Deep impact: new Florida homeowners insurance laws are influencing the insurance and reinsurance market in other states and other lines.

Florida winds--whether hurricane-strength or political--can reach far beyond the Sunshine State's borders.

The Florida Legislature's recent decision to expand the Florida Hurricane Catastrophe Fund to offer cheaper reinsurance to homeowners insurers has impacted the entire reinsurance industry, some experts said.

Also, many in the industry question the ability of Florida to recover from another major hurricane--a peril, they say, that has the potential to increase in frequency and severity.

Florida's Plan

In early January, Florida enacted legislation to make homeowners insurance more affordable, including expanding the Florida Hurricane Catastrophe Fund.

The idea was to make reinsurance cheaper for homeowners insurers, who would then pass the savings on to their policyholders. "We have heard the calls for help from Floridians suffering from high insurance rates," Florida Gov. Charlie Crist said in a statement.

While early reports show homeowners rates are not dropping as low as expected, the state fund expansion is equivalent to a $38 billion-capitalized reinsurer coming into the state, according to Willis Group.

To put it another way, about $55 billion in property catastrophe reinsurance limits were purchased in 2006. The Florida pool has been expanded to $12 billion (and could grow by another $4 billion). That's 20% of the total market buy that's been taken out of the private sector, noted Rob Bredahl, president of reinsurance broker Benfield.

"Twenty percent of the total cat limit--and the highest paying cat limit--being taken off the market has led to the market softening," Bredahl said.

In a matter of weeks, the property catastrophe market went from one with firm pricing and limited capacity to one with soft pricing and excess capacity.

The Impact

The Florida Hurricane Catastrophe Fund has been expanded to provide additional coverage above and below the original program. The reinsurance is being offered at a fraction of the cost charged by the private market, said Vibhu Sharma, chief financial officer of Collins, also a reinsurance broker. The fund is charging about $2.3 million for $100 million in coverage, compared to $12.5 million to $17.5 million for the same coverage purchased in the private market.

"The state of Florida is in effect becoming the reinsurer," which has had a swift and tremendous impact on the entire reinsurance industry, Sharma said. "It took the hardness of the market off real quick."

Anne Marie Roberts, president and chief executive officer of BMS Intermediaries Inc., said reinsurers with excess capacity now are using it to write property business in other regions and even other lines, which is softening rates elsewhere.

"Rates are dropping. It's pushing prices down in the Midwest, and in the mid-Atlantic if you don't have coastal exposure," Roberts said. "Companies with capital to burn may apply it to writing casualty lines. There's a lot more capacity out there. But I don't think you'll see the soft market you saw before Sept. 11, 2001."

Sharma suggested reinsurers may redeploy their capital by looking at mergers and acquisitions, or repurchasing shares of stock. Some industry watchers suggested the softer market will lead to a slowing of hedge fund and private equity investing in insurance. (See New Capital Flow Slows on page 40.)

Pierre L. Ozendo, a member of Swiss Re's executive board, said it's not yet clear how much the legislation will impact the reinsurance marketplace outside of property catastrophe coverage.

Another View

Hannover Re said in a February conference call that the expansion of the Florida cat fund--which could cost the company up to $25 million in premium--also brings new opportunities.

Hans Rohlf, managing director of Hannover Re's North American treaty division, said the Florida cat fund covers up to a 1-in-65-years storm, and that many insurers will look to buy coverage for a 1-in-100-years event.

Also, while the attachment point of the fund has been cut from $6 billion to $3 billion, many companies will want to purchase coverage under the $3 billion threshold.

"So this is also an opportunity," Rohlf said during the Feb. 8, 2007, call. "If you take it all together, it's a substantial change, yes; one has to admit it. Automatically it will reduce our opportunities--this $25 million which I said earlier--slightly, but it offers additional opportunities on an overall basis."

Questionable Viability

It might take some time before the industry feels the full effect of Florida's new law.

Sharma said most property catastrophe treaties in Florida renew June 1. "We might see some decrease [in rates] occur on 6/1/07, but the greater effect will be seen in 2008," he said.

Meanwhile, many in the insurance industry continue to question the viability of Florida's plan.

"It's a risky venture," Sharma said.

What Florida is doing is attempting to keep rates artificially low--below the actual cost of the risk, Sharma said. "If someone wants to build a $5 million home on oceanfront property, they should pay market rates for insurance on it."

The state, he said, is betting that if a loss were to occur, the federal government would provide some aid, while the state could issue bonds in the public sector to cover losses.

The private market should be allowed to function, Sharma said. "Over time, the private market is generally fight. People make money, new capital comes in, which brings new competition, and rates go down. If rates are too low, the private sector exits, and rates have to go up. It's good old capitalism," Sharma said.

Bob Deutsch, CEO of Ironshore, a commercial property catastrophe writer launched in January, said: "A political solution that distorts the marketplace is rarely a good long-term solution. It's a subsidy from one group of taxpayers to another. They are subsidizing for people who aren't paying actuarially sound prices. They live on the coast and coastal exposures are high, even if voters don't like to pay all that money."

Ozendo, of Swiss Re, said offering reinsurance rates below the risk-adjusted rate "is a dangerous practice. We know the incidence of hurricanes, the frequency and severity is increasing. To have a situation where hurricane exposure is underpriced, intentionally or otherwise, ... the state of Florida is putting that mortgage on the back of its citizens."

A study by Tillinghast Towers Perrin on behalf of the Associated Industries of Florida found any perceived savings from the Florida law would quickly be outpaced by the actual cost of even a moderate hurricane.

Per household, the cost to pay off bonds to cover losses could range from $1,700 for a moderate hurricane to $14,000 for a major hurricane, and be spread over the next 10 to 20 years in assessments to auto, homeowners and business insurance, the study found. The average premium savings in 2007 from the legislation is $265 per household, according to the study.

"No one knows the size of a potential hurricane. It could be anything from a 1-in-20-years event to a 1-in-100-years event, which could create post-funding of up to $50 billion for the state," Ozendo said.

Insurers paid $89 billion in hurricane claims in the 2004-05 hurricane season, he said, $31 billion in Florida alone.

"I think the state is talking about the industry gouging consumers. But for the last decade and a haft, insurers have paid $11 billion more in losses than they received in premiums," Ozendo said.

Ozendo said insurers aren't asking for sympathy.

"Citizens, the state insurance company, should be the insurer of last resort. It should be able to help subsidize insurance for those who cannot afford it. What the current legislation does is subsidize insurance for those who can afford it," Ozendo said.

Key Points

* The expansion of Florida's catastrophe fund is equivalent to a $38 billion reinsurer moving into the state.

* The fund is offering reinsurance at prices below private market rates for instance, charging $2.3 million for $100 million in coverage, compared to $12.5 million to $17.5 million for the same coverage purchased in the private market.

* The cost for Florida to issue bonds to pay for even a moderate hurricane loss would eclipse any premium savings homeowners might receive from the expanded fund.

Key Features of the New Florida Law

* Expands the Florida Hurricane Catastrophe Fund to provide additional coverage above and below the original program. Insurers can now buy additional reinsurance in $1 billion increments up to $12 billion above the FHCF industry-limit of $16 billion estimated for 2007.

* Eliminates "cherry picking." Florida private-passenger auto writers who write homeowners in other states will be required to offer homeowners in Florida.

* Requires every homeowners insurer to file rates reflecting savings from the cat fund expansion--even if they do not participate in the cat fund.

* Changes Citizens Property Insurance Corp.'s rates to make it the most competitive homeowners insurer in Florida; opens door to allow Citizens to pick up commercial coverages currently written by the Property Casualty Joint Underwriting Association (subject to state approval); allows Citizens to write multiperil, insurance in high-risk areas.

* Increases reserve requirements for Florida-only subsidiaries to $50 million in policyholders' surplus; eliminates collateral requirements for non-U.S. insurers, suspends the "use-and-file rate filings.

Source: Collins

How the Florida Hurricane Catastrophe Fund Expanded

The Florida Legislature expanded the state-run cat fund to provide additional coverage above and below the original program. The maximum industry losses that could be covered have been increased to 90% of $37 billion in excess of $3 billion, compared to the previous maximum of 90% of $18 billion in excess of $6 billion. ($ Billions)