Despite the efforts of state lawmakers, analysts at Fitch warn that the Florida homeowners insurance market could effectively "collapse" if a major storm were to hit the state this year, and that the effect could be magnified by the withdrawal of private capital.

In its report, "Fitch Comments on Florida Homeowners Insurance Market," the agency said that the Florida market may be in peril and is not likely to stabilize soon.

Fitch said it views exposure to the Florida homeowners' market as a negative for insurer credit ratings, and that a major storm hitting the state would have a severe impact on company ratings.

While the agency noted that lawmakers have enacted significant reforms, with more being debated in the legislature, Fitch said it does not believe an "easy solution" exists, adding that the agency "does not expect the issues to be resolved in the near term."

At the same time, Fitch said that should a major storm strike and capital exit the state, the pressures "will continue to create uncertainties for insurance companies with material presence in the Florida homeowners market, and in some cases, could become a more significant negative ratings consideration if stability does not return to the market relatively soon."

The state's Office of Insurance Regulation disputed some of Fitch's arguments, arguing that some of the changes seen in Florida are more reflective of large-scale national shifts in the broader insurance market rather than a Florida-specific crisis.

"What you are seeing is a fundamental transition in the marketplace," said Ray Spudeck, chief economist at the OIR. "The large national companies are in fact exiting catastrophe-exposed markets, leaving opportunities for newer entrants. Unfortunately, as this transition occurs, the role of residual markets is even more important. As the take-outs [by private carriers] continue in Florida, we are noting that Citizens [Property Insurance Corp.] growth has actually flattened it."

In its commentary, however, Fitch characterized these new companies as "thinly capitalized," to which Mr. Spudeck took exception.

"OIR is vigilant in its oversight of the financial solvency of the companies writing in its jurisdiction," he said. "We have had this disagreement with several rating agencies over the years."

The state did have trouble with the Poe Financial Group, which filed for Chapter 11 bankruptcy protection in 2006 after its insurance affiliates went into liquidation. But Mr. Spudeck argued that the company's failure occurred for many reasons beyond catastrophe exposure in 2004 and 2005, and that the incident should not be seen as an overall reflection on the state market.

"While it is true we lost the Poe Group after 2004 and 2005," he said, "compare that with the post-[Hurricane] Andrew results, where the majority of the private market was significantly damaged."

Mr. Spudeck also noted that policies are bring "taken out" of Citizens, the state-run insurer--a trend the OIR has said it expects to continue with a new directive from Insurance Commissioner Kevin McCarty that takes effect in May. That directive allows companies to notify homeowners directly of an offer for private coverage, even if their agent disagrees with the move.

Under the current system, agents could refuse to service the policy under the "take-out" insurer, effectively killing the process, and insurers were advised about which policies agents had opposed to moving out of Citizens.

Under Mr. McCarty's order, insurers will be given lists of policies eligible for take-out, with no mention of the whether or not the agent involved would support the move.

Florida lawmakers have struggled to find an answer to the state's homeowners' insurance problem, including allowing Citizens to compete with the private market.

However, lawmakers have since become alarmed that a major hurricane could result in taxpayers being forced to cover billions in Citizens exposure through a series of post-event assessments. According to a presentation given to lawmakers, a once-in-100-year event would involve a liability of roughly $24 billion, far exceeding its current ability to pay.

The challenge facing the Florida market, and the main factor behind it, is an area where Mr. Spudeck and Fitch are on common ground. "I would note that one of their conclusions is absolutely correct--the issue in Florida is hurricane risk," he said. "Everything else results from that fact."

Further complicating that issue, he said, are the models being used to gauge catastrophe risk.

"One of the facts that is important is that for the models themselves--regardless of who is providing it--the results are highly uncertain, and become more uncertain as the level of specificity increases," according to Mr. Spudeck. "Even the experts disagree on the likely future frequency of storms, as well as future severity."