Best Assesses Impact of New Florida Insurance Law

NU Online News Service

Florida 's new insurance reforms will make state carriers with large property catastrophe exposures there the most vulnerable to negative rating actions, rating firm A.M. Best Co. said.

The Oldwick, N.J.-based firm said the impact of the reform measure on the reinsurance sector may be limited to an overall price softening as the legislation encourages an exit from the Florida market of reinsurers who must look for new places to deploy capital.

Under the new law, primary insurers can buy reinsurance from the state's Hurricane Catastrophe Trust fund at a reduced cost--provided their savings on that expense are passed directly to consumers.

Best said the legislative changes may have far-reaching consequences in the Florida insurance market. The company said it will be evaluating the exposure of companies to recoverables from the fund and the impact on companies' overall capitalization.

But that impact will for the most part remain in the primary sector, where insurance companies will face new rate restrictions once the so-called "factor" from the fund expansion has been determined.

Companies most exposed to negative rating pressure and rating downgrades will be those with large gross catastrophe exposure, and thus greater exposure to fund recoverables, Best said.

The reforms are expected to eliminate billions of dollars of reinsurance premiums from the private reinsurance market, which could result in a considerable amount of capacity becoming available for redeployment, according to Best.

Best reported that as reinsurers seek to recapture lost revenue, the manner in which they react to the legislative curtailment of the Florida reinsurance market could accelerate rate softening in non-coastal property regions and result in increased competition in casualty lines.

Overall, the impact on a company's rating will be largely dependent on several factors; key among them is each organization's unique ability to manage through the regulatory and market challenges that lie ahead while maintaining adequate pricing and favorable risk-adjusted capitalization.

The Best report views the recent legislative changes as weakening the business profile of companies with a significant concentration of Florida business.

In addition, the prospective capitalization of property insurance writers is weakened, as they carry the burden of potentially unrecoverable reinsurance in the event of a major catastrophic event, Best said.