Fitch: Florida Insurance Bill Could Spell Trouble for Reinsurers
Florida Governor Charlie Crist is expected to sign into law this week legislation that will significantly reduce the average Florida homeowner's insurance premium. In a statement released today, Fitch Ratings said it does not believe the proposed legislation will have any impact on insurance company ratings. The agency did, however, say that it exects a significant negative impact for reinsurers in the Florida market. Fitch said it views Florida's proposed legislation as a mechanism to further suppress homeowner's insurance rates in a market where rates continue to be inadequate despite several large recent rate increases, and believes the best long term solution to the Florida homeowners market is for the state to allow competitive market forces to set rate levels and to continue to encourage risk mitigation efforts such as more stringent building code requirements (one example is the elimination of the Florida Panhandle exemption in the proposed legislation). Fitch expects that the legislation will enable the state to further subsidize insurance rates in Florida through both of its state-sponsored vehicles, the Florida Hurricane Catastrophe Fund (FHCF) and Citizens Property Insurance Corporation. The bill expands private insurers' access to below market cost reinsurance from the FHCF by increasing the available coverage up to $33 billion from $16 billion currently, with primary insurers required to pass the savings onto policyholders in the form of lower premium rates. In addition, several provisions of the proposed legislation will increase Citizens' competitiveness with the private market, Fitch said. This includes a repeal of Citizens recent average 23 percent rate increase that went into effect on the first of this year and 56 percent rate increase that was to be effective March 1, 2007, as well as a freeze of any additional rate increases for the remainder of 2007. Also, Citizens' premium rates are no longer required to be non-competitive with the voluntary market. State legislators have said they hope that these provisions will work to keep rates in the private market low. However, these actions will also serve to further increase the risk exposure to the FHCF and Citizens, as capacity in the voluntary market continues to decline, Fitch said. Fitch said it believes the proposed legislation will have a significant impact on reinsurers, as additional capacity from the FHCF will apply pressure on reinsurance rates and squeeze out private market capacity. Overall, Fitch believes the impact will be less on the primary market participants; however, Fitch noted two key items for the primary market. First, primary insurers rates will likely be impinged by the "excess profits" provision included in the legislation. Second, companies who write homeowners insurance in other states but not in Florida are no longer able to "cherry pick" the Florida auto business without offering Florida homeowner insurance business. Continued suppression of rates or reduced profitability are widely seen as factors driving primary insurers out of Florida's homeowner's market.