Will Florida Reforms Harm The E&S Market?

The excess and surplus lines market could be another industry casualty of a Florida insurance reform law that is already delivering a direct blow against reinsurers, legislative and reinsurance experts gathered here warned.

For one, the expansion of Florida's Hurricane Catastrophe Fund could prompt more reinsurers to go after specialty business, aggravating softening market conditions in the E&S sector, reinsurance experts predicted during a panel discussion here at the midyear educational meeting of the National Association of Professional Surplus Lines Offices.

In addition, provisions of a Florida reform bill signed into law by Gov. Charlie Crist in January expand the role of Citizens Property Insurance Corp.–Florida's residual property insurance market. Those provisions could ultimately mean that Citizens partially supplants the E&S market's role in homeowners insurance, as well as encroach on its role as the market of last choice for commercial insurance, NAPSLO officials told National Underwriter.

One worrisome proposed bill already spawned by the new law would require surplus lines agents to get a declination from Citizens before placing homeowners insurance with a surplus lines insurer, according to NAPSLO Executive Director Richard Bouhan and Director of Government Relations Steven Stephan.

“It used to be that before you could get into Citizens, you had to get declinations from the surplus lines [market]. That doesn't appear to be the case under the new regime,” Mr. Bouhan noted.

Referring to legislation now being proposed that would mandate the reverse–in other words, it would require Citizens to decline a risk before it can get into the surplus lines market–Mr. Bouhan said “the potential for this to restrict the surplus lines market, and its ability to serve the Florida public, is very great.”

“That may cause Citizens to just monopolize the market because their rates are going to be so low,” Mr. Stephan agreed, referring to provisions of the law that allow Citizens to price business competitively–another departure from the past.

Mr. Stephan went on to note a technical problem with the proposal requiring surplus lines brokers to get declinations from Citizens. “They don't really have the legal ability to do that,” he said. “A surplus lines broker doesn't have an appointment from Citizens. So the broker will have to go find someone that does have an appointment…to get the declination from Citizens”–which, he predicted, “they'll never get.”

Is the implication that the surplus lines market at some point dries up while Citizens takes on all the high-risk business?

“For homeowners, it might,” Mr. Stephan said, adding that surplus lines insurers are “ready, willing and able” to write the business, “so they're not really happy about having to compete with the state.”

“If they force surplus lines out of the market, I think it will be more difficult to depopulate [Citizens] when that day comes,” he added, noting that states typically aim to depopulate state-run insurance mechanisms a few years after they're created.

Mr. Stephan said he has already written a letter objecting to the process being proposed, although he had not sent the letter out yet. He stressed that the situation is in a state of flux, with new proposed changes relating to Citizens surfacing just last week, and various proposals coming at 20, 30 or even 50 pages long.

Mr. Bouhan noted that the law signed by the governor on Jan. 25 deleted a prior requirement that Citizens' rates be noncompetitive and no lower than the top 20 insurers. “They're now going to have to provide rates that are actuarially sound,” he said, adding that “they also are going to become a commercial writer,” referring to another new wrinkle in the law.

“They're trying to set that company up as the market of last choice,” he said, noting that is exactly the role the surplus lines market plays. “They're displacing the surplus lines market by just those rules.”

“Now Citizens is going to be the market of last resort with rates that are…lower, and in the high-risk areas, they can write multiperil policies, too,” he said.

“I can't help but believe that is going to have some impact in displacing the surplus lines market, and if they come up with a law that you've got to get a declination from Citizens before you could even go to the surplus lines market, then that would put the nail in the coffin,” he concluded.

Mr. Bouhan made his remarks after moderating a panel of reinsurance experts who discussed the reinsurance implications of the new law–in particular the expansion of a hurricane catastrophe fund that many believe will displace a portion of the property-catastrophe reinsurance market.

While panelists noted that the amount of coverage to be provided by the fund has also undergone changes recently, with the amount somewhere in the $34-to-$38 billion range, Paul Goodwin, vice president of direct treaty for Munich Reinsurance America in Princeton, N.J., estimated that as a result, at least $1.2 billion in premiums will be removed from the private reinsurance market.

“Where are those reinsurers going to make it up?” he asked, speculating that property-catastrophe writers could look to write more California quake exposures, or even eye the middle of the country to take on casualty risks. “The Florida changes have very far-reaching implications into a lot of areas,” he said.

Other panelists noted that such moves were already underway absent the Florida law changes.

David Leonard, executive vice president of RSUI Group in Atlanta, said that “to the extent reinsurers and insurers don't want to expose themselves to the high-severity [events], and they've had good years that created capital, then they've got to deploy that capital or watch their [returns-on-equity] go down,” noting that diversification into casualty represents one method to deploy the capital.

“We've already seen [offshore] companies that were primarily in the property market moving into the United States, wanting to set up specialty insurance operations to underwrite casualty business. That's got to have a negative impact on where the market will go for casualty,” he said, adding that there's likely to be more downward pressure on prices.

Mr. Goodwin said his company witnessed the Bermuda “Class of 2005″ companies that were set up in the wake of Hurricane Katrina start to “move out of the realm of cat and down into working layer covers and pro-rata-type deals” toward the end of last year.

Thomas Leonhardt, senior vice president for Towers Perrin Reinsurance in Chicago, also said some had moved into casualty by way of the workers' compensation line, because property-catastrophe experts can model comp aggregations using models similar to those used to model wind risks.

As for Florida, RSUI's Mr. Leonard said “it's unfortunate when we have a public-sector solution put in front of a private-sector solution that was really beginning to work,” noting that capital and limits were beginning to flow back to the state.

Just after Katrina, “if you were a large commercial risk, you could probably get 10 percent of your limit. It's probably back to 50-to-60 percent,” he said.

The law change, he said, “causes us to be concerned about the future because reinsurance is a very efficient and effective risk-spreading mechanism. What it's done is taken the international spread of risk through reinsurance out of the mix in Florida and concentrated the risk in the state,” he said.

“It's not a solution,” Mr. Leonhardt said. “I don't know where they're going to sell those bonds,” he added, referring to bond offerings that will support the catastrophe fund in the event of a large loss.

Mr. Bouhan said he believes, based on his reading of the law, there is a forced-placement provision that would require licensed companies to buy the “junk bonds from Florida,” potentially causing issues with other states reviewing the quality of asset portfolios.