Study: Fla.'s Moves To Stabilize Property Market Both Good, Bad

NU Online News Service, Jan. 26, 1:13 p.m. EST

Stakeholders in Florida's fractured property insurance market are working to stabilize it and improve funding with a shift to risk-based pricing at an individual policy level and insurance regulation addressing capital adequacy, according to Towers Watson.

In a bulletin released today on the Florida property insurance market called "The Window of Opportunity," the consulting firm examined proposed or enacted state policy decisions that seek to reshape the market.

Towers Watson said one recently passed measure (HB 1495) will reduce the amount of reinsurance offered by the state-run Florida Hurricane Catastrophe Fund (FHCF) by $12 billion over the next six years while instituting a cash build-up program to pay claims.

Additionally, Florida's legislature voted to incrementally raise rates for policies written by Citizens Property Insurance Company–the state's insurer of last resort.

Towers Watson said of both initiatives, "These changes are designed to strengthen [state agencies] and shift more of the region's hurricane risk to well-capitalized private insurance and reinsurance companies."

Towers Watson added that the changes mean a higher proportion of hurricane losses will be paid by private capital rather than taxpayers.

Because of heavy reliance on the state for covering wind risks, Towers Watson cited concerns with Florida's unfunded hurricane liabilities and the state's ability to raise debt financing to pay for them.

The financial crisis brought those concerns into sharp focus, Towers Watson noted, prompting questions about Florida's post-event funding strategy that relies on the state's ability to sell bonds to finance its liabilities.

To date, Towers Watson said, the largest state debt issuance has been California's $12.3 billion bond in 2002. "Florida's potential hurricane liabilities are more than three times that amount, making its ability to fund catastrophes after they occur highly questionable," Towers Watson said.

The company added it assumes that HB 1495 reducing FHCF exposure "was passed with this issue in mind."

Two other bills considered during the last legislative session, HB 1171 and SB 2036, would have moved Florida toward a market-based solution to address the state's hurricane risk.

Those measures were designed to give a few large insurers the freedom to charge rates that would not be subject to approval by the Office of Insurance Regulation (OIR).

Under HB 1171, Towers Watson explained, insurers would have to have either $500 million or more in surplus funds; $200 million in surplus funds and a net written premium-to-policyholders surplus ratio of less than two to one; or greater than $150 million in surplus and selling primarily to nonprofit organizations.

Towers Watson said, "Proponents of HB 1171 assert that consumer choice is expanding by allowing Florida's residents to choose between large companies that charge their own actuarially calculated rates and smaller companies that are subject to the state's rate regulations."

The company said the bills would provide rate flexibility for some insurers, but would also create an uneven playing field.

While some initiatives in Florida seek to decrease the public sector's role in the market, Towers Watson said HB 1157 and SB 2384 propose the creation of a state-run wind-only pool for hurricane insurance risk.

Property owners would have two policies under this plan–hurricane coverage with a state-run pool, and private coverage for the balance of homeowners coverage.

Towers Watson said proponents of these bills contend that a wind-only pool would stabilize the marketplace by pooling funds locally and eliminating the profit load that private insurers and reinsurers include in premiums.

But Towers Watson said the creation of a wind-only pool would "dramatically increase Florida's reliance on funding catastrophes after they occur. Any event above a 1-in-30-year storm, Towers Watson said, would increase the state's reliance on post-event funding.