In prior years, the great legislative property and casualty debates centered on medical malpractice insurance and workers' compensation coverage. Now, however, with those two lines of coverage running at near optimum levels, policymakers have focused the majority of their energy and angst on homeowners' insurance. And landing square in the middle of that debate is the role of the excess and surplus lines' role in the marketplace.

Given Florida's coastline, building boom, and weather, most people agree that that is not necessarily a bad thing. The disagreements take hold when rhetoric becomes law. The wind began shifting at January's special session with major changes to Citizens Property Insurance Corp., driven by new Governor Charlie Crist.

At the session's end, Florida Insurance Commissioner Kevin McCarty issued an order rescinding Citizens Property Insurance Corporation's approved rates that would have become effective January 1, 2007, and ordered Citizens to roll back rates to December 31, 2006 levels. Further legislation during the regular session extended that freeze to January 2009.

The rollbacks were designed to make Citizens more appealing to consumers. Some would say that it did not need the help. At the time, Citizens already was the largest insurance company in Florida with some 1.3 million policyholders, almost half in South Florida.

Savior or Threat?

“What it comes down to is the state of Florida has turned to Citizens as the salvation to all our problems. I think that is despicable,” says Steven A. Firestone, president of Firestone Agency of Florida, a major Excess & Surplus Lines broker in Coral Springs.

In recent years, the E&S market has increasingly stepped in to provide property coverage as the standard writers have backed off. “We've been in a hard market for the property market, particularly with windstorm, since Hurricane Andrew,” says Firestone. “A lot of carriers still have diminished capacity. This [bill] was a political move by legislators, trying to keep consumers happy. They should let the market be the market. When the state's own CFO says it's not going to work, and no one listens to her, I just don't understand it.”

Firestone was referring to Florida CFO Alex Sink's statement during the May session that extending the Citizens' rate freeze by another year “is not a good fiscal idea at all.”

William Stander, assistant vice president of the Property Casualty Insurers Association of America, was even more outspoken, declaring that the rollbacks and other measurers put Florida “one step closer to the financial catastrophe we've predicted.”

“Citizens is aptly named, because the citizens of Florida are going to pay for it,” says Ron Gabor of Gabor Insurance Services, Inc., a property and casualty wholesaler in Miami.

Concerns aside, on June 1, Citizens began writing, on a short-term basis, wind-only coverage for small commercial, non-residential customers across the state. Under the program, Citizens provides up to $1 million in wind coverage to business owners with no more than $10 million of total insured value. By September 1, Citizens will offer a commercial multi-peril policy throughout the state that includes wind coverage. The policy will provide the first $2.5 million of building coverage for structures with a value of $20 million or less.

Encroaching Into Other Lines

The new law also allows Citizens to write other more profitable lines of insurance, such as fire, theft, and vandalism.

“What is the state of Florida doing writing fire, theft, and vandalism?” asks Firestone. “The only place the private sector needs help is windstorm. Private companies are more than willing to write policies with hurricane exclusions. They are moving the private sector out the door. We are going to suffer for it.”

“I think Citizens will be the primary market in Florida,” declares Firestone. “Right now, we are being dictated to. Last time I looked, this was still the United States, not Russia. Anytime the government gets involved in something, it messes it up. If we have a major event, the assessment is going to be huge. Citizens can have a financial shortfall, have gaps in reinsurance, be incompetent, and just bill everybody the difference. What a deal. I wish our carriers could do that.”

Not likely. In fact, the bill requires existing subsidiaries of companies to report their parent companies' profits as part of a rate increase request and prohibits national insurance companies from creating new Florida-only subsidiaries.

“Insurance is very competitive,” Gabor says. “Anytime somebody smells a profit, everybody rushes in. Why haven't the standard market companies rushed in? Because the profits are not as big as people say. Rates have gone up, I agree, but that was compounded by home values, construction costs, and land costs. You have to look at everything.

“E&S wants the admitted market back in. We need the big carriers,” Gabor says. “Only having E&S is not healthy. But with the assessments that hang over their heads and the inability to get what they think are proper rates, they [standard carriers] are not going to come back. Admitted markets are pulling back in many lines because there are too many negatives to do it. I don't think they will come back in strength until they are out from under the assessment and regulatory burdens.”

Betting on Sunshine

The governor and legislators adopted the massive set of reforms fully understanding that a catastrophic hurricane, or multiple-storm year, over the next three to five years will result in billions of dollars of assessments against all lines of insurance for state residents and businesses.

It is hardly an unlikely scenario. Florida's property insurance policyholders paid extra charges on their insurance bills after Citizens ran out of money in the wake of the 2004 and 2005 hurricane seasons. The company had a $516 million deficit in 2004, and a $1.7 billion shortfall in 2005.

Policyholders in the E&S market fared better back then only because the surplus lines had a surplus. The Office of Insurance Regulation allowed the Florida Surplus Lines Office to utilize excess funds collected from surplus lines insureds in 2006 to satisfy assessment obligation for Citizens' assessment to be collected in 2007. So, no assessment collection was needed. However, endorsements on 2006 policies still incur the 2006 Citizens' assessment of 6.84 percent.

Steve Finver, president of the Florida Surplus Lines Association and of Continental Agency of Florida, Inc., of Boca Raton, agrees that if a big storm hits, Citizens is in trouble. “The general public is gambling on a non-eventful storm season,” he says.

Finver also thinks Citizens' rate system is upside down. “They put in rates where the high risk accounts are still fairly cheap, but rates for other risks are fairly high, which to me is kind of reverse. But E&S has to adjust to the marketplace–and we will. Right now, Citizens can only write $1 million in coverage; surplus lines can still pick up the gap. What we are not thrilled about is the level they want to go to on September 1, and granting them the ability to write all-perils statewide. We don't feel that is necessary. There are plenty of companies in standard and surplus markets writing ex. wind for smaller accounts. The way the bill is currently written, Citizens is becoming the market of first resort.”

Traditional E&S Markets Look Good

Of course, September is a long way off as policymaking goes, and Finver says “plans can be changed.”

In the meantime, what of the E&S market countrywide and in lines other than property?

From a national perspective, the Midwest is “soft as a grape,” says Firestone. “Nationwide, the market is very soft and the surplus lines people are suffering for it. But on the coast–from Florida all the way up to New York–the market is very hard in property.”

What lines besides property are good for E&S now? “That's where creativity comes in,” Firestone says, “putting together programs outside the Cat exposures. We need to get back to the traditional surplus lines–liquor liability, jewelers block, and others. These property risks (away from the coast) are traditional market risks and we got spoiled by writing them.”

Gabor reports that rates are coming down on almost all lines in surplus. “There is lots of capacity out there, particularly for non-Cat and not overly regulated lines.”

Finver agrees that E&S is “still here for the GL and PL and the property, including large property. Rates in the surplus lines industry are coming down. It's a cycle. Reinsurers are checking themselves. After the hurricanes, it was really the reinsurers who were driving prices up. Our biggest challenge right now it to try to compete in today's industry and provide P&C to commercial property owners and homeowners.”

At least until September.

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E&S Is Ready, Willing and Able to Write

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