It is a scenario that has become all too familiar. The state once again finds itself facing a crisis in the property market, this time in the commercial market where the evidence points to a lack of affordable, available, and sufficient coverage. Although the Financial Services Commission and regulators would prefer to take the long view in working out the problem, they don't have the luxury to wait for lawmakers and the industry to hammer out a solution. Faced with the need for an immediate safety net, the commission and regulators reached back into history, and an almost forgotten part of the law, to reactivate one of those entities they know well: another joint underwriting association. As the commission and regulators move quickly to reopen the association, they trigger a number of well worn public debates such as whether the residual market will prove to be a short term solution until the private market regains its footing, or whether the association will morph into another permanent fixture like Citizens Property Insurance Corporation. Those and other questions remain to be answered. But if history provides any guide, it indicates that once the government wades into the insurance business, it's hard to get out.

Another Shortage

The FSC recently approved an emergency rule issued by Insurance Commissioner Kevin McCarty to reactivate a residual market for commercial property. The rule is based on a 1986 law that sets out the regulations for the residual market and has the benefit of not requiring legislative approval to become operational. McCarty said that the JUA is a necessary step to bring stability to the market and that it would be available to companies as of Sept. 1.

"I have heard from too many Florida business owners who are facing losing their insurance in the middle of hurricane season," he said. "If left unchecked, this problem would have a negative effect on our state's economy, as we have heard from businesses that may have to move out of Florida."

The emergency rule reflects just how devastating the 2004 and 2005 hurricane season was on the reinsurance market and the subsequent pressure it placed on carriers as witnessed by the failure of Poe Financial Group and Florida Select Ins. Co. Faced with paying a healthy share of the $40 billion in losses from eight major storms, there is little appetite among reinsurers to gamble by placing their capital on the line in Florida. As a result, reinsurers have taken steps to raise rates, require carriers to retain more risk, or have stopped writing coverage altogether.

Robert Hartwig, president of the Insurance Information Institute, said reinsurers have no choice but to reevaluate their position in the market and not just in Florida.

"The cost of reinsurance is not just affecting Florida but anywhere a hurricane hits," he said, adding that reinsurers last year paid out $1.30 in losses for every dollar in earned premium. On a positive note, he said, the higher reinsurance prices rise, the more capital they will attract. Since Hurricane Katrina, 14 new reinsurers have been created, but it will take time before that capital is transformed into affordable coverage and able to relieve the problems Florida is facing.

The problem faced by companies due to the volatility in the reinsurance market is backed up by a recent survey conducted by the Office of Insurance Regulation. The Internet survey was conducted over a two-week period and paints a picture of a struggling market, which is affecting companies across the board.

Insurance Commissioner Kevin McCarty recently told the FSC that while the survey is based on anecdotal observations, it nonetheless shows the problems facing companies. "We had no doubt there is a burgeoning crisis in commercial insurance," McCarty told the commission. "This allows us to better identify the difficulties businesses are facing, what type of businesses are facing them, and where they are located," he said.

The most telling part of the survey addressed the ability of companies to find available coverage that was adequate and affordable. Out of the 1,900 participants, 17 percent could find no coverage at all while 15 percent could not find all the coverage they needed. Some 40 percent reported having significant rate increases while 10 percent indicated they are facing higher deductibles. The reinsurance crisis is also hitting some of the state's largest businesses. Thirty-six percent of those surveyed had been in business longer than 20 years with revenues in the range of between $1 million and $10 million.

Seventy-seven percent of the respondents have between one and 50 employees and 71 percent of the respondents indicated they only conduct business in Florida. The majority of the businesses were in the service industries (38 percent), followed by contractors (17 percent), offices (16 percent), and retail and wholesale companies (15.5 percent). Per expected the counties with the greatest concern over the availability of coverage are Miami-Dade, Pinellas, Hillsborough, and Broward counties.

One reason for the need for a commercial JUA is that Citizens doesn't have the statutory authority to issue the policies. Citizens is restricted to issuing commercial policies in its high-risk account, which provides hurricane coverage along the state's coastline and doesn't offer an all-perils policy statewide — as is the case in the Citizens' personal lines account. Currently, there are around 39,000 commercial policies in the residual market's high-risk account. Although there is talk that Citizens may help administer the new commercial JUA policies, the rule makes clear the JUA will function as an independent agency.

Commercial JUA

Every JUA is based on three fundamentals: who gets in, how much they pay, and who else gets to pay when the association's losses exceeds its financial resources. The commercial JUA is no exception. As approved, businesses are eligible for coverage if by law they must purchase commercial insurance and the coverage is unavailable in the private market or the surplus lines market. A commercial risk that is not required by law to purchase commercial coverage is also eligible under the same terms with the added requirement that the failure to secure coverage would impair the business' viability.

One controversial aspects of the rule is how it defines the classification system of risks. Under the rule, "Commercial property insurance is considered a class of property insurance." However, the rule leaves open the possibility it could extend its coverage to other commercial lines if amended. Earlier drafts of the rule specifically mention the possibility of the JUA issuing liability coverage, an idea quickly shot down by the industry.

Key to the commercial JUA rule is the creation of a market assistance plan, which is the trigger point for the activation of the residual market. As spelled out in the rule, the plan will provide coverage if it receives a minimum of 100 commercial property quote requests over a three-month period or 200 quotes over a one-year period and fails to place 80 percent of those applicants in the private market. The coverage is not available to properties that have been declared uninsurable by the voluntary market and a risk underwriting review. Every six months, the commercial JUA's 13-member board is required to evaluate the number of applications submitted to the market assistance plan. If the board determines that 90 percent or more have been placed in the voluntary market, the association will cease issuing new policies within 30 days. Current policies will remain in force until their expiration date. The insured can then reapply for coverage if it continues to meet the eligibility requirements.

When it comes to residual property markets, the number one concern is rates. Going back as far as the old Florida Residential Property and Casualty Underwriting Association, agents and carrier groups have long argued that the state has suppressed rates, making the residual market competitive with the voluntary market. The commercial JUA may prove to be no exception. The rule does call for the rates to be actuarial sound, but still draws concern. As stated in the rule, unless 80 percent of the applicants to the commercial JUA find coverage through the market assistance plan that is at or below the "qualified quoted premium," the risks are eligible for JUA coverage.

The rule defines "qualified quoted premium" as follows:

?In the case of an admitted carrier, the quoted premium must not exceed the premium available for a given classification currently in use by the association or the premium developed by using rates and rating plans on file with the office of the quoted insurer, which ever is greater.

?In the case of an unauthorized surplus lines insurer, the quoted premium must not exceed the premium available for a given classification currently in use by the association by more than 25 percent, after consideration of any individual risk surcharge or credit.

As for deficits, the rule provides that the JUA could use surpluses from a previous year if there is a reasonable certainty that the monies will not be necessary to pay losses from that year. After that it comes down to insurer assessments. Any potential assessments are levied based on the net direct written premiums collected by carriers that provide commercial property insurance in the state. The one exclusion are premiums collected on commercial residential properties. The assessments are limited to 10 percent per year of the insurer's assessable premium in the prior calendar years.

Mixed Reaction

As is the case with any changes to the property market, there are critics and supporters. This is doubly so when it involves the government entering the marketplace. Even Gov. Jeb Bush expressed his trepidation at putting in place another quasi-government program that contains its share of unknowns. Chief Financial Officer Tom Gallagher, however, praised the FSC's decision and was not shy about taking his share of the credit for pushing for the commercial JUA. "The solution I recommended and we approved today will help provide basic coverage to Florida employers who employ thousands of hardworking citizens and serve as the backbone of our economy," he said. "There are still some real opportunities to provide further relief for Floridians, and fighting for homeowners remains my number one concern."

Insurers and agents, however, are less than enthused.

Tom Enright, executive vice president of Enright & Wilson, said that while there is no doubt a crisis in the commercial market, there is no way to measure whether reactivating the commercial JUA is an answer. "I think they felt they had to do something and don't know what to do," he said. "The vehicle there was in the statute that they could activate immediately, but you hope it doesn't turn out to make things worse."

Others are concerned that regulators will be willing to charge the rates necessary to make it a true market of last resort. "The basic concern is that it doesn't supplement the private market that is already there," said William Stander, with Property Insurance Association. "We just hope this truly is a relief value."

Special Reports /

Commercial JUA: Problem or Life Preserver?

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