OIR-07-14M. Notice of Premium Discounts for Hurricane
    Loss Mitigation. Office of Insurance Regulation. September 14, 2007.

Informational Memorandum OIR-03-001M. Implementation of Revision to Section
    627.0629(1), F.S. Concerning Residential Property Insurance Rate Filings. Office of
    Insurance Regulation. Effective June 1, 2002.

Informational Memorandum OIR-07-06M. Presumed Factor Filings. Office of Insurance
    Regulation. March 7, 2007.




For more information email: sjohnson@faia.com.




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                       Mitigation: A Report Card on Florida’s Quest to Harden Homes



                                          INFORMATIONAL MEMORANDUM
                                                      OIR-03-001M
                                                         ISSUED
                                                   January 23, 2003
                                             Office of Insurance Regulation
                                                   Kevin M. McCarty
                                                         Director


All Property and Casualty Insurers Authorized to Write Residential Property Insurance
                                in the State of Florida

Implementation of Revision to Section 627.0629(1), F.S. Concerning Residential Property
                        Insurance Rate Filings, Effective June 1, 2002

 Supplement to INFORMATIONAL MEMORANDUM 02-0470M issued on June 6, 2002

 The purpose of this memorandum is to assist insurers with the filing requirements for this
 referenced statutory revision. The Department has analyzed the study, Development of Loss
 Relativities for Wind Resistive Features of Residential Structures commissioned by the
 Florida Department of Community Affairs, and created suggested sets of credits for new and
 existing construction. These suggested credits are available on the Department’s website and
 are intended to facilitate filing preparation and review as well as simplify administration and
 application of such credits.

 For existing construction, the Department’s analysis combined Tables 6-1, 6-2, and 6-4 from
 the above-referenced study. For purposes of determining credits, all of the relativities were
 divided by the existing construction relativity for the non-FBC equivalent roof cover, roof
 deck attachment A, roof-wall toe nails connection, and no opening protection for Terrain B
 and C, respectively. This approach was confirmed as appropriate with the firm that
 conducted this study. Credits were then determined and tempered by 50%. This tempering
 was applied in view of the large rate changes which might otherwise be induced, the
 approximations needed to produce practical results (such as the specifications of the houses
 used for modeling and the number of rating factors used), and the potential for differences in
 results using different hurricane models. As filers become able to measure the effects of
 implementation accurately, this tempering must be curtailed. An examination of the resultant
 credits indicated that the differences between the credits for certain fixtures/techniques were
 minimal. The suggested credits, therefore, combined the credits for the following
 fixtures/techniques:

    1 Roof Deck Attachment D and Roof Deck Attachment C.
    2 Hurricane Opening Protection for All Openings and Windows Only.
    3 Basic Opening Protection for All Openings and Windows Only.
    4 Braced Gable Roof Shape and Unbraced Gable Roof Shape.




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                       Mitigation: A Report Card on Florida’s Quest to Harden Homes



The suggested additional credits for Masonry and Reinforced Masonry Construction were
eliminated recognizing the fact that insurers currently use construction type in the rating of
their policies and will continue to do so.

For new construction, the Department’s analysis combined Tables 6-6 and 6-7 from the
above-referenced study. For purposes of determining credits, all of the relativities were
divided by the existing construction relativity for the non-FBC equivalent roof cover, roof
deck attachment A, roof-wall toe nails connection, and no opening protection for Terrain B
and C, respectively (the Terrain C relativity was used for the High Velocity Hurricane Zone).
This approach was confirmed as appropriate with the firm that conducted this study. Credits
were then determined and tempered by 50%. This tempering was applied in view of the
large rate changes which might otherwise be induced, the approximations needed to produce
practical results (such as the specifications of the houses used for modeling and the number
of rating factors used), and the potential for differences in results using different hurricane
models. As filers become able to measure the effects of implementation accurately, this
tempering must be curtailed. An examination of the resultant credits indicated that the
differences between the credits for certain fixtures/techniques were minimal. The suggested
credits, therefore, combined the credits for the following fixtures/techniques:

   1 Dimensional Lumber Deck and Other Roof Deck.
   2 Terrain B and Terrain C - Wind Speed ≥ 120, Wind Borne Debris Region.
   3 High Velocity Hurricane Zone and Terrain C.
   4 Terrain B FBC Wind Speed = 100, all Wind Speeds of Design.
   5 Terrain B FBC Wind Speed = 110, all Wind Speeds of Design.
   6 Enclosed and Partially Enclosed Structures.
   7 Opening Protection – All Openings and Windows Only.

The suggested additional credits for Masonry and Reinforced Masonry Construction were
eliminated recognizing the fact that insurers currently use construction type in the rating of
their policies and will continue to do so.

These suggested sets of credits contemplate the elimination of insurers’ current windstorm
protective devices (i.e. shutter) credits. Insureds who currently qualify for a windstorm
protective devices credit should at least qualify for a Basic Opening Protection credit.

Insurers should continue to give Building Code Effectiveness Grading Schedule (BCEGS)
credits to those insureds that qualify for such credits. The Department suggests tempering
these credits by 25% to eliminate any overlap between these credits and the suggested
windstorm loss reduction credits.

The Department is willing to consider the reduction or elimination of new home discounts on
wind premiums for homes that qualify for new construction credits.

Questions regarding this memorandum may be directed to Ken Ritzenthaler. He can be
contacted at (850) 413-5314 or ritzenthalerk@dfs.state.fl.us.




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                               Mitigation: A Report Card on Florida’s Quest to Harden Homes



                                                           INFORMATIONAL MEMORANDUM
                                                                        OIR-05-22M
                                                                           ISSUED
                                                                     December 8, 2005
                                                            Florida Office of Insurance Regulation
                                                             Kevin M. McCarty, Commissioner




                      To All Property and Casualty Insurers in the State of Florida

                             Premium Discounts for Hurricane Loss Mitigation

During the 2005 Legislative Session, the Florida Legislature passed Senate Bill 1486 creating Section 627.711, Florida
Statutes, titled “Notice of premium discounts for hurricane loss mitigation.”

Section 627.711, Florida Statutes: Using a form prescribed by the Office of Insurance Regulation (Office), the insurer
shall at the issuance of a new policy and at each renewal, clearly notify the applicant or policyholder of any personal
lines residential property insurance policy of the availability and the range of each premium discount, credit, other rate
differential, or reduction in deductibles for properties on which fixtures or construction techniques demonstrated to
reduce the amount of loss in a windstorm can or have been installed or implemented. The prescribed form shall
describe generally what actions the policyholders may be able to take to reduce their windstorm premium. The
prescribed form, and a list of such ranges approved by the Office for each insurer licensed in the state and providing
such discounts, credits, other rate differentials, or reductions in deductibles for properties described in this subsection,
shall be available for electronic viewing and download from the Department of Financial Services or the Office
Internet website. The Financial Services Commission may adopt rules to implement this subsection.

The aforementioned form is available on the Office website at http://www.floir.com/HotTopics_Other.htm. The
Office has initiated the Rule Making Process to adopt this form. The Office has held both a Rule workshop and a Rule
Hearing.

There is an example of a partially completed form on the aforementioned website for insurers who have filed and
adopted the credits published by the Office. For insurers that have adopted the Insurance Service Office (ISO) credits,
a partially completed form is available from ISO.

Forms should be submitted electronically, no later than January 31, 2006, using the online application also found at
http://www.floir.com/HotTopics_Other.htm. This online application is similar to I-File in that it will prompt you to
create an account. You will then select the appropriate company name and line of business, complete the online form
and submit the form to the Office. This online application will be available starting December 15, 2005.

Should any questions arise, please direct them to Michael Milnes at (850) 413-5306 or Michael.Milnes@FLDFS.com.




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Mitigation: A Report Card on Florida’s Quest to Harden Homes




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                       Mitigation: A Report Card on Florida’s Quest to Harden Homes



       69O-170.017 Windstorm Mitigation Shutter Discounts.

       (1)(a) This rule applies to all residential property insurance rate filings filed on or

after January 1, 2007. All residential property insurers must make new filings by March

1, 2007, to reflect the requirements in this rule. For the purpose of determining

appropriate discounts, credits, rate differentials, or reductions in deductibles for

residential properties on which shutters or other wind mitigation devices or fixtures have

been installed, pursuant to Section 627.0629(1), Florida Statutes, any rate filing which

provides discounts, credits, rate differentials, or reductions in deductibles consistent

with any statewide rating organization plan currently approved pursuant to Section

627.062, Florida Statutes, shall be considered in compliance with the applicable

requirements of Section 627.0629(1), Florida Statutes.

       (b) A rate filing which does not provide at least the same level of discounts,

credits, rate differentials, or reductions in deductibles as specified in such a plan will be

disapproved, unless the insurer demonstrates that the discounts, credits, rate

differentials, or reductions comply with the requirements of Sections 627.062 and

627.0629(1), Florida Statutes.

       (2) Section 627.0629, F.S., states that discounts on an actuarially reasonable

basis or appropriate reductions in deductibles must be provided in the rates for

residential property insurance for fixtures or construction techniques, including minimum

provisions of the Florida Building Code which have been demonstrated to reduce

windstorm loss. The discounts must reflect the discounts as set forth in Form OIR-B1-

1700, “Windstorm Mitigation Discounts; Non-Single Family Residences" (10-06) and




                                                  1




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                        Mitigation: A Report Card on Florida’s Quest to Harden Homes



Form OIR-B1-1699 "Windstorm Mitigation Discounts; Single Family Residences" (10-

06), which are incorporated by reference, and which are based upon the studies

Development of Loss Relativities for Wind Resistive Features of Residential Structures

and Development of Loss Relativities for Wind-Resistive Features of Residential

Structures of Five or More Units. These discounts must be used without any

modification unless they are supported by detail alternate studies where all

assumptions are available to the Office for review. These public domain studies

providing data and information on estimated loss reduction for wind resistive building

features in residences are incorporated by reference, and are available for downloading

at the website of the Florida Department of Community Affairs, at

http://www.floridadisaster.org/brm/RCMP/Wind%20Loss/ and

http://www.floridadisater.org/brm/RCMP/Wind%20Loss/index2.htm respectively. The

forms are available for downloading at the Office’s website at www.floir.com. Any

insurer that has implemented a residential property rate filing on or after July 1, 1994,

that does not provide at least the level of discounts, credits, rate differentials, or

reductions in deductibles provided for in an approved rating plan referenced in

subsection (1) above, or otherwise comply with the requirements of Section

627.0629(1), Florida Statutes, shall make a shutter discount filing immediately.

       (3) Filings can modify other rating factors to reflect revenue impact on current

business only if they have actual information on policies receiving the discounts

currently to support the modification. An insurer shall provide to residential property

insurance policy applicants at the time of procurement of the policy application actual

notice of the availability of discounts, credits, rate differentials, or reductions in




                                                   2


                                                    23
                        Mitigation: A Report Card on Florida’s Quest to Harden Homes



deductibles, as well as all requirements that must be satisfied in order to qualify for such

discounts, credits, rate differentials or reductions. For all residential property insurance

policies in force on the effective date of this rule, an insurer shall, at the next renewal,

provide such actual notice to the policyholder. After once providing such actual notice to

a policyholder or policy applicant, an insurer shall not be required to again provide such

notice at the time of renewal of the policy unless the insurer implements changes to its

discounts, credits, rate differentials, reductions in deductibles, or requirements that must

be satisfied to qualify for such discounts, credits, rate differentials, or reductions. Failure

to provide such notice shall be considered a violation of Section 626.9541(1)(a)1.,

Florida Statutes.

Specific Authority 624.307(1), 624.308(1) FS. Law Implemented 624.307(1),

627.062(1), (2)(b), (e), (f), (g), 627.0629(1) FS. History–New 4-1-98, Formerly 4-

170.017, Amended ___________.




                                                   3


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Mitigation: A Report Card on Florida’s Quest to Harden Homes




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                           Mitigation: A Report Card on Florida’s Quest to Harden Homes




                                                        INFORMATIONAL MEMORANDUM
                                                                OIR-07-06M
                                                                  ISSUED
                                                                          March 07, 2007
                                                            Florida Office of Insurance Regulation
                                                               Kevin M. McCarty, Commissioner



                                   To All Licensed Residential Property Insurers
                                                  Presumed Factors Filings


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, 2007, 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 the rates currently in effect, and the
elimination of the 25% rapid cash buildup portion of the insurer’s Florida Hurricane Catastrophe Fund premium. 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 to be
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.



                                                               1


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                                Mitigation: A Report Card on Florida’s Quest to Harden Homes


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 of 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 procedure 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.”

If you have any questions regarding the filing process, please contact Mike Milnes, Deputy Director, Property and
Casualty Product Review, Florida Office of Insurance Regulation at Michael.Milnes@fldfs.com or (850) 413-5306.




                                                            2




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Mitigation: A Report Card on Florida’s Quest to Harden Homes




         For more information contact:

          Scott Johnson, AAI, CAE
          Executive Vice President
  Florida Association of Insurance Agents
         Email: sjohnson@faia.com
       Phone: 850-893-4155, ext. 370




                            39

				
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