AM Best: Florida’s Insurance Dilemma Might Continue Despite Hurricane Season Outcome

May 27, 2008
AM Best – Chad Hemenway

It appears at this point in Florida that all there is left to do is buy stock in plywood and take bets on what the next hurricane will be named, because what has been done in the Florida legislature — what they are terming insurance reforms — isn’t really going to come in handy unless the state dodges hurricanes.

And maybe not even then.

At the end of a legislative session, what Florida residents got were promises for the future and an insurance market that looks increasingly like one national insurers with the most capital would rather avoid. They’ve already been accused of conspiracy and collusion by its governor, and one was just temporarily suspended from writing.

Florida split the baby, and the situation is dire enough that no one prevented it. Everyone took what they could get and hunkered down. For insurers, the legislature removed language subjecting the industry to antitrust laws and the idea it had about insurers needing regulatory approval for nonrenewals. Lawmakers also reduced proposed increases in fines for noncompliance with regulators and made it easier for them to be sued for not settling “undisputed” portions of a claim.

In the meantime, Citizens Property Insurance Corp. will remove $250 million from its surplus to provide loans for start-ups. The loans, currently funded by the state, have been available and dozens of companies did spring to life — enough to begin a plan for some of them, called “take-outs,” to remove policies from Citizens, the state’s largest homeowners insurer, in order to spread the risk.

That is good news and it’ll be better news in November, if the companies have weathered the storm. Solvency is a question that can only be answered under the worst circumstances. But if the domestics are running by that time, then that will mean Florida again was lucky and Citizens was not too overrun, which means the hurricane catastrophe fund did not have to sell bonds on the street corner in order to pay the insurers’ claims. A recent A.M. Best Special report said finding investors willing to buy these bonds would be difficult.

But if the season does end with more scares than actual hits, does Florida rejoice? Surpluses will continue to build. Competition will increase. Residents will begin seeing rate reductions (even though they’ll be paying that pesky surcharge to pay policy claims from 2005). Jimmy Buffet songs will be blasting from every corner of the state and stock in plywood will be sold in order to purchase stock in margarita mix!

Not exactly. If the storm never comes, insurers will likely go right back to butting heads with the state, which will be threatening to fine them for noncompliance. There may be no secrets soon. Insurers could be expected to hand over everything to the OIR without the services of an arbitration process and with a ban on file-and-use practices when asking for rates that must be set using state-approved models.

In a move to appease voters, the Legislature has prevented Citizens from establishing actuarially sound rates until 2010 and it will have $250 million less in surplus. In addition, the hurricane catastrophe fund will still have a $28 billion piano on its back.

Mind you, that’s the best case scenario.

The 2008 Special Report by A.M. Best: Credit Crunch Clouds Outlook of Hurricane Insurers, Cat Funds is attached to the original document for your review.