Florida Chief McCarty Calls for ‘Substantive Change’ in Property Market

Florida Insurance Commissioner Kevin McCarty thinks the time has come for the private insurance industry and public leaders to move beyond debating regulation of insurance rates and “be open and willing to make substantive changes” in the way business is conducted in the Sunshine State.

In a wide-ranging video interview with Insurance Journal, the controversial regulator said it’s time for the state to “stop digging a hole” and to start discussing longer-term issues including land use planning, personal responsibility, state responsibility and how to bring more capital into the state.

In the interview, McCarty suggests that the industry and policymakers might want to look at introducing new products such as policies tied to mortgages, or at raising deductibles, which he acknowledges may be difficult on families.

He calls for a fresh look at the distribution of hurricane fund liabilities and the role played by state-backed Citizens. He questions whether Citizens should be insuring high-rise buildings in the construction stages or whether there should be building in erosion zones.

He urges a discussion on the “vulnerability of the housing stock, the increasing exposure in Florida, and how to properly calibrate the attachment point of the state government and its role and personal responsibility:

“There are things that we need to look at, and look at the whole residual market, and say, ‘is it fair, does it make sense that we continue to put large, expensive structures in harm’s way?’ I think we need to look at [things] in a more holistic fashion, and be open and willing to make substantive changes to the way we currently do business in Florida.”

He said the state also must attract new capital.

“We need to look at how we can bring in capital markets to provide greater return. We talk in terms of reinsurance of billions, and in capital markets, you’re talking trillions. How can we tap into some of that, and look at some of the opportunities to do some of those things.”

McCarty on Reinsurance Requirements

Insurance Journal: You’re taking a broader look at reinsurance requirements. Why do that now? What effect will that have on insurance companies?

McCarty: What we’re trying to do is bring some competition in the market place, to allow companies to look at their own risk portfolio, their particular business plans, and let the directors and management of the company make their decisions based on what they think is necessary for the upcoming hurricane season. Submit that plan to us for a review.

Many companies, including our office, are concerned not just about the vertical exposure, but about the horizontal exposure. About three or four storms a one in 10 year, a one in 15, followed by the one in 10, as opposed to a major daddy storm of all ages that would be 2.5 times or three times of Andrew in a reinstatement, as opposed to what we saw in 2004/5 and recent histories, where we would have companies that never even reach their attachment point, and using and employing reinsurance in what they think is a more prudent manner.

And so, we’re just giving flexibility in the market place. One of the things it has accomplished is not only giving some muscle for our companies in their negotiations, but I think it gives a broader opportunity to investigate other risk transfer mechanisms in the market place and bring greater capital into the market place, which ultimately provides more stability, but also lower prices.

Don’t rating agencies require 1-in-100? If so, doesn’t that mean there really is no flexibility for these companies?

McCarty: Well, it depends… Not all of them are rated by A.M. Best. Demotech is looking at a more holistic approach. I don’t necessarily agree with what the rating organizations use. We have some disagreements. We are fundamentally getting at the same question. What happens to a company when they go through a series of storms? What is the probability of them being able to pay claims and survive? We all look at it; we just look at it in different ways.

Do you think it should reduce the confidence that agents or policyholders have in a company’s ability to pay claims?

McCarty: Is there a difference in a confidence level between a 1 in a 100-year and a 1 in a 90-year? And having three reinstatements instead of two reinstatements? In some cases, I think I would have more confidence with a company that has prepared for many small storms. Particularly since many people/companies, based upon the information they have from their staff, their economists, their interactions with the weather folks, is that they are expecting more frequent storms. And so, maybe it’s a more prudent business decision for them to invest in that, as opposed to going to a 1 in 100 or 1 in 150.

Interviews with McCarty and interviews with other Florida insurance leaders can be viewed at www.insurancejournal.tv.

Topics Florida Reinsurance Property