PropertyCasualty360.com
by Chad Hemenway
June 2, 2011
Forecasters say Florida is the most likely state to get a hurricane landfall, and storm activity is supposed to be above normal, putting all property insurers in this extremely volatile market on notice.
“It is hard to say,” answers Insurance Commissioner Kevin McCarty when asked how many of the state’s insurers will be in financial trouble if the forecasts are right. “It depends on whether it’s one event—how severe it is. Or will it be a series of events? What is the company’s reinsurance [and] reinstatements?”
“Some have high retentions,” he tells NU Online News Service. “Their survival is questionable.”
The Atlantic hurricane season began June 1. The Sunshine State has not been affected by a hurricane for several years. But it may not take a storm to push some teetering property insurers to the brink of collapse.
“This year will be a turning point for a few, and for more depending on the weather,” McCarty predicts.
He says three to five insurers, irrespective of hurricanes, will leave Florida this year. This is no revelation. The commissioner says he has been telling state officials this for some time, as the Office of Insurance Regulation (OIR) was “very active in promoting legislative change” in 2011, he adds.
“They aren’t able to secure [reinsurance] coverage,” McCarty says of insurers. “There will be winners and losers in Bermuda.”
Reinsurance costs was one of a handful of so-called “cost drivers” McCarty identified after speaking with the state’s insurers, many of whom have reported underwriting losses in years without hurricanes.
The industry looked to this year’s Legislative Session to cure some of the ills and wound up with SB 408.
“It’s a very good first step,” McCarty says. “Is it the panacea for the industry? No. But it is good, strong public policy that will help with some of the issues plaguing our companies.”
Since insurers buy reinsurance just as the hurricane season starts, insurers had long looked for an expedited way to recoup the costs because by the time companies were able to make a filing and get it approved, they had missed half the year to collect premiums.
SB 408 allows for a streamlined filing. McCarty’s office must look at the filing within 45 days, not 90.
“It will still be reviewed in the same manner,” he explains. “But this way is more reflective of reality.”
The law also requires insurers to carry $15 million of surplus, not the old standard of $5 million. Companies already operating in the state get 10 years to get to the new minimum.
Currently seven companies in Florida operate with a surplus under $6 million, McCarty says. The new minimum of $15 million, as well as other factors, will likely spur some merger and acquisition activity, he adds.
Via SB 408 insurers also get some relief when it comes to compensation for public adjusters, defining a sinkhole claim, replacement costs, and a shorter timeframe for policyholders to file a claim after a storm.
Citizens Property Insurance Corp., the state-run insurer, benefits from some of the language in the bill about public adjusters and it will be able to charge additional rates for sinkhole coverage. However, nothing was done to modify the rate plan of Citizens, which has long-eclipsed its intended purpose of being the last-resort insurer.
Citizens has become the largest writer of property insurance in the state, as rates from private companies have crept ahead of Citizens over the years.
“This is simply not sustainable,” McCarty says. “It prevents companies from deploying capital they have in Florida.”
Companies have applied for and taken less rate increases in order to prevent pricing themselves out of the market, especially since Citizens offers a lower rate, he adds.
Therefore, even with reforms in SB 408, “money is sitting on the sidelines,” McCarty adds, as companies observe the market. Whether SB 408 will attract any new players to the property insurance market “remains to be seen,” he said.
Competition from Citizens, and the potential for insurers to be assessed to pay the state-run insurer’s claims following a significant storm, is keeping private insurers away.
“These facts are something I need to be very candid about when I speak to companies about our market,” McCarty says.
http://www.propertycasualty360.com/2011/06/02/mccarty-fla-insurance-law-fixes-some-things-but-bi
