Legislation in Florida requiring the state's residual market insurer to reduce prices has cut its revenues dramatically and created actuarially unsound insurance rates, according to a brokerage executive.
Speaking earlier this month during the Stephens Springs Investment Conference in New York, Powell Brown, president of Daytona Beach, Fla.-based Brown & Brown, detailed how rates have changed over the past few decades to a point where they are almost half of what they once were prior to the 2005 hurricane season.
Florida is a major piece of the broker's business, Mr. Brown noted. Of $878 million in revenue last year, Florida accounted for $345 million. In its wholesale business alone, which accounts for 19 percent of Brown & Brown's business ($163 million in revenue), Florida's portion was approximately $90 million.
Mr. Brown noted that in 2004, for example, private rates for high-rise triple-floor condos in the counties of Palm Beach, Miami-Dade and Broward stood between 80 cents to $1 of $100 property value. Rates at Citizens, the state's insurer of last resort, were at $1.15. When the legislature made Citizens more competitive earlier this year, its rates dropped to 70 cents and settled at 55 cents, he said.
"They will tell you the rates are not actuarially sound and will stay the same through 2009," he said, adding that any competitors have to stay within 15 percent of Citizens rates to write business.
The positive part, he pointed out, is that reinsurance capacity expanded thanks to the state increasing its hurricane catastrophe fund so insurers can purchase cheaper reinsurance.
What this means, he said, is that rates dropped from $1 to 60 cents per $100 of value, or 75 percent of "what the market will bear." He noted, however, that what Brown & Brown offers is better coverage than what Citizens offers.
"Citizens is sort of like a Yugo–a stripped-down, basic coverage," he noted. "Our coverage is like a Cadillac."
There are a lot of condominiums coming into the market–about 90,000–some of which were out of the market until they were retrofitted with shutters or hurricane glass. Many of these can be written within Brown & Brown, he said.
Brown & Brown's wholesale business is also being affected by Citizens. He said commercial risks will be able to apply for wind-only coverage up to $10 million in property value. Any properties over $10 million in value will have to go to the private market for coverage.
Because of Citizens' effect on the marketplace, combined with the competitiveness of the soft market generally, Brown & Brown recorded negative internal growth for the first time in its history and saw first-quarter revenues slashed in half compared to the same period last year, Mr. Brown related.
And where it will all lead in the end is uncertain, depending on whether there are any major losses from a hurricane through this year, he said.
"There's lots of moving things going on with Citizens right now," said Mr. Brown. "My analogy is like a top spinning on a table. When it stops spinning, I will be in a better position to answer with more certainty what is happening in our business."
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