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The continuing challenges of Florida's E&S market: a roundtable discussion with three experts.


The traditional role of the excess and surplus (E&S) lines industry has been to provide a market for insuring hard-to-place risks not written by the standard markets. The National Association of Professional Surplus Lines Offices outlines three basic categories of surplus lines risks: Non-standard risks that have unusual underwriting characteristics; unique risks that admitted carriers do not offer a filed policy form or rate; and capacity risks where a client seeks a higher level of coverage.

Because of its unique position in the industry, E&S operations are relatively free of regulatory interference. Surplus lines is not, however, immune to the problems of the overall economy. As noted in the November issue of Florida Underwriter, the trending for Florida's E&S premiums written has been a fairly consistent drop off for the past several years.


A report from Gary Pullen, executive director of the Florida Surplus Lines Service Office (FSLSO), showed that total surplus lines premium in 2010 was $3.88 million versus $4.03 million in 2009. Total surplus lines policy count in 2010 was 775,000 versus 791,000 in 2009. Pullen noted that while the number of reported policies followed a trend line similar to reported premium, as a percentage the decrease in policies was about half of the percentage decrease in reported premium. Pullen said this is evidence that the premium per policy has decreased as a result of market competition.

Pullen was able to offer some positive numbers. Agent submissions in 2010 were 277,510, up from 206,041 in 2009, a gain of 34.7 percent. Agent-originated policies were up slightly: 774,638 in 2010 compared to 773,816 in 2009.

To put these statistics into perspective and give us additional inside views into our current E&S market, Florida Underwriter spoke with three insurance executives from across the state: Michael Franzese, CPCU, CIC, CRM, ASLI, CPA, vice president with Burns & Wilcox in Tampa; Ron Gabor, president of Gabor Insurance Services, Inc., in Miami; and Irvin "Skip" Wolf III, a senior vice president at Regional Excess Underwriters, LLC, in Jacksonville.

This excerpt from our conversation focuses primarily on legislative issues and capacity. The second installment, which will appear in a Florida Surplus Lines Association E&S Supplement in the April edition of Florida Underwriter, will focus on market cycles, emerging coverages, and the impact of the standard market.

FLAU: According to the Florida Surplus Lines Service Office (FSLSO), no new carriers entered the Florida E&S market in 2010. Do you attribute this to the economy (both nationwide and in Florida), or to the insurance market and regulatory environment specific to our state?


Franzese: The economy has reduced exposures nationally as well as in Florida. There was no real corresponding reduction in capital in the marketplace, which created excess capital. With the amount of excess capital in the market place right now, there is really no great need for a new market. E&S markets are less constricted by regulations in most states. While Florida's regulatory environment may be perceived to be less carrier-friendly than most states, I do not believe that was the driving force in no new markets coming here.

Gabor: If no new carriers entered the E&S market in Florida in 2010 it is probably due to more of a saturation point being reached than anything else. I do not believe that the regulatory environment has kept out surplus lines markets in Florida--probably just the opposite. The regulatory environment has helped surplus lines in Florida as it has kept the admitted carriers out.

Wolf: Definitely a combination of factors, both economic and regulatory. The downturn in the national economy has played a major role, combined with the ongoing struggles in the Florida economy. Florida's personal and commercial foreclosure statistics and unemployment rates are national leaders. Florida's regulatory environment is not viewed in a positive manner, which in itself hinders the state's ability to attract additional capital from the insurance industry. When taken together with the catastrophic exposures presented by our market, there are other locations around the country where the industry can deploy capital that will allow carriers the opportunity to maximize their returns without additional undue pressures.

FLAU: With organic growth languishing, do you foresee significant merger and acquisition activity in 2011 for brokerages, agencies, carriers?

Franzese: There will likely be some mergers and acquisitions this year, but probably not a significant increase from prior years. Many brokers and agents want to get the most they can for their businesses. With revenues down over the past few years, they will not be able to get top dollar right now, so they will want to hang on until the good times return. The challenge for these businesses will be if they have not implemented expense controls over the past few years.


There are some brokers and agents who are financially secure. They may be interested in expanding their reach into new markets. One quick way for them to do so is via acquisition.

Gabor: I do not believe that we will see a significant increase in M&A activity this year. I think that those who might want to sell will try to hold out, awaiting a market upturn. Of course, there will always be those who, for various reasons, have more immediate needs.

Wolf: There is always talk about mergers at the carrier level. One never knows what Wall Street has cooking. For brokerage and agencies, we envision a rash of this activity similar to what we witnessed in the E&S market in 2009 and 2010 when several large wholesale operations combined. At the same time we also saw the entry into the market of several new firms.

As you noted, organic growth is languishing, certainly at the retail and wholesale level, so the primary way of increasing revenue and writings is either through acquisition or the selective hiring of key brokerage teams. Without a true specialty or underwriting relationship in place, I would suggest it will be very difficult for the smaller or regional independent agents and wholesalers to sustain themselves if the present soft market continues for too much longer.

FLAU: We have a new governor, CFO, and Attorney General. If you could send any of them a to-do list (or a leave-it-alone list) concerning Florida's E&S industry, what would it include?

Franzese: Gov. Rick Scott already has said he needs to address Citizens Property Insurance Corp.'s size and inadequate rates. Getting Citizens' rates actuarially sound should be high on his to-do list. He also should work toward allowing the free market to operate in Florida. This could have a positive impact on the E&S market for years to come.

Gabor: I believe that there are a number of pressing issues that the Legislature and the executive branch need to address. While these are not specific to surplus lines, they impact all of us. First amongst them will be the scaling back of Citizens. This is one of the biggest threats to the state of Florida. They should start by removing non-residential commercial lines from Citizens. There is no need for Citizens to write this risk, and it needs to be stopped before it does to the commercial market what Citizens' Personal Residential plan has done to the homeowners' market and the Commercial Residential plan has done to that segment. The residential side of Citizens has to have rates that properly reflect exposure and in many cases have coverages narrowed to those appropriate for a market of last resort.

We also need to address the multitude of problems that have caused property claims to skyrocket in non-hurricane years, and are a result of a general abuse of our legal system. Hopefully, Gov. Scott will have a different attitude than former Gov. Charlie Christ and will recognize that the insurance industry is not an enemy of the people. I hope that the entire Cabinet recognizes that it is to Florida's advantage to have a regulatory environment that encourages insurance companies to write in this state and to move away from its present image of being one of the most difficult states to do business in from a regulatory point of view. Rate regulation isn't just about making certain that rates are not too high; it is also about ensuring that rates for all companies are adequate. Florida's insolvency rate for domestic carriers is simply inexcusable, and the blame for this must rest with the regulators.

Wolf: My first priority would be for Citizens to be legislated back to its original purpose--a market of last resort for residential properties needing wind/ hail coverage. It should be prohibited from writing any commercial business. Commercial residential classes should also be limited to the perils of wind and hail only, with the amount of coverage sub-limited to a maximum of $2.5 million per insured. It is astonishing that Citizens has been allowed to accumulate an aggregate exposure of almost $457 billion with a surplus position of about $4.6 billion. Additional sources of revenue from the Cat Fund and pre-event bonding would bring the total dollars available to pay claims to $14 billion.

The surplus lines market should be included in the declination pro cess prior to any account being considered by Citizens. The E&S market has been excluded from this process since Citizens' inception. Our market segment helped save the Florida economy during the 2004-2006 hurricane seasons, and worked diligently to allow business to continue as usual. A good portion of Citizens' business should have been written by the E&S market.

As commercial lines are deregulated in the admitted market, the due diligence requirement for surplus lines consideration should be eliminated.

The E&S per policy fee should be increased to a maximum of $125. The current limitation of $35 per policy is outdated and does not reflect the costs associated with placing and underwriting business in the surplus lines market today.

FLAU: The Nonadmitted & Reinsurance Reform Act (NRRA) is scheduled to go into effect on July 21. When that happens, many of the existing state laws and regulations addressing placements of non-admitted insurance will be preempted by federal law. What is Florida doing to get ready?

Franzese: Florida will be ready when the NRRA is implemented in July. The regulators in Florida--including people from the Office of Insurance Regulation (OIR) and the FSLSO--are actively involved in working on an agreement (SLIMPACT) with the other state regulators. Much of the business currently placed in the Florida E&S marketplace is not multi-state business and will continue to be subject to Florida laws. The legislators need to make sure they make the modifications to state law that will allow any national agreements to work in Florida.

Gabor: I am not certain that anyone is really ready for the effects of the NRRA. I believe that the Florida legislature will need to take action in order to allow Florida to participate in either an interstate compact or other similar agreement between the states. The Florida OIR has been very active within the National Association of Insurance Commissioners (NAIC) in trying to draft an agreement between the states, but it is yet to be seen what Florida and the other major states will do insofar as joining any of these. The NRRA will change the way surplus lines business is transacted and could, if Florida does not take proper action, have a negative effect on the state far beyond just insurance agents, wholesalers, and insureds of surplus lines carriers. Florida needs to be a part of a compact such as SLIMPACT or the NAIC-proposed Nonadmitted Insurance Multi-State Agreement (NIMA), and to encourage the other states to belong as well.

Wolf: NRRA is very complicated legislation, especially its implementation at the state level. It is designed to impact the insured with multi-state exposures rather than the single location risk. It also addresses other regulatory issues in respect to surplus lines insurance and brokers.

The major issue facing Florida from this federal statute is the collection and allocation of Florida state premium taxes and assessments (such as for Citizens or the Cat Fund), when Florida is not the home state of the insured. This was not addressed in the legislation and must be dealt with by the states.

NRRA specifically prohibits states, other than the "home state" of the insured, from taxing the non-admitted premium of multi-state risks. Ironically, the law permits but does not require the "home state" to tax 100 percent of the premium for multi-state risks.

Florida has been actively involved in the process to resolve these tax issues. The OIR and FSLSO are working with the NAIC to reach an agreement that all states can subscribe to. The final agreement accepted will then dictate what statute changes, if any, need to be made to our current law. Several compacts have been presented by the various trades and states. Failure to participate or reach agreement could cost the states, including Florida, appreciable amounts of E&S tax revenue and needed assessment funds. The Florida Surplus Lines Association will be working with OIR and FSLSO to be certain any legislative action needed will be forthcoming in order for Florida to receive and retain its proper share of this revenue.

FLAU: Closing Thoughts?

Wolf: Florida faces major insurance challenges as we move into 2011 and beyond. These are a result of our own making. The "800-pound gorilla in the room"--the state-supported Citizens--has the ability to devastate Florida financially and permanently. Given the intertwined relationships of Citizens, the Cat Fund, and the Florida Guaranty Fund, one can only imagine the assessments and other costs Floridians will be asked to bear to salvage this massive, financially tangled web of confusion when the next major storm hits the Sunshine State. ?

Michael Franzese, CPCU, CIC, CRM, ASLI, CPA, is a vice president with Burns & Wilcox, and a member of the Board of Directors of the Florida Surplus Lines Association. Burns & Wilcox is North America's largest independent wholesaler and managing general agent, with 37 offices in nationwide and in London. Franzese may be reached at or 813-558-9560.

Ron Gabor is president of Gabor Insurance Services, Inc., in Miami, a full service MGA and E&S broker dealing exclusively with retail insurance agencies. He is a member and past officer of the Florida Surplus Lines Association. Gabor may be reached at or 786-924-7070.

Irvin "Skip" Wolf III is a senior vice president and regional manager at Regional Excess Underwriters, LLC, in Jacksonville. REU is a wholly owned subsidiary of W.R. Berkley Corp. with offices throughout the U.S. Wolf is treasurer and a member of the Board of Directors of the Florida Surplus Lines Association and a member of the Board of Directors for the Independent Agents Association of Northeast Florida. Wolf may be reached at or 866-873-0171.

By Joan E. Collier

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Author:Collier, Joan E.
Publication:Florida Underwriter
Article Type:Cover story
Geographic Code:1U5FL
Date:Feb 1, 2011
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