Although Florida has weathered the past four hurricane seasons with barely a strong wind and also has been spared the recent massive flooding experienced in other states, it is important to note some longer range historical facts. According to Dr. Robert Hartwig from the Insurance Information Institute, Florida has accounted for 19 percent of all U.S. catastrophe-insured losses from 1980 to 2008, by far the largest share of any state. Also, eight of the top 12 most costly disasters in history have affected Florida. As of 2007, Florida was the most exposed state for hurricane loss, with a total insured value of almost $2.5 trillion, up over $532 billion since 2004.

Faced with this catastrophe exposure, there is a widespread understanding within the global insurance and reinsurance market that many Florida property insurers are fighting an uphill battle to generate sufficient premium to keep pace with associated cost drivers and to manage their hurricane exposure.

The Current Makeup of Florida's Property Insurance Market

Florida's personal and commercial residential property insurance market today consists mostly of small domestic insurers, Citizens Property Insurance Corp. and State Farm Florida Insurance Co. As of the end of 2009, Citizens wrote 21.9 percent of Florida's personal and commercial residential property insurance premium, according to statistics from the Office of Insurance Regulation (OIR). State Farm Florida was next at 10.7 percent, although the insurer is in the early stages of non-renewing 125,000 of its policies.

The next four largest carriers cumulatively wrote 13.7 percent of Florida's annualized premium, with the rest of the market divided among approximately 200 carriers, most with less than a one percent market share.

Most of OIR's top 25 property writers are Florida domestic carriers. They and Citizens write an overwhelming majority of new policies. These carriers were also involved in the bulk of 2009 policy cancellations and non-renewals, indicating that they make up the significant portion of Florida's active market players. On the other hand, a little over four percent of the new policies written in 2009 among OIR's top 25 companies came from Florida-only affiliates of national carriers nicknamed PUPs.

According to Anita Byer, president of Setnor Byer Insurance and Risk in Plantation, "Our market is Citizens, the Florida domestics and a very small select group of national carriers or Florida PUPs."

Frank Russo, a principal agent for Florida Insurance Specialists in Lake Mary, said, "Big brand name national carriers are essentially out of the state altogether. This includes both coastal and inland properties. They couldn't get enough rate to stay here. The remaining companies can't get rate along the coast, so for those properties, it is all Citizens. The private market focus has been inland along Interstate 4 and north."

Citizens Continues to Loom Large, Impacting Competition

Citizens was created as an insurer-of-last-resort in 2002 under then-Insurance Commissioner Tom Gallagher, with Gov. Jeb Bush at the state's helm. Its creation sparked significant debate, and it has rarely been out of the news since.

According to Russo, "Ninety-nine percent of the consumers don't care about the ratings of companies or issues related to Citizens. They are only worried about price and will go with the lowest price."

Private carriers looking to write good business have had to deal with a very competitive market led by the publicly subsidized Citizens. Citizens' rates were frozen at 2005 levels through the end of 2009. It implemented its first "glide path" rate increase at the beginning of 2010, which will result in Citizens' policyholders seeing their first premium increases throughout 2010.

Heading into this year's hurricane season, Citizens has increased its policy count by a dramatic 4.8 percent from the end of 2009 through May 10, 2010. This increase to almost 1,050,000 risks may be related to normal growth plus a decline in depopulation activity, as well as the recent liquidations of Northern Capital Insurance Co. and Magnolia Insurance Co.  At one time, these now insolvent companies insured approximately 143,000 policyholders, many of whom probably ended up in Citizens.

In addition, 125,000 policies are currently in the process of being non-renewed by State Farm Florida under its December 2009 agreement with OIR to remain in the state. Each non-renewed policyholder must be given 180 days advance notice of non-renewal. Therefore, the impact of this non-renewal plan should start to be felt by mid-2010. While State Farm Florida agents have limited authority to place these policies with certain private market carriers, Byer surmised that, "State Farm will likely shed its highest risk policies, making it difficult to place them in the private market." If so, many of these policies could also end up in Citizens.

Byer further noted that, "Citizens is getting all the old homes and homes on the coast, except for some $1 million-plus homes that are going to financially sound A-rated admitted and non-admitted carriers, often at rates 30 percent higher." Considering the current market conditions and the recent developments, it is very likely that Citizens, already the largest property insurer in Florida by far, will continue to grow.

In an effort to provide relief to the takeout companies, the OIR recently lifted its mandate that Citizens' takeout policies must be renewed by the assuming insurers for three consecutive years. By lifting this ban, the OIR estimates that nearly 32,500 additional policies will be non-renewed over the coming year.  

Cost Drivers, Legislation and Regulation

But will there be insurers to take additional policies? While control over rates garners most of the ink in reports about the Florida property market, insurers are equally concerned about the cost drivers that affect the profitability of that line. 

Mark Brannon, a principal actuary for Merlinos & Associates, Inc., of Norcross, Ga., reviewed some of Florida's residential property insurance rate drivers starting with the implementation of HB 1A in January 2007 (the massive Insurance Industry Accountability and Consumer Protection Act passed during Special Session 2007A). According to Brannon, " . . . [the] average premium began to drop in mid-2007. This drop resulted from mandatory rate reductions due to cost savings expected under HB 1A related to the expansion of coverage available from the Florida Hurricane Catastrophe Fund. Also, insurers had to comply with the OIR's Windstorm Mitigation Discounts rule that required the increase of discounts that had been in effect for several years.

"Most insurers struggled to project the full impact of these rate adjustments on their books of business and had difficulty in gaining regulatory approval for indicated rate increases through 2008," Brannon continued. "At the same time, the cost of private reinsurance increased dramatically following the 2004 and 2005 hurricanes and remains at elevated levels. On top of all of that, non-catastrophe loss costs have just about doubled since 2006 in Florida and many other southeastern states."

Brannon further said, "These factors have been the primary drivers leading to the underwriting losses and surplus drain many companies have experienced, even though Florida has avoided any major catastrophe losses since 2005."

In a report to the Florida Cabinet on March 23, Commissioner McCarty acknowledged the challenges facing the property market. He indicated that, as of year-end 2009, "Eighty-one companies reported underwriting gains, while 100 companies reported underwriting losses."

As factors, the commissioner cited several Florida-specific cost drivers: Increased reinsurance costs, replacement cost claims payments, fraud, sinkhole claims, and premium reductions from the full implementation of mitigation discounts.

Closer Scrutiny of OIR Leads to More Scrutiny by OIR

Spurred by questions about insurer solvency from lawmakers and Cabinet officials, McCarty's office has been scrutinizing the books and records of certain carriers and encouraging them to better optimize their catastrophe risk allocation. OIR issued an Informational Memorandum on April 10 directing insurers to structure their reinsurance programs to consider a number of more likely catastrophe loss scenarios, rather than just the 100-year probable maximum loss benchmark.

During a recent presentation to the Cabinet focusing on the issues facing Florida's property market, McCarty reassured officials that, "We will not allow known troubled companies to enter the hurricane season without the financial capacity to pay claims; those companies that do not have the financial wherewithal to pay these claims will be either re-capitalized, acquired, merged or liquidated."

McCarty also indicated that three to four insurer failures per year is typical for Florida. With this in mind, it would be reasonable to expect more insurer liquidations, particularly if Florida experiences a catastrophic storm.

The rating agency Demotech continues to step up its scrutiny of the Florida domestic carriers with a possibility that it may take rating action against some of them. A rating downgrade by Demotech could prevent a carrier from continuing to write business. All of these developments could lead to the non-renewal of a significant number of policies.

On a positive note, Allstate's PUPs - the two Castle Key companies - previously agreed they would write new policies in Florida. OIR recently announced that the companies intend to write more than 50,000 new policies in 2010 and 2011, which may include Citizens' takeouts.

Crist Praises McCarty, Declares Reforms Good for Consumers

In his State of the State address before the Florida Legislature on March 2, Gov. Charlie Crist recounted his view of the condition of the Florida insurance market when he took office, the enactment of House Bill 1A in early 2007, and the developments that have arisen since. He declared that, "Three years later, Floridians are better off because of these insurance reforms and by the diligence of Insurance Commissioner Kevin McCarty, through his rejection of unjustified insurance premium hikes...."

Ultimately, only Mother Nature will determine how Floridians and the property insurance market will fare during the months ahead.

Fred E. Karlinsky is a shareholder in the law firm of Colodny, Fass, Talenfeld, Karlinsky, Abate. Richard J. Fidei is a partner in the firm. Karlinsky may be reached in the Ft. Lauderdale office at 954-332-1749 or by e-mail at fkarlinsky@cftlaw.com. Fidei may be reached in the Ft. Lauderdale office at 954-332-1758 or by e-mail at rfidei@cftlaw.com. The firm also has offices in Tallahassee. The firm specializes in insurance, legislative, regulatory and transactional law, commercial and civil litigation, governmental consulting and administrative law. Its litigation practice group handles commercial, civil rights, employment discrimination and child advocacy matters in both trial and appellate levels. More information is available at www.cftlaw.com.