Florida 2007 Update: Law Changes and Market Responses

The severe storm seasons of 2004 and 2005 followed years of poor results by reinsurers, and decades of volatile and generally unprofitable results for Florida Property insurance. When the market hardened in 2006, Florida insurance buyers, especially homeowners, saw some of the largest changes in price and capacity. House sales and prices in some areas fell sharply. This situation may have been a surprise to Florida politicians, who thought that they had already “fixed” their insurance issues during the previous two years. The legislature responded in early 2007 with another far-reaching measure, House Bill 1A (HB 1A), designed to rapidly reduce insurance prices and increase availability for consumers, and Senate Bill (SB) 2498, a following technical bill passed during the regular legislative session.

Due to these law changes — but also new capital and strong earnings for reinsurers — the Florida reinsurance market has moderated from last year’s level, but is still at historically high prices. Many insurance consumers still face premium increases and limited alternatives. They also have an increased long-term exposure to policy assessments. This Holborn Perspectives paper summarizes the new laws, the reasons behind them, and describes the Florida Property insurance market and its current trends.

Summary

A. What the New Laws Do — Summary of the 2007 legislation, including the changes to the Florida Hurricane Catastrophe Fund and Citizens Insurance, new rate standards and “anti-cherry picking” requirements.

B. Why the Changes? Mid-year 2006 was the hardest Property reinsurance market in memory, and, Florida was the hardest part of the market. Although, there were other areas in disarray, as well.

C. What Was There Before HB 1A? The prior structure of the Florida market and pools.

D. What the Laws Mean for Buyers and Sellers — Observation on current effect on Florida personal lines writers, other Florida companies, other peak-exposed companies, non-peak companies. Long-term view on assessments and subsidies.

E. Market Responses

F. For More Information

G. Technical Appendices: Background and statistical information

A. What the New Laws Do

The Florida Legislature met in special session in January and adopted a comprehensive package intended to both directly and indirectly decrease the cost of residential insurance coverage. HB 1A reduced the price and increased the capacity of the reinsurance that the state provides to residential insurers through the Florida Hurricane Catastrophe Fund. It forced corresponding rate reductions. Rates were also reduced at Citizens Insurance, the residual market. Both changes significantly increased the potential for policyholder assessments from both entities and perhaps of government “bail outs”.

HB 1A was signed by Governor Charlie Crist on January 25. A subsequent bill, SB 2498, included both technical corrections and further expansions of some consumer protections. It passed both houses unanimously in early May. The two laws address other areas; some encourage long-term hazard reduction and some items are not substantial. Several provisions of both bills are temporary.

The major provisions of HB 1A were organized by the House Whip’s staff as follows (with some additions noted where amended by SB 2498):

Insurance Industry Accountability and Consumer Protection

• Florida-only, Homeowners-business subsidiaries of national groups (“pup” companies) must now have cash assets of over $50Mn, and SB 2498 forbids creating new pups. Rate filings for these local subsidiaries must disclose the parents’ profitability.


• A new excess profits tax was introduced, although with terms that are unlikely to have much effect (a ten-year underwriting profit in excess of 10%, and surplus over the 1-in-250 year gross PML).


• Prior-approval rate filings are required, and dispute arbitration is suspended, for the next two years.


• A new “anti-cherry picking” provision, effective January 1, 2008, requires insurer groups selling both Auto and Homeowners outside of Florida to sell at least some Homeowners policies in the state, in order to continue providing Auto. Since no minimum amount of Homeowners business is required, this also will have little short-term effect.


• New loss-reporting requirements after hurricanes.


• Increased consumer options for wind deductibles and for excluding Wind coverage entirely.


• Increased payment options for the insureds of Citizens Insurance, and requirements that private companies offer payment plans (which many nationally companies were already doing).


• New option for excluding Contents coverage.


• Expanded disclosure of the various assessments.

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