Florida's property insurance reforms will not be as devastatingto reinsurers as previously thought, but they also will not fullydeliver premium reductions promised to insurance consumers, aninsurance executive and former lawmaker contends.

Locke Burt, president of Royal Palm Insurance Company andSecurity First Insurance Company in Ormond Beach, Fla.–who is alsoa former Republican state senator in Florida–delivered an insider'saccount of the controversial legislation's passage and impact hereduring a Casualty Actuarial Society meeting on reinsurance.

Mr. Burt addressed the actuaries just two days after the FloridaLegislature passed some late-session changes to a reform billoriginally approved in January.

The original legislation essentially doubled the size of theFlorida Hurricane Catastrophe Fund and expanded the role ofCitizens Property Insurance Corp., the state's residual marketmechanism.

The late-session changes passed earlier this month, among otherthings, further increased Citizens' role, allowing consumers to buyinsurance from the facility if rates offered by other insurers are15 percent higher.

In the aftermath of all the reforms, Mr. Burt reported,“Executives in the reinsurance business are pleasantly surprised asthey move into midyear renewals,” referring to earlier predictionsof dire reinsurance market implications.

Immediately after Gov. Charles Crist signed the original law inJanuary, experts who analyze reinsurers in Bermuda and Europewarned that the increased size of the FHCF–offering reinsurance atbelow-market rates–would remove at least $1 billion in premiums outof a profitable market for property-catastrophe reinsurers.

Mr. Burt contradicted this claim, however, explaining to theactuaries that primary insurers are in fact buying more catastrophereinsurance from the private market. “State Farm is in the marketfor almost $1 billion” in reinsurance coverage, while Allstateseeks more than $1 billion, according to Mr. Burt, who is also areinsurance broker and managing general agent.

“I think the reinsurance premium volume will go down, but notanywhere near as much as [experts] thought,” he said, noting thathigher probable-maximum-loss indications from catastrophe modelspartially explain why insurers are buying more reinsurance.

In addition, he explained that over the summer, insurers willmake rate filings–referred to as “true-up” filings–in which theyare required to pass the actual savings in reinsurance costs theyexperience as a result of FCHF changes onto consumers through lowerrates.

“I think insurance company executives might be looking foradditional ammunition to put in their summer filings,” he said,suggesting that this was a second reason for increased appetitesfor reinsurance coverage.

Earlier this year, the insurers made an initial round of“presumed-factor” filings to reflect anticipated reinsurance costsavings.

Mr. Burt, who presented a summary of the indicatedpresumed-factor filing rate decreases for the state's top-10insurers, noted that only three of the carriers–Allstate, FederalInsurance and Tower Hill Preferred–indicated double-digit ratedeclines (14 percent, 12 percent and 16 percent, respectively).

Earlier, however, he said lawmakers had crafted “sound bites”telling Florida consumers who had policies from companies otherthan State Farm and Citizens that they would see 22 percent savingson their overall premiums, and 43 percent on wind premiums.

State Farm was excluded because of its unique reinsurance buyinghabits (including intercompany deals), as was Citizens, whichdoesn't buy any reinsurance. Savings for State Farm and Citizenscustomers were correctly projected at roughly 7 percent.

“There were some savings, but nothing close to what people werepromised,” he said, noting that this was particularly true forthose insured by large companies that started off with the lowestrate bases.

To make matters worse, “people had not seen the rate increasesthat were approved last year,” he said–noting, for example, thatconsumers were just starting to feel the impact of a 55 percentrate increase approved last August for his company, Security First,when the filings were made.

Among other provisions that might not pan out as lawmakersexpect is one that attempts to prevent multi-line insurers fromwriting auto, but not homeowners, in Florida.

The statute doesn't say how much homeowners premium an insurerhas to write, Mr. Burt pointed out, envisioning a scenario where anexecutive sticks his head out of his office, asks if anyone has acondo in Florida, and authorizes coverage for the three people thatraise their hands.

Another way to comply with the statute is to become “affiliated”in some way with a Florida homeowners insurer, perhaps through asmall ownership stake or exclusive marketing deal, he said, notingthat “a lot of owners of little insurance companies…have beenapproached.”

Mr. Burt, who attended the January special legislative session,gave actuaries an insiders' view of the proposals and compromisesthat produced the legislation.

While he likened the process of coming up with the law to“watching truck drivers perform brain surgery,” he also gave adetailed description of the very real concerns that lawmakers weregrappling with and a number of proposed alternative solutions.

Among the concerns, he said, were how to keep a hot real estatemarket going–”Florida's engine of economic growth”–and how torespond to consumer horror stories, with some people paying 10percent of their take-home pay for insurance, he noted.

“That doesn't happen anywhere else in the world,” he said,sharing the contents of a letter from a policyholder paying closeto $3,000 and facing the prospect of selling her home. “We arescared right now…Our future depends on your company's quote,” theletter said.

While an obvious solution was to attack reinsurance costs (whichhad grown from 7 percent of the premium dollar of four largeinsurers in 2002 to nearly 50 percent in 2007), Mr. Burt saidlawmakers also considered eliminating premium taxes and agentcommissions, replacing the latter with a one-time placement feethat's fully earned when a policy is sold.

While these ideas were rejected, another proposal that did makeit into the law allows homeowners to cut costs by reducingcoverage. Using the more palatable phrase, “Empowering consumers tomake additional choices,” lawmakers passed provisions that allowhomeowners to raise deductibles, forego contents coverage, or evenforego wind coverage.

Homeowners electing the last option must sign handwrittenstatements saying, “I do not want the insurance on my home…to payfor damage from windstorms or hurricanes. I will pay those costs.My insurance will not,'” Mr. Burt reported, noting this couldminimize coverage disputes.

In an effort to minimize insurer headaches in maintaining suchrecords, the late-session amendments allow carriers to keep theseon file electronically, he said.

Meanwhile, primary companies have concerns about both theviability of the Florida Hurricane Catastrophe Fund and competingwith Citizens, which no longer has to charge rates at least as highas the average for the top-20 companies.

“The big companies are appalled by what's going on,” Mr. Burtsaid, referring to concerns about potential exposure to purchasebonds and policyholder assessments in the event of large FHCFlosses, which prompted Auto-Owners and USAA to stop writing newbusiness (except, in the case of USAA, for active militarytransferred to Florida).

Of interest to the actuaries, Mr. Burt noted that the only ratestandard left in the new law for Citizens says rates “shall beactuarially sound,” which even a staff analysis accompanying thebill concedes “has no precise definition.”

“What does it mean to be 'actuarially sound' for a residualmarket that doesn't have capital and reinsurance, and doesn't facethe risk of ruin?” Mr. Burt asked, speaking from the perspective ofa concerned competing insurer that does have to include provisionsfor such costs in its rates.