In the wake of State Farm Florida's announcement of its plan to withdraw its property insurance business from Florida and Insurance Commissioner Kevin McCarty's Order (issued on Feb. 13) conditionally approving that withdrawal, the state's insurance market and regulators face important issues that will most likely be addressed in the 2009 Florida legislative session, which begins this month. How the departure of Florida's largest private homeowner's carrier might impact other companies and Florida insureds are of concern to the public and policymakers.

Many observers want to see State Farm stay in Florida because of its respected name, size, and longtime importance to the state's insurance base. On the other hand, many others agree it may not be feasible or appropriate from a rate and exposure standpoint for any company to have as much Florida business exposure as State Farm presently does.

With Gov. Charlie Crist saying "good riddance" to State Farm, one can presume he has been advised that Florida has enough private market capacity to absorb the additional 1.2 million policies that would become available with the carrier's retreat. In fact, a number of insurers have expressed to state regulators and legislators that they are prepared and willing to take on these State Farm risks.

This is borne out by McCarty, who publicly indicated that there are fifteen private carriers available to pick up the bulk of the State Farm policies. The commissioner's withdrawal Order said that placing the policies with Citizens, as proposed by State Farm, would be hazardous to those policyholders, Citizens' policyholders and the Florida public. Thus, one of the conditions in McCarty's Order is that "State Farm shall facilitate the orderly transition of policies from State Farm Florida to the private marketplace in a method directed by the Office and shall not place any of the policies in Citizens."

Legislative Action Expected

Interestingly, by submitting its 90-day notice of withdrawal to the Florida Office of Insurance Regulation as required by law, State Farm may have created an action timeline that dovetails with the start of the 2009 legislative session.

Possible legislation in reaction to State Farm's withdrawal plan could include revision to Florida's "cherry-picking" statute. As of Jan. 1, 2008, existing auto insurers are prohibited from continuing to write auto insurance in Florida if they write homeowners' insurance in other states, but choose not to write the same coverage in Florida. Any amendment to this statute could make withdrawals by certain carriers more difficult to achieve.

Adding to the State Farm dynamic is the Citizens' rate freeze, which is due to sunset at the end of 2009. Any proposal to extend the rate freeze may have to take into account the possibility that a certain number of State Farm policyholders may end up with Citizens. CFO Alex Sink has publicly declared that it would be unwise to extend the rate freeze. Increasing Citizens' policyholder count will surely add to loss and assessment exposure for all Florida insureds. Based on McCarty's State Farm Order, this was not an acceptable option to OIR.

To further complicate matters, the Florida Hurricane Catastrophe Fund's (Cat Fund) Temporary Increase in Coverage Limits (TICL) layer is set to expire at the end of the 2009-2010 contract year. The TICL layer is the $12 billion in Cat Fund optional coverage above the mandatory coverage insurers are required to purchase from the fund. At this point, the fund's bonding estimates have indicated that it does not have the bonding capacity for its current loss exposure. Some rating agencies have warned the market that insurers face rating downgrades unless they adequately provide for the expected shortfall. However, insurers have not been able to pass on their acquisition expenses in rate filings to protect against this shortfall, whether in the form of additional reinsurance, a credit wrap facility, a line of credit or otherwise.

State Farm's withdrawal will create a need for more reinsurance for the private market carriers that assume these risks. This, in conjunction with the impending expiration of the TICL layer, will likely create the largest demand for additional reinsurance capacity the Florida market has ever experienced. Pricing for this reinsurance and issues related to State Farm's withdrawal, Cat Fund loss exposure, and primary carrier rate adequacy and credit ratings should draw meaningful legislative attention this session.

Agents Stuck in the Middle

The State Farm situation is further clouded by the position in which the withdrawal plan places State Farm's agents. These agents, unlike those from Allstate and Nationwide, have not been permitted to write business for other private companies, even Citizens' take-out companies. This would place State Farm agents in the difficult position of not being able to place their customers with other private carriers. However, OIR's conditional approval of State Farm's withdrawal plan provides that their agents should have the right to be appointed by other private carriers.

Of importance to all agents — not just those with State Farm — is the legislative sentiment toward eliminating the multi-policy discount. The discount is currently available to any agent who writes a policy with Citizens and an auto policy for the same insured. A legislative repeal could eliminate the multi-policy discount as an incentive for policyholders to be placed with Citizens.

In an unprecedented economic downturn, and with the prospect of 1.2 million policies from State Farm hitting Florida's private market and possibly Citizens, the Legislature will be confronted with very difficult policy decisions that could substantially affect Floridians for years to come. This could place policymakers in the position of having to explain rising homeowners' insurance rates to constituents whose home values have concurrently declined in value, while at the same time trying to justify the assessment exposures of Citizens and the Cat Fund.

Also expected to garner the attention of legislators this year will be insurance bills addressing judicial developments in surplus lines and workers' compensation insurance. Typically, contentious issues such as these are not taken up until the session's closing days. However, in the final analysis, the only legislative certainty is the mandated passage of a state budget. That debate alone could consume much of the lawmakers' allotted 60 regular session days.

Fred E. Karlinsky is a shareholder in the law firm of Colodny, Fass, Talenfeld, Karlinsky, Abate. Richard J. Fidei is a partner in the firm. Karlinsky may be reached in the Ft. Lauderdale office at 954-332-1749 or by e-mail at fkarlinsky@cftlaw.com. Fidei may be reached in the Ft. Lauderdale office at 954-332-1758 or by e-mail at rfidei@cftlaw.com. The firm also has offices in Tallahassee. The firm specializes in insurance, legislative, regulatory and transactional law, commercial and civil litigation, governmental consulting and administrative law. Its litigation practice group handles commercial, civil rights, employment discrimination and child advocacy matters in both trial and appellate levels. More information is available at www.cftlaw.com.

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