New Florida legislation aimed at cutting insurance premiums for the state's homeowners should not impact insurance company ratings, Fitch Ratings in Chicago said.
However, the rating agency noted a variety of problems it said could cut insurance market capacity.
The measure, which passed over the weekend, is expected be signed shortly by Republican Gov. Charlie Crist who ran on a platform of insurance reform.
Fitch said it views the bill that was passed as a "mechanism to further suppress homeowner's insurance rates in a market where rates continue to be inadequate despite several large recent rate increases."
The rating firm said it believes the best long-term solution to the Florida homeowners market is for the state to allow competitive market forces to set rate levels and to continue to encourage risk mitigation efforts, such as more stringent building code requirements.
It noted that the new legislation eliminates an exemption from more stringent building codes in the Florida Panhandle.
Fitch said it believes the legislation enables the state to further subsidize insurance rates in Florida through both of its state-sponsored vehicles, the Florida Hurricane Catastrophe Fund (FHCF) and Citizens Property Insurance Corporation.
The bill expands private insurers' access to below-market cost reinsurance from the FHCF by increasing the available coverage up to $33 billion from $16 billion currently, with primary insurers required to pass the savings onto policyholders in the form of lower premium rates.
In addition, Fitch said several provisions will increase Citizens competitiveness with the private market. This includes a repeal of Citizens recent average 23 percent rate increase that went into effect on the first of this year and 56 percent rate increase that was to be effective March 1, as well as a freeze of any additional rate increases for the remainder of 2007.
Also, Fitch noted that Citizens' premium rates are no longer required to be non-competitive with the voluntary market and the state hopes that these provisions will work to keep rates in the private market low.
But Fitch cautioned that these actions "will also serve to further increase the risk exposure to the FHCF and Citizens, as capacity in the voluntary market continues to decline."
Positively, the proposed legislation expands the assessment base of Citizens to be identical with the Florida Hurricane Catastrophe Fund except for the exemption of medical malpractice insurance, said Fitch.
The rating firm believes the proposed legislation will have a significant impact on reinsurers as additional capacity from the FHCF will apply pressure on reinsurance rates and squeeze out private market capacity.
Overall, Fitch said the impact will be less on the primary market participants; however, Fitch notes there are two key items for the primary market. First, primary insurers' rates will be limited impinged by the "excess profits" provision included in the legislation. Second, companies who write homeowners insurance in other states but not in Florida are no longer able to "cherry pick" the Florida auto business without offering Florida homeowner insurance business.
Fitch believes that any such continued suppression of rates or reduced profitability will only serve to continue to reduce the willingness of primary insurers to remain in the Florida homeowners market.
Fitch described a "highly politicized and regulated Florida insurance market" as extremely fragile.
The company noted the current existence of a high-frequency hurricane cycle and said it does not see "any way that Florida can have both "availability and affordability" of insurance in the long term under the current conditions."
If Florida suffers significant hurricane losses in the near term, the market is likely to experience even more disruption and withdrawal of private capacity, further shifting exposure to the public, Fitch predicted.
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