It was a short but informative visit last week paid to NU Editorial HQ here in Hoboken by Florida Insurance Commissioner Kevin McCarty, who laid out the reasons why his state is going its own way on reinsurance regulation, given its massive catastrophe exposure and the snail's pace of change at the national level.
(For full coverage of the Jan. 9 visit, click here.)
Mr. McCarty told NU that Florida would likely have a new reinsurance collateral law on the books by April, permitting foreign carriers in good standing to do business in the Sunshine State without having to post the equivalent of 100 percent of its potential liabilities--the standard trapped in the Byzantine model law alteration process at the National Association of Insurance Commissioners.
New York is taking the same road, prompting some to suggest (myself included) that the two states are going rogue (which, in this case, is a compliment, not a criticism).
Still, Mr. McCarty's frustration was plain as he addressed that point in our conference room. “We’ve been abundantly patient,” he told us, stating that his department was prepared to go along with a revised rule from the NAIC that would have set up a sliding scale of collateral for foreign and domestic firms alike, depending on how rating agencies viewed them.
But then the proposal got stuck in the seemingly endless NAIC review process. “We were disappointed the NAIC [went back to reconsider] something we had studied for seven years,” noted Mr. McCarty. Who could blame him? How long can the market afford to wait for state regulators as a whole to agree on anything? It's like herding cats!
Florida, however, is not about to go out on a limb alone. Mr. McCarty said his people are closely coordinating with the New York department to make sure both giant states are not independently reinventing the wheel. “At the end of the day, if not similar, the differences between the two regulations will be minimal,” he assured us.
The hope, of course, is that by making it easier to enter Florida (by not automatically having to post 100 percent collateral), capacity will rise--particularly for catastrophe exposures. Indeed, the commissioner's authority to revise the collateral rule came under the same legislation that allowed the Florida Hurricane Catastrophe Fund to offer reinsurance based on below-market pricing. That's all part of the "good cop" role in Florida's one-two punch.
However, there is a "bad cop" on duty as well. The grand plan is to lower property insurance rates for Floridians, but thus far, that objective has not been reached--at least not to the satisfaction of state lawmakers. That's prompted the scheduling of many hearings, extensive document demands and preparations for a massive class-action suit on the state's part.
Mr. McCarty said he would also like to see Uncle Sam offer some relief--if not by forming a national catastrophe insurance facility, then at least by allowing private carriers to take a tax deduction for disaster-reserves.
"The U.S. Tax Code is the problem," he said. "It makes no sense now for insurers to set aside a catastrophe reserve when they're going to get a 33 percent haircut."
However, he is not realistic help is on the way from Washington, even with the presidential candidates from both parties tripping over one another to pledge their support for a national cat plan to win support in the critical Florida primary just a couple of weeks away.
"It was hard to make the case [for a cat reserve tax deduction] when we had federal budget surpluses," he said. "Now that we have deficits, it's even harder," adding that the idea is "still seen as a bailout for insurers," raising the odds against passage even higher.
Meanwhile, he said, "there is a hurricane out there that is the daddy of all storms. We're doing our best to be prepared for it."
Comments (5)
Mr. McCarty completely forgets the bare, undisputable fact that neither he nor Gov. Crist consulted with the insurers before promising the rate decrease.
That number was picked because it would be politically popular, not because it would be possible to achieve.
Now they have to shovel like the dickens to:
1. Cover up their grave error, and
2. Still look like heroes to the public.
If Allstate can't renew their policies, do they really think there is enough capacity to pick them all up at reduced rates?
Will the replacement policies offer the same broadness of coverage that Allstate's do? That's unlikely, as most insurers entering the market in the last few years have only offered stripped-down policies.
I just saw another bulletin that said the restriction was just for writing new business. Since Allstate hasn't written any new business down here in years, I'm not sure that's much of a punishment!
Posted by Bill Lockhart | January 16, 2008 12:40 PM
Posted on January 16, 2008 12:40
Meanwhile, he (McCarty) said, "there is a hurricane out there that is the daddy of all storms. We're doing our best to be prepared for it."
That pretty much sums up the problem with Florida.
When you have over a trillion dollars in exposure out there, is there any amount of premium and reinsurance available to cover a Category 5 hitting South Florida, or criss-crossing the state and taking out Orlando/Tampa/St. Petersburg?
Posted by J.R. | January 16, 2008 1:16 PM
Posted on January 16, 2008 13:16
It's the same old song and dance, just a new tune to go with it.
Why do New York and Florida think they are so special as to deserve cut rates and tax incentives on property insurance premiums? I'm sure beyond a reasonable doubt that California is not far behind.
These states have high premiums due to the fact they are in high cat areas with the potential for widespread damage.
Meanwhile, Middle-Aamerica--that would be about 90% of the land and 50% of the people--are financing the premium cuts and reinsurance these states are trying to hold on to.
It's nice to try and control costs for your constituents, but at what cost?
I know I would love to live in a million-dollar home on the coast and have it reinsured by the rest of Middle-America, but unfortunately myself and everyone I know is on the other side of the equation.
Now Florida decides to suspend Allstate's authority to write business in the state. Wow, that was quick thinking! "Let's suspend the authority of the third-largest property carrier in the state, and show how tough we are."
If it comes back to bite them and Allstate decides to do something crazy--like, say, leave the state--Florida will be summarily screwed in Biblical-type proportions.
But I guess at that point Washington will step in and set up the cat fund that Florida wants so badly, and you, I and every American taxpayer can fund it through taxes and higher insurance premiums. (You didn't really think Washington was going to pick up the entire tab, did you?).
I don't fault Florida for trying to help their residents, but the way they are going about it is like removing a splinter with a table saw--it's way over the top.
The last time Florida had one of these brainstorms they came up with Citizens, and we know how that turned out.
Now Florida has actually sold their bad idea to Louisiana, who can now follow suit.
Posted by Michael Burnell | January 16, 2008 1:37 PM
Posted on January 16, 2008 13:37
Hmmm....0% collateral seems especially sweet with a falling dollar.
It almost lets you take an effective short position, and without having to wait for an uptick or be hassled with margin calls to boot!
Posted by Anonymous | January 17, 2008 1:46 PM
Posted on January 17, 2008 13:46
I worked with the Florida Office of Insurance Regulation on the Presumed Factor report. I can assure you that the number we came up with was not selected for political reasons.
We worked very hard to calculate the rate on line being paid by the primary insurers for the private reinsurance that was being replaced by the Florida CAT fund, and then compared it to the rate on line being charged by the CAT fund.
So the key assumption was the private rate on line as the CAT Fund rate on line was known as fixed by the Fund.
When we finished the calculation--a rate on line of 20 percent--I felt that we had done a good job with a complex problem. I was particularly pleased to see that an insurance entity had also estimated the private rate on line to be replaced and the number was identical to ours.
If you read the Presumed Factor Report you will see this at footnote 19, which states, "It should be noted that the estimate made during the special session by Paragon/Benfield, the CAT Fund's vendor, was also 20 percent."
Posted by Bob Hunter | January 17, 2008 2:45 PM
Posted on January 17, 2008 14:45