Fla. Property Insurance Reforms Might Not Hurt Reinsurers After All

Florida's property insurance reforms will not be as devastating to reinsurers as previously thought, but they also will not fully deliver premium reductions promised to insurance consumers, an insurance executive and former lawmaker contends.

Locke Burt, president of Royal Palm Insurance Company and Security First Insurance Company in Ormond Beach, Fla.–who is also a former Republican state senator in Florida–delivered an insider's account of the controversial legislation's passage and impact here during a Casualty Actuarial Society meeting on reinsurance.

Mr. Burt addressed the actuaries just two days after the Florida Legislature passed some late-session changes to a reform bill originally approved in January.

The original legislation essentially doubled the size of the Florida Hurricane Catastrophe Fund and expanded the role of Citizens Property Insurance Corp., the state's residual market mechanism.

The late-session changes passed earlier this month, among other things, further increased Citizens' role, allowing consumers to buy insurance from the facility if rates offered by other insurers are 15 percent higher.

In the aftermath of all the reforms, Mr. Burt reported, “Executives in the reinsurance business are pleasantly surprised as they move into midyear renewals,” referring to earlier predictions of dire reinsurance market implications.

Immediately after Gov. Charles Crist signed the original law in January, experts who analyze reinsurers in Bermuda and Europe warned that the increased size of the FHCF–offering reinsurance at below-market rates–would remove at least $1 billion in premiums out of a profitable market for property-catastrophe reinsurers.

Mr. Burt contradicted this claim, however, explaining to the actuaries that primary insurers are in fact buying more catastrophe reinsurance from the private market. “State Farm is in the market for almost $1 billion” in reinsurance coverage, while Allstate seeks more than $1 billion, according to Mr. Burt, who is also a reinsurance broker and managing general agent.

“I think the reinsurance premium volume will go down, but not anywhere near as much as [experts] thought,” he said, noting that higher probable-maximum-loss indications from catastrophe models partially explain why insurers are buying more reinsurance.

In addition, he explained that over the summer, insurers will make rate filings–referred to as “true-up” filings–in which they are required to pass the actual savings in reinsurance costs they experience as a result of FCHF changes onto consumers through lower rates.

“I think insurance company executives might be looking for additional ammunition to put in their summer filings,” he said, suggesting that this was a second reason for increased appetites for reinsurance coverage.

Earlier this year, the insurers made an initial round of “presumed-factor” filings to reflect anticipated reinsurance cost savings.

Mr. Burt, who presented a summary of the indicated presumed-factor filing rate decreases for the state's top-10 insurers, noted that only three of the carriers–Allstate, Federal Insurance and Tower Hill Preferred–indicated double-digit rate declines (14 percent, 12 percent and 16 percent, respectively).

Earlier, however, he said lawmakers had crafted “sound bites” telling Florida consumers who had policies from companies other than State Farm and Citizens that they would see 22 percent savings on their overall premiums, and 43 percent on wind premiums.

State Farm was excluded because of its unique reinsurance buying habits (including intercompany deals), as was Citizens, which doesn't buy any reinsurance. Savings for State Farm and Citizens customers were correctly projected at roughly 7 percent.

“There were some savings, but nothing close to what people were promised,” he said, noting that this was particularly true for those insured by large companies that started off with the lowest rate bases.

To make matters worse, “people had not seen the rate increases that were approved last year,” he said–noting, for example, that consumers were just starting to feel the impact of a 55 percent rate increase approved last August for his company, Security First, when the filings were made.

Among other provisions that might not pan out as lawmakers expect is one that attempts to prevent multi-line insurers from writing auto, but not homeowners, in Florida.

The statute doesn't say how much homeowners premium an insurer has to write, Mr. Burt pointed out, envisioning a scenario where an executive sticks his head out of his office, asks if anyone has a condo in Florida, and authorizes coverage for the three people that raise their hands.

Another way to comply with the statute is to become “affiliated” in some way with a Florida homeowners insurer, perhaps through a small ownership stake or exclusive marketing deal, he said, noting that “a lot of owners of little insurance companies…have been approached.”

Mr. Burt, who attended the January special legislative session, gave actuaries an insiders' view of the proposals and compromises that produced the legislation.

While he likened the process of coming up with the law to “watching truck drivers perform brain surgery,” he also gave a detailed description of the very real concerns that lawmakers were grappling with and a number of proposed alternative solutions.

Among the concerns, he said, were how to keep a hot real estate market going–”Florida's engine of economic growth”–and how to respond to consumer horror stories, with some people paying 10 percent of their take-home pay for insurance, he noted.

“That doesn't happen anywhere else in the world,” he said, sharing the contents of a letter from a policyholder paying close to $3,000 and facing the prospect of selling her home. “We are scared right now…Our future depends on your company's quote,” the letter said.

While an obvious solution was to attack reinsurance costs (which had grown from 7 percent of the premium dollar of four large insurers in 2002 to nearly 50 percent in 2007), Mr. Burt said lawmakers also considered eliminating premium taxes and agent commissions, replacing the latter with a one-time placement fee that's fully earned when a policy is sold.

While these ideas were rejected, another proposal that did make it into the law allows homeowners to cut costs by reducing coverage. Using the more palatable phrase, “Empowering consumers to make additional choices,” lawmakers passed provisions that allow homeowners to raise deductibles, forego contents coverage, or even forego wind coverage.

Homeowners electing the last option must sign handwritten statements saying, “I do not want the insurance on my home…to pay for damage from windstorms or hurricanes. I will pay those costs. My insurance will not,'” Mr. Burt reported, noting this could minimize coverage disputes.

In an effort to minimize insurer headaches in maintaining such records, the late-session amendments allow carriers to keep these on file electronically, he said.

Meanwhile, primary companies have concerns about both the viability of the Florida Hurricane Catastrophe Fund and competing with Citizens, which no longer has to charge rates at least as high as the average for the top-20 companies.

“The big companies are appalled by what's going on,” Mr. Burt said, referring to concerns about potential exposure to purchase bonds and policyholder assessments in the event of large FHCF losses, which prompted Auto-Owners and USAA to stop writing new business (except, in the case of USAA, for active military transferred to Florida).

Of interest to the actuaries, Mr. Burt noted that the only rate standard left in the new law for Citizens says rates “shall be actuarially sound,” which even a staff analysis accompanying the bill concedes “has no precise definition.”

“What does it mean to be 'actuarially sound' for a residual market that doesn't have capital and reinsurance, and doesn't face the risk of ruin?” Mr. Burt asked, speaking from the perspective of a concerned competing insurer that does have to include provisions for such costs in its rates.