MISSISSIPPI LEGISLATURE

1999 Regular Session

To: Insurance; Ways and Means

By: Representative Simpson

AN ACT TO CREATE THE "MISSISSIPPI CATASTROPHE FUND ACT"; TO PROVIDE DEFINITIONS; TO CREATE THE MISSISSIPPI CATASTROPHE FUND TO BE ADMINISTERED BY THE STATE BOARD OF ADMINISTRATION; TO REQUIRE EACH INSURER WRITING POLICIES IN THIS STATE TO ENTER INTO A CONTRACT WITH THE BOARD WHEREIN THE INSURER RECEIVES REIMBURSEMENT COVERAGE IN EXCHANGE FOR A REIMBURSEMENT PREMIUM PAID TO THE FUND; TO PROVIDE METHODS OF DETERMINING THE AMOUNT OF THE PREMIUM; TO PROVIDE FOR AN ADVISORY COUNCIL TO THE BOARD; AND FOR RELATED PURPOSES.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MISSISSIPPI:

SECTION 1. This act shall be known and may be cited as the "Mississippi Catastrophe Fund Act."

SECTION 2. The Legislature finds as follows:

(a) There is a compelling state interest in maintaining a viable and orderly private sector market for property insurance in this state. To the extent that the private sector is unable to maintain such a market for property insurance statewide, state actions to provide such a viable and orderly market are valid and necessary exercises of public and governmental purpose.

(b) As a result of losses from catastrophic natural disasters, many insurers, in order to protect their solvency, find it necessary to reduce their exposure in certain geographic areas. Also, as a result from these losses, world reinsurance capacity has significantly contracted increasing the pressure on insurers to reduce catastrophic exposures.

(c) Mortgages require reliable property insurance and the unavailability of such insurance would restrict the orderly growth and development of the state. Also, public health, safety and welfare demand that structures damaged or destroyed in a catastrophe be repaired or reconstructed as soon as possible.

(d) A state catastrophe program to provide reimbursement to insurers for a portion of catastrophic natural disaster losses will create additional insurance capacity. It is essential to the functioning of a state catastrophe program in order to increase insurance capacity that revenues received be exempt from federal taxation. It is therefore the intent of the Legislature that such a state program be structured as a state trust fund under the direction and control of the Mississippi State Board of Administration.

(e) It is the intent of the Legislature, with the creation of the Mississippi Catastrophe Fund, to advance the state's interest in maintaining insurance capacity and affordability, as well as to mitigate concerns about the impact of a catastrophic event.

(f) The creation of the Mississippi Catastrophe Fund is in no way meant to affect the premium taxes now levied on fire insurance policies written on properties in this state under Sections 27-15-103 through 27-15-127.

SECTION 3. As used in this act:

(a) "Actuarially indicated" means, with respect to premiums paid by insurers for reimbursement provided by the fund, an amount determined by actuarial science principals to be adequate, but not excessive, in the aggregate, to pay current and future obligations and expenses of the fund. This includes amounts if needed to pay debt service on revenue bonds issued under Section 7 of this act. These amounts are determined to reflect each insurer's relative exposure to catastrophe losses.

(b) "Covered event" means any one (1) named hurricane declared by the National Hurricane Center causing insured losses in this state or any seismic activity reported by the United States Geographical Survey causing insured losses in this state.

(c) "Covered policy" means any insurance policy covering residential property in this state issued by an authorized insurer including joint underwriting associations. It does not include any policy that excludes wind/hurricane/earthquake coverage or any reinsurance agreement.

(d) "Losses" means direct incurred losses under covered policies, excluding additional living expense losses and loss adjustment expenses.

(e) "Retention" means the amount of losses below which an insurer is not entitled to reimbursement from the fund. The board shall calculate and report to each insurer the retention multiples for that year.

(f) "State Board of Administration" means the trustees of the Mississippi Catastrophe Fund to consist of the Governor, the State Auditor, the Treasurer and the Commissioner of Insurance or their designated appointee.

SECTION 4. (1) There is hereby created the Mississippi Catastrophe Fund to be administered by the State Board of Administration. Monies in the fund may not be expended, loaned or appropriated except to pay the obligations of the fund. Monies in the fund shall be invested in accordance with state laws. Earnings from all investments shall be retained in the fund.

(2) The State Board of Administration may employ or contract staff and professionals as it deems necessary for administration of the fund and may adopt rules as reasonable to implement this act. Rules must conform to and enhance the Legislature's intent of the fund, as stated in Section 2 of this act, to respond to claims for covered events. Rules must contain general provisions so they can be applied with reasonable flexibility so as to accommodate insurers in situations where undue hardship may result. Such flexibility may not in any way impair, override, supersede or constrain the public purpose of the fund and must be consistent with sound insurance practices.

SECTION 5. (1) The board shall enter into a contract with each insurer writing covered policies in this state to provide to the insurer the reimbursement coverage in exchange for a reimbursement premium paid to the fund. As a condition of doing business in the state, each insurer shall enter into such a contract.

(2) The reimbursement contract shall reimburse the insurer at the level of forty-five percent (45%), seventy-five percent (75%) or ninety percent (90%) of its losses from each covered event over the insurer's determined retention, plus five percent (5%) of the reimbursed losses to cover loss adjustment expenses. Each insurer shall elect the level of payment percentages. All companies in a group must participate at the same level.

(3) Any joint underwriting association must elect ninety percent (90%) payment coverage.

(4) Reimbursement amounts shall not be reduced by reinsurance paid to the insurer; however, recoveries to insurers from reimbursement under contract and from other sources may not exceed one hundred percent (100%) of insurers losses from covered events. Any amount in excess of one hundred percent (100%) of loss shall be returned to the fund.

(5) The reimbursement contract shall provide that all contracts covering a particular year shall not exceed the current balance of the fund together with the maximum amount that the board is able to raise through issuance of revenue bonds under Section 7 of this act. Each insurer must be notified annually of the anticipated borrowing capacity of the fund for the next year, current balance in the fund and insurers' estimated share of total reimbursement premium to be paid to the fund. For all regulatory and reinsurance purposes, an insurer may calculate its projected payout from the fund as its share of the total fund premium for the current contract year multiplied by the sum of the projected year-end fund balance and the anticipated borrowing capacity for that year as reported under this subsection.

(6) The contract shall require an insurer to report all losses from covered events December 31 of each year and quarterly thereafter. The contract shall require the board to determine and pay, as soon as practicable after receiving these reports, the initial amount of reimbursement due and any adjustments based on later loss information.

(7) The contract shall provide, that in the event of insolvency of an insurer, the fund shall pay directly to the State Guaranty Association, for the benefit of the insurer's policyholders in this state, the net amount of reimbursement money owed to the insurer.

SECTION 6. (1) Each reimbursement contract shall require the insurer to annually pay to the fund an actuarially indicated premium for reimbursement.

(2) The State Board of Administration shall select an independent consultant to develop a formula for determining actuarially indicated premium to be paid to the fund. The formula shall specify for each limited geographical area or zip code the amount to be paid by an insurer for each One Thousand Dollars ($1,000.00) of insured value under covered policies in that area. Premiums shall be developed considering the coverage level elected by the insurer and any factors that enhance the actuarial sophistication of rate making for the fund.

(3) No later than September 1 of each year, each insurer shall notify the board of its insured values under covered policies by the specified geographical area or zip code. On the basis of these reports, the premium shall be calculated based on the formula adopted as shown herein.

(4) In order to provide startup monies for the administration of the fund, each insurer subject to this section shall pay to the fund an advance premium payment of One Thousand Dollars ($1,000.00) no later than October 1, 1999. The Department of Insurance shall collect the advance premium payments required by this paragraph on behalf of the board. The insurer shall receive a credit against future premiums for the advance payment.

SECTION 7. Upon the occurrence of a covered event and a determination that the monies in the fund are insufficient to pay reimbursement at the levels chosen in the reimbursement contracts, the board shall enter into agreements with local governments for the issuance of revenue bonds for the benefit of the fund. The term of the bond may not exceed thirty (30) years.

SECTION 8. The board may procure reinsurance from reinsurers for the purpose of maximizing the capacity of the fund.

SECTION 9. The State Board of Administration shall appoint a nine-member advisory council that consists of an actuary, a meteorologist, an engineer, a representative of insurers, a representative of insurance agents, a representative of reinsurers and three (3) consumers, who shall also be representatives of other affected professions and industries, to provide the board with information and advice in connection with its duties under this section. Members of the advisory board shall serve at the pleasure of the board and are eligible for per diem and travel expenses as determined by the board.

SECTION 10. Any violation of this act or of the rules adopted under this act constitutes a violation of the insurance laws of this state.

SECTION 11. Upon the creation of a federal or multistate catastrophic insurance or reinsurance program intended to serve purposes similar to the purpose of the fund created by this act, the board shall make recommendations to the Legislature for coordination with the federal or multistate program, for termination of the fund or for such other actions as it finds appropriate.

SECTION 12. This act shall take effect and be in force from and after July 1, 1999.