The Florida Hurricane Catastrophe Fund’s Ratemaking Formula Report is an “Actuarial Communication” as governed by actuary profession’s U.S. Standards of Practice, specifically #41. Therefore, it must adhere to the following standard (from section 3.2 of #41) unless the actuary discloses a deviation from standards and explains why:
“In the actuarial report, the actuary should state the actuarial findings, and identify the methods, procedures, assumptions, and data used by the actuary with sufficient clarity that another actuary qualified in the same practice area could make an objective appraisal of the reasonableness of the actuary’s work as presented in the actuarial report.”
The FHCF’s Ratemaking Formula Report does not currently adhere for at least two reasons:
- The underlying individual catastrophe model results are unidentified, making it impossible to understand the impact of a single model’s change (for example, when the Commission accepts an updated model version) on any rate;
- The blending method among models is identified by the actuaries (e.g. the 5-20-50-20-5 statewide and 1/3-1/3-1/3 territory averages), but there are no work papers in the FHCF’s Ratemaking Formula Report allowing peer review or audit of the calculations, making it impossible to understand the impact of any changes in actuarial judgment on any rate.
Though not required by actuarial standards, many organizations require a “rotation”, either of firms or of partners within firms, for similar mission-critical professional services such as audits of financial statements. The FHCF has had the same actuaries, using the same methods, with no outside peer review, audit, or rotation, throughout its 24 years.
The modeling firms have an arrangement with FHCF to keep their outputs (which are inputs to the FHCF Ratemaking Formula Report) private. Transparency should ultimately be more important for public policy than transactional confidentiality.
The FHCF takes in nearly $100 million in premium a month from policyholders. Shouldn’t Floridians have the right to know exactly how the FHFC rate is calculated?
Fortunately, the Florida legislature starts its session work on January 14th. Legislative action can require more transparency into the FHCF’s ratemaking process. FAIR is asking state regulators and legislators to develop and pass balanced and meaningful reforms to provide relief to Florida’s policyholders.