In May, GR ran a readership survey to establish what impact new Florida laws could have on the Bermuda market ahead of the mid-year renewals. Helen Yates presents the results

Will new Florida laws see Bermudian reinsurers lose premium at the mid-year renewals? Florida governor Charlie Crist’s controversial new legislation, signed into law in February, raised fears that private market insurers and reinsurers would be squeezed out of this important property catastrophe market.

Crist fought and won last year’s election campaign in Florida by promising he would do something about the state’s inflated homeowner rates. His solution was to double the capacity of the state’s reinsurer-of-last-resort, the Florida Hurricane Catastrophe Fund (FHCF), and increase the capacity of the state’s insurer-of-last-resort, Citizens Property Insurance. In addition, he offered the insurer the right to undercut rates offered by the private market.

With Bermudian reinsurers relying so much on the Florida market (they write around 35% of homeowners reinsurance in the state), the impact was expected to be felt hardest there, particularly come the mid-year “Florida book” renewals. Back in February, Willis Re researcher David Pannell said the impact would be akin to the creation of a $38bn capitalised Florida reinsurer. Since then, other commentators have argued that the impact has not been as bad as first anticipated. So what do our readers think?

Downward pressure on rates

The majority of those surveyed said the new laws in Florida would negatively influence reinsurance rates at the mid-year renewals. Fifty percent said it would push “moderately” to softer rates, while 13% said it would push “strongly” to softer rates. Interestingly, 17% thought it would push “moderately” to harder rates. A further 17% thought it would have a neutral impact (see figure 1).

“Property catastrophe rates are down 20% to 30% compared to a year ago. There is much less business in the market as a result of the expansion of the Florida Hurricane Catastrophe Fund,” said one respondent. Others thought Bermuda would have had to contend with softening rates regardless. “Even without the FHCF, the incredibly good results enjoyed by reinsurers generally for the 2006 undewriting year, which more than offset the poor 2004 and 2005 results, plus additional capacity in Bermuda would have led to a softening of prices,” was another view.

Other respondents doubted the expansion of the FHCF would have any impact at all. “Most carriers are requesting as much or more reinsurance capacity as last year despite the expanded FHCF,” said one. “The softening is more down to increased capacity compared to last year.” A Dublin-based reinsurance underwriter went further. “The cat fund has been a total red herring,” he said. “It’s getting soft and this was just an excuse to make everything softer.” Less than one third of respondents said they would be looking to reallocate capacity away from the Florida market. Returning capital to shareholders and expanding into new markets were the favoured options for reallocation (see figure 2).

Too much capacity; too little business

Others saw softening extending to non-US catastrophe markets and to other lines of business. “Cat XL [catastrophe excess-of-loss] reinsurers will look for opportunities to compensate the premium lost and, thus, further push the cat XL rates down outside the USA,” was one view. Many thought the continued pressure to diversify (from rating agencies and regulators) and now additional pressure to make up for lost premium could also lead to softening in other lines. “The generally weakening pricing in the catastrophe market will lead more Bermuda-based reinsurers (who had previously written only cat business) to expand into US casualty business,” said a Florida-based reinsurance consultant. “I therefore expect that segment of the market to suffer increasing pricing reductions as well.”

“Crist fought and won last year’s election campaign in Florida by promising he would do something about the state’s inflated homeowner rates

The majority (50%) of respondents agreed there was a moderate excess of available capacity in the Bermuda market, but there were varied views as to how that would manifest. Some thought non-traditional capacity would exit the market. “The opportunistic capital will withdraw if rates fall off,” said a London-based banker to the insurance industry.

There were concerns that unless M&A occurs and some capacity withdraws, rates will continue to go down. Others though, believe demand still outstrips supply in peak zones, particularly as a number of US insurers have upped their reinsurance spend in 2007.

Asked about a drop in written premiums experienced by a number of Bermuda companies after the first quarter of 2007, many said it was caused by greater competition and the increased pressure to diversify. “It’s 100% Florida Re,” said one respondent, but most were dubious about a direct link. “It’s not Florida-driven,” insisted one respondent. “It’s consistent with disciplined underwriting strategy on a global level.” Interestingly, there was an equal split between those who put the declines in premium down to underwriting discipline and those who said it was due to “rate cutting”.

Can Florida cope?

The most agreement anywhere in the survey came when GR asked readers about Florida’s chances of withstanding a hurricane season equivalent to that in 2004 (when the state was hit by four storms in quick succession). An impressive 78% gave Florida Re a moderate, slim or negligible chance of weathering such a scenario, if you’ll excuse the pun.

With catastrophe models now predicting that a 1-in-100-year event would double Florida’s public debt overnight, GR asked if the State of Florida’s pockets were deep enough to provide catastrophe reinsurance at long-term stable prices? Most said no. “Of course not! They’ll squeal to the federal government as soon as anything bad happens (and rue the day they became reinsurers),” was the general indictment.

The levels of condemnation of the Florida legislation, which is unsurprising given the impact on private market insurers and reinsurers, varied. Fifty-four percent opted to describe it as, “A well-meant but naïve scheme that could well have unforeseen, adverse financial consequences for Florida taxpayers”, while just shy of a third opted for the much stronger option, saying it was a “cynical piece of populist electioneering that will end in financial disaster for Florida”. One respondent’s advice was clear. “Take your capacity to other states – Florida is a loser and will continue to be!”

The language, on the whole, was emotive. Our readers quite clearly have strong feelings about the Florida situation and fears that this model could be adopted elsewhere (see figure 3). When asked about the proper role of the state or federal government in insuring catastrophes, the CEO of a New York-based reinsurance service provider, summed it up thus: “None. Get the feds out of all insurance – flood, nuclear, crop. Let the private sector do its job. Then if the losses are too great and pull the industry into a quagmire, let the feds come in and bail us out. That’s the American way!”

Helen Yates is editor of Global Reinsurance.