Poor Timing?

The Governor of Florida and the Legislature have passed legislation solving, they hope, Florida’s property insurance challenges, but after a mild hurricane season and increasing competition in the insurance market are they buying at the peak? We won’t know for years whether this bet with (against?) Mother Nature is a good one, and the current politicians will probably not be around to deal with any problems that develop.
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In case you missed it, the new legislation puts the State of Florida in the insurance business by having the state assume a large share of the hurricane risk and by having Citizens compete with private insurers (see here, here, here and here). The legislation:
Is expected to result in significantly lower insurance premiums through a rate freeze and rollbacks
Will allow insurers to purchase catastrophe (cat) insurance from the state fund if savings are passed to consumers
Allows Citizens to compete with private insurers
Requires that claims be paid or denied within 90 days
Prevents insurers from dropping insureds during hurricane season
Requires excess profits be returned
All this as the market, even the property cat market, gets more competitive:
Primary and reinsurance incorporations in Bermuda totaled 82 in 2006 – a three year high (see here)
There is anecdotal evidence that underwriting discipline is waning (see here)
What is the risk for residents? The state sustains one or more huge cats and significant losses from their entry into the insurance business, and has to go back to taxpayers to foot the bill. While the specific impact of the new legislation is difficult to assess, a leading analyst had the following comments (see here):
The legislation … will drive more than $1 billion in premiums from the property-catastrophe reinsurance market—along with a quarter of reinsurers’ profits
The Florida plan is a “backhanded attempt” at national catastrophe fund legislation
The aggregate limit covered by the [state cat] fund has soared from $16 billion to $33 billion
The $10-to-$12 billion property-catastrophe reinsurance marketplace will collectively lose $1.2-to-$1.6 billion in premiums—or perhaps even as much as $2 billion
The reduced profit impact will be even worse… It is not inconceivable to talk about 25-30 percent of the expected profitability of the worldwide property-cat market that has just been eliminated
The insurance industry has lost faith in Florida where the political risk of operating has intensified. It is effectively the Roach Motel - you can get in, but you cannot get out
Pricing, which would have been under downward pressure absent the Florida law, is now under more intense pressure
A prominent insurance author offers the following comments (see here):
Florida lawmakers didn't have the political guts to accept reality and truly represent the long-term interests of their constituents
The scariest part is that Gov. Crist says the new statute is only the first stage of insurance reform in the state
And Fitch sums up the industry sentiment (see here):
Fitch views Florida's proposed legislation as a mechanism to further suppress homeowner's insurance rates in a market where rates continue to be inadequate