Moody's Sees No Rating Impact From Fla. P-C Law

Florida's recent property-casualty insurance legislation will have a mixed impact on primary insurers and likely "crowd out' reinsurers, according to a rating firm's analysis.

Moody's Investors Service also said in its report that it expects the majority of its ratings for p-c insurers and reinsurers will remain stable as a result of the new measures.

The reforms will nearly double reinsurance capacity offered by the Florida Hurricane Catastrophe Fund (FHCF) at rates-on-line significantly below private market levels, Moody's said.

According to the rating firm, the changes will also provide for a "dramatic increase" in the claims-paying resources of Florida's residual market insurer, Citizens Property Insurance Corporation.

Citizens' finances have been bulked up with a mandated increase in the company's assessment powers and the expanded FHCF protection.

The new law also eliminates a requirement that Citizens' rates be noncompetitive and creates an anti-cherry picking measure requiring auto insurers in Florida that write homeowners coverage in other states to write homeowners in Florida.

Additionally, Florida Gov. Charlie Crist has issued an emergency order freezing insurer rate levels and restricting policy cancellations.

"Growing consumer concerns about the availability and affordability of property insurance in Florida after the 2004-2005 storm seasons have prompted these initiatives," commented Pano Karambelas, a Moody's vice president and an author of the report.

Mr. Karambelas said the law and an emergency order enacted by Florida's governor are intended to "provide immediate relief to surging policyholder premium rates in the state's homeowners' insurance market."

According to the report, the reforms represent a "mixed bag" for primary insurers with carriers likely to face increased competition from Citizens' more competitive rates going forward.

Moody's also foresees that primary insurers will face challenges associated with catastrophe risk management due to premium rate freezes and restrictions on policy cancellations.

However, Moody's said it expects that primary carriers will benefit from the influx of significant additional FHCF-provided reinsurance capacity.

Private reinsurers are likely to be "crowded out" of the Florida market given the additional FHCF capacity, in Moody's opinion.

According to the firm's analysis, investor demand for structured risk-transfer vehicles, particularly reinsurance sidecars, which benefited from a peak catastrophe pricing environment in 2006, are expected to dampen.

Mr. Karambelas noted that "reinsurers may offer capacity which complements the FHCF, deploy excess capacity outside of Florida or in other lines of business, and/or return capital to shareholders."

The analyst also pointed out that Citizens' near-term catastrophe exposure relative to claims-paying resources will improve significantly because of its enhanced claims-paying resources.

Mr. Karambelas cautioned, however, that "over time, Citizens' new rate-setting rules are expected to lead to an increase in its market share and a heightened level of catastrophe exposure for Citizens."

"Reinsurance capacity offered by the FHCF will nearly double," Mr. Karambelas found, "but its limited liability structure will cap its obligations to no more than its claims-paying resources, which remain unchanged over two seasons at approximately $50 billion."

He also remarked that "the FHCF's expanded reinsurance capacity will increase the expected size of post-event bond financings, translating into larger emergency assessments by the FHCF."

The report is titled "Regulatory Climate Change in Florida: Implications for the Property-Casualty (Re) Insurance Sector."