Fitch Advises Florida Insurance Market Remains ‘Fragile’

May 20, 2009

Fitch Ratings agency is advising that the Florida property insurance market is “fragile” and remains a “peak risk zone.”

The Florida assessment is included in a Fitch report for investors right before the 2009 hurricane season starts and right after lawmakers passed legislation allowing some property insurance rate hikes.

The entire East Coast is the “world’s peak reinsurance aggregate zone,” says Fitch, and Florida represents a “significant portion of that risk.”

The ratings company identifies several particular concerns in the Florida market, including that the primary property market is “increasingly dominated by small, unrated” domestic carriers along with the state-backed insurer, Citizens Property Insurance Corp., and that primary insurance rates remain under wraps by regulators even while reinsurance rates are rising.

The analysis notes that the state, through the Florida Hurricane Catastrophe Fund (FHCF), subsidizes reinsurance to insurers in the state, but adds that “there is uncertainty as to whether the FHCF can meet all of its obligations in a severe storm season.”

The rating agency’s advisory is in keeping with warning from the state’s independent insurance agents and a consumer advocate last week that the state’s insurance rates and regulatory approach need to be reformed.

“The Florida hurricane insurance market has been strained since the significant losses incurred in 2004 and 2005 hurricane seasons. The financial crisis of 2008 did not improve this situation. Florida is a complex market with several moving parts,” Fitch writes.

The “moving parts” include the state-sponsored FHCF, which appears to be $14 billion short of being able to fulfill its obligation to reimburse insurers up to $27.8 billion after a major storm, and Citizens, which was designed to be an insurer of last resort but has become the largest primary insurer in the state with 14 percent personal lines and 29 percent commercial lines market share, according to Fitch.

Fitch also cites the pending withdrawal of the state’s second largest home insurer, State Farm Florida, which has 16 percent of the market or some 1.2 million policies, as contributing to Florida’s insurance outlook. Lawmakers have passed legislation, HB 1171, that would let large carriers raise rates, a measure some believe could keep State Farm from leaving, but there is uncertainty whether Gov. Charlie Crist will sign it.

The Florida Legislature has also passed legislation that will allow Citizens to raise its currently frozen premiums by up to 10 percent annually, beginning in 2010. The legislation, HB 1495, also promises to phase out the $12 billion upper layer of the coverage oeffered by the FHCF over a six-year period. Gov. Crist has indicated he will sign this legislation.

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