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Florida cat fund reforms seen as blow to reinsurers

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Florida cat fund reforms seen as blow to reinsurers

TALLAHASSEE, Fla.—Florida Gov. Charlie Crist dealt a blow to the reinsurance market last week in signing legislation to add up to $17 billion in state-backed capacity for buyers of property catastrophe reinsurance, among other sweeping changes.

The law could significantly reduce profits for the worldwide reinsurance market and halt the recent spate of start-up reinsurance vehicles that have targeted catastrophe risks, industry observers say.

Florida House Bill 1A--designed to curb rising homeowners property rates and promote private-market competition--boosts the state's subsidy of insurance rates through two state-backed vehicles: the Florida Hurricane Catastrophe Fund and Citizens Property Insurance Corp., traditionally the state's insurer of last resort.

Among other changes, the law doubles available limits under Florida's cat fund to about $33 billion. It also allows private insurers to buy state-backed reinsurance at below-market prices.

The legislation, which Gov. Crist signed into law last Thursday, includes other sweeping changes such as canceling rate increases by Citizens, freezing rate increases during 2007, lifting collateral requirements for non-U.S.-based reinsurers at the discretion of the Florida Office of Insurance Regulation, and requiring insurers to resolve claims within 90 days.

"With this legislation, the powerless have become the powerful," Gov. Crist said in a statement.

The law's expansion of the Florida cat fund "will help offset the massive increase in unregulated global reinsurance costs that have put immense upward pressure on insurance rates in Florida," said Insurance Commissioner Kevin McCarty in a statement.

However, insurance industry reaction was less positive.

"We remain concerned about the expanded role that this legislation provides for state government in the business of insurance," said a spokesman for the Des Plaines, Ill.-based Property Casualty Insurers Assn. of America in a statement. "This reform package transfers the cost of paying for future hurricanes to generations of taxpayers, mortgaging our economic future on the hope that a major storm won't strike anytime soon."

"The new law puts the burden of these potential losses squarely on the shoulders of the citizens of Florida instead of spreading the risk to the worldwide insurance and reinsurance market," said Frank Nutter, president of the Washington-based Reinsurance Assn. of America, in a statement.

While the law's impact on commercial lines insurers is expected to be limited, the reinsurance sector will be greatly affected, industry observers say.

"This bill is most detrimental to the reinsurers, as it adds significant, low-priced capacity to the (Florida) market," said David Small, an analyst at Bear, Stearns & Co., in a research note. "Reinsurers who were planning on a stable pricing environment at (July 1 renewals) are likely to see prices fall in many zones."

Bryon Ehrhart, president and chief executive officer of Aon Re Services in Chicago, said the law "certainly changes the metrics in the reinsurance market."

Observers say insurers will be lured from the private market to tap the billions in new low-cost capacity provided by Florida's cat fund.

In terms of the property catastrophe reinsurance industry, "we would argue that there is $1.5 to $2 billion of reinsurance premium which will come out of the market, and that market worldwide is probably $10 billion to $12 billion," said Vincent J. Dowling Jr., managing partner of Dowling & Partners L.L.C. in Farmington, Conn.

"However, the impact as far as profitability is higher, because the expected profit from Florida is higher than any other market in the world," Mr. Dowling said. "It is not inconceivable to be talking about 25% to 30% of the expected profitably of the worldwide property cat market (being) eliminated."

Companies with excess capital likely will either redeploy it to other parts of the reinsurance market or return it to shareholders through hefty dividends and share repurchases, observers say.

In addition, they say, the recent popularity of sidecars may wane in light of Florida's new legislation.

Florida's law could also mean more price volatility for insurance buyers, Aon's Mr. Ehrhart said.

"If one major season wipes out the capital...presumably that external capital will need to once again be located in the private marketplace," and the cost of acquiring that capital will increase, he said.

A provision that lifts collateral requirements for non-U.S. based reinsurers, could, however, benefit some non-U.S. companies, said Mark Rouck, senior director at Fitch Ratings in Chicago. The law will "make it easier for (foreign) reinsurers to provide capacity."