Florida’s E&S Brokers: Doing Business in a World Gone Flat

Brokers Hoping Improving Economy, Changes in Tallahassee, Rate Deregulation Will Bring Some Relief

The numbers alone tell the story. According to the Florida Surplus Lines Office, the total surplus lines premiums written in the state in 2010 equaled roughly $3.8 billion as opposed to four years earlier when the total was $4.7 billion. That’s right, in just four years nearly 20 percent of the market’s premium base has been erased from the board, taking along with it state taxes, assessments, and agent and broker commissions.

In other lines of insurance this would constitute a catastrophe. But as Florida’s excess and surplus market and its brokers have proven on more than one occasion, they are nothing if not resilient.

Heading into 2011, despite similarly uncertain market conditions, the introduction of the Nonadmitted and Reinsurance Reform Act, and the specter of new leadership in Tallahassee, the market and its brokers doggedly continue to move ahead.

A Competitive Market

An overview of the surplus lines markets is a tale of two viewpoints. From the insurance buyer’s point of view there is plenty of competition as the market continues to be soft, with pricing competitive and coverage widely available.

When it comes to the perspective of agents and brokers, however, the market continues to take its toll. The industry’s continued flat profit lines have left wholesale brokers scrambling for business.

But talking to these brokers around the state, there is a sense that maybe the market has reached the bottom and this year could bring some relief.

Dan O’Leary, president of Shelly, Middlebrooks, and O’Leary, said he is still writing a lot of business and starting to see more construction risks in Jacksonville. He is not expecting much growth this year, buthe says rates have at least started leveling off. O’Leary said the state of the economy still works against a full market recovery. “We hope for growth in the economy, but we just have too many open houses and office spaces,” O’Leary said.

Michael Gabor, vice president, Gabor Insurance Services, said the commercial market is still competitive, but that rates are no longer falling. “The market seems to be holding where it is and that is not necessarily bad news given the economy,” he said.

Marketing Matters

In as competitive market as excess and surplus segment has become, the ability of brokers to market their services is paramount to their survival. In previous years, brokers might be able to rely on the loyalty of their retail agencies and clients who would stick with them through the normal ebb and flow of rate changes. But in a market such as this one where the consumer is king, all agents and brokers rely on that loyalty at their own risk.

Florida Surplus Lines Association President-elect Ray Fabry knows firsthand what it’s like out there as president of Miami-based Kahn-Carlin & Co. He said that while consumers are certainly benefiting from the competition in the market, this prolonged competition produces heartburn in an agent. “No matter how good a relationship you have with someone, at some point they start looking at their bottom line,” he said.

Not helping the outlook for agents, Fabry said, is the fact that in this flat economy there is no guarantee of finding a replacement. “There’s not a lot of new businesses and start-up companies out there,” he said.

Brokers are facing a similar situation when it comes to maintaining their relationships with agents.

O’Leary pointed out that brokerages face the same economic equations faced by all business. If revenues don’t equal expenditures, then something has to go.

“A lot of surplus lines operations have had to cut back substantially on staff,” O’Leary said, adding that is one reason there continues to be a lot of talk around the industry about possible mergers and acquisitions.

Skip Wolf, senior vice president for Regional Excess Underwriters, LLC, agreed with O’Leary, especially about mergers and smaller operations. “You see a lot of small and medium size agencies trying to hold on, but they can’t do it anymore,” he said. “At some point it becomes the only move left on the table.”

All Eyes on Tallahassee

Many brokers are looking to Tallahassee to help break the stagnation the market finds itself in. When the former governor, Charlie Crist, vetoed a high-profile property reform bill last year, he left many in the business shaking their heads and there was more than one sigh of relief when he opted to make an ill-timed run for Senate instead of seeking a second term as governor.

Many in the industry heavily backed Chief Financial Officer Alex Sink’s bid for governor, only to see her come up short by some 50,000 votes to Rick Scott.

But so far Scott seems to be saying the right things and the industry is optimistic that he, along with newly-elected CFO Jeff Atwater and the legislative leadership, will do what’s in the industry’s interest.

O’Leary, for one, sees positive signs.

“The Department of Financial Services and the Office of Insurance Regulation have made fraud a priority, which is a big factor in the auto market,” said O’Leary. “I think Florida will have a healthier insurance climate.”

One piece of legislation that has caught the FSLA’s attention is a commercial deregulation bill, which the association hopes will free up several markets. Under state law, rate changes fall under a “file and use” or “use and file” method. Under file and use, a company must submit a rate filing at least 90 days before implementing the rate and first receive OIR approval. Under use and file, a company can implement a rate increase, but within 30 days make a rate filing with the OIR. If regulators find the rate excessive, the company must refund that portion of the rate change to the policyholders. Companies contend that regulators often turn down rate requests that result in settlements, which negates the use and file provision in the law.

Last year, Florida enacted a law that allows insurers to sell commercial motor vehicle insurance on fleets on 20 or more vehicles without obtaining prior OIR approval. The rationale behind the change was that a market is available for the product and that the buyers consist of large employers sophisticated enough to understand and negotiate for the coverage.

Now the industry is back before lawmakers seeking to expand upon that change by broadening the scope of deregulated products in other commercial lines. Specifically, the bill would extend the motor vehicle rate exemption to fleets with less than 20 vehicles. It would also deregulate rates for errors and omission professional liability insurance, fiduciary and management liability, general liability, non-residential property and multi-peril coverage and excess property coverage.

“There are some good bills out there,” said Wolf. “With deregulation, we hope it will bring in some new capital when they see they have the freedom to change rates when they need to.”

The industry is also hoping that lawmakers address the Citizens’ Property Insurance Corp. The so-called market of last resort has over 1.2 million policyholders, some of whom industry experts say could be absorbed by the surplus lines market. FSLA President Bruce Bowers says there is no reason the state-backed insurer should be covering high-end homes valued at $1 million or more and having its rates subsidized.

NARR: The Questions Continue

Mentioning the Nonadmitted and Reinsurance Reform Act to brokers tends to cause them to roll their eyes into the back of their heads. Their second reaction is to admit that they don’t understand just how it is supposed to work out, even in the face of a July 21 effective date. “The jury is still out on just how this is going to work out,” said Wolf.

NRRA is intended to simplify the premium taxes an agent has to pay on multi-state risk by requiring them only to be paid to the insured’s “home state.” But states have to reach some agreement on how to operate in this new world. With proposals on the table from the National Association of Insurance Commissioners, the National Conference of Insurance Legislatures and others it remains to be seen just how the states are going to allocate premium taxes among themselves. As Bowers noted, “It is a moving target.”

In a Florida Surplus Lines Service Office survey, 89 percent of Florida surplus lines agents noted that five percent or less of their business transcends state lines. Additionally, 64 percent of agents that provide multi-state business do so in five or less states outside of Florida. The top five states are California, Texas, New York, Pennsylvania and Georgia. Independent Procured Coverage filers stated that 61 percent of their surplus lines policies were multi-state policies.

In 2009, the FSLSO processed some 13,000 transactions that included $492 million in IPC premiums. Of those transactions, 25 had exposures in multiple states. Without an interstate allocation agreement under the NRRA, estimates are that the state of Florida could lose more than $100 million in taxable premium.

Topics Florida Agencies Legislation Excess Surplus