Jolted by the news that State Farm was pulling out of the Florida property insurance market, some state lawmakers are reversing themselves dramatically on how to fix the state's fragile property insurance market. Instead of clamping down with more regulation, some Republican legislators have proposed giving ratepayers a choice: Pay now or pay later. And if a customer wants to pay now, the price won't be controlled by the state. It will be up to the property insurance carrier to decide what to charge.

"I think it is essential that we initiate a major effort to restore the private market in Florida," said Rep. Bill Proctor (R-St. Augustine), and a sponsor of the legislation. "Homeowners should have a choice among the well-established, national companies. Moreover, the homeowners who are willing to pay an actuarially sound premium before the event should not be subjected to post -assessments."

Earlier this year, State Farm Florida told state officials that it planned to get out of the state's property insurance market, which has been volatile ever since eight hurricanes slammed into the state in 2004 and 2005. One of the key reasons cited by the company was the state's refusal to grant the company a nearly 50 percent rate hike. Since that news in January, the company has battled with state regulators on when and how State Farm would shed its policies over the next two years. But there are bills that have begun to move through the House and Senate that could prompt State Farm officials to reverse course.

Proctor has filed legislation (HB 1171) that would create a new line of property insurance called "non-assessable residential property insurance." It would allow well-capitalized companies to sell insurance in Florida without being subject to rate regulation. Proctor's bill would exempt any policies sold this way from assessments that Citizens Property Insurance Corp. is allowed to charge in the event the state-created insurer posts a deficit.

Sen. Michael Bennett (R-Bradenton), has proposed similar legislation (SB 2036). Like Proctor's bill, it would allow companies with a surplus of $500 million to avoid rate regulation by the Office of Insurance Regulation (OIR). But Bennett's legislation does not exempt these unregulated policies from assessments.

A Senate analysis concludes that 44 insurers could meet the surplus requirements.

Not Everyone Is on Board

It remains unclear whether or not this legislation will actually make it to the desk of Gov. Charlie Crist. Some legislators are skittish about unregulated rates, especially during an economic downturn.

"To just take it back to the days of the Wild Wild West where there is absolutely no regulation…is not acceptable to me," said Sen. Ronda Storms (R-Brandon), and a member of the Senate Banking and Insurance Committee.

Crist — who said Floridians would be "better off" when State Farm announced its departure — stated that he is not in favor of letting the free market rule in the world of property insurance. "I'm a free market guy, but I think we need to keep our eye on insurance companies, property insurance companies specifically,'" Crist said. "They have a history of not being the kindest, warmest industry to the people of Florida."

But the fact that the legislation has been heard and approved by legislative committees is a sign that some lawmakers are now uncomfortable with the regulatory reforms first enacted in 2007.

Another major insurance bill (HB 1495) moving through the Legislature would allow private insurers to have a so-called "flex rating" in 2010. It would allow companies to decrease or increase rates 10 percent statewide, or 15 percent per rating territory, without prior approval by the OIR. "The goal here is to get a competitive property insurance market going again in Florida and get it to where the companies can pay the claims," said Rep. Pat Patterson (R-Deland), an insurance agent and chairman of the House Insurance, Business and Financial Affairs Committee.

Citizens and Cat Fund Changes

Other reforms that also could be changed by lawmakers this session deal with both Citizens and the Florida Hurricane Catastrophe Fund (Cat Fund).

As lawmakers entered the home stretch of the 2009 session, it appeared there was a growing consensus to create a so-called "glide path" to allow Citizens' rates to go up in 2010.

Lawmakers have frozen the rates charged by the state's largest property insurer since January 2007. But instead of allowing Citizens to charge actuarially sound rates — which could cause some rates to spike up as much as 55 percent in 2010 — legislators favor allowing a gradual year-by-year increase.

House and Senate committees have approved bills that would let Citizens raise its rates, although the two chambers differ slightly in how high those rates could be. The House legislation would allow Citizens to increase its rates by a statewide average of 10 percent a year and no more than 20 percent a year for any single policyholder. The Senate would limit rates to no more than 10 percent for all individual policyholders.

Both bills order Citizens to take 10 percent of the money raised from the graduated rate increases and transfer it to the state for the My Safe Florida Home program, which provides mitigation grants to help homeowners storm-proof their homes. The move is expected to generate $26 million for the program, which has almost exhausted its funding.

Some lawmakers have complained that a recession is the wrong time to let Citizens raise its rates. But Sen. Garrett Richter (R-Naples), and chairman of the Senate Banking and Insurance Committee, defended the rate hikes, saying the impact would be much greater on Citizens nearly 1.1 million policyholders if the state did nothing.

He also said that the state cannot continue to hope that Florida avoids hurricanes like it has the last two seasons. Models show that a major storm could cause as much as $21.8 billion in claims for Citizens, but Citizens currently only has about $6.74 billion in available resources, not including any reinsurance reimbursements. That shortfall raises the likelihood that Citizens would have to impose assessments on its policyholders and on other private property insurance lines in order to recoup the losses.

"When you are in a hole the first thing you need to do is stop digging," said Richter. "Freezing policies and hoping that we don't ever get hit by a storm is not a good strategy for Florida."

Gov. Crist has been supportive of allowing some level of rate hikes for Citizens. "If this is incremental, that doesn't sound inappropriate to me," he said.

Lawmakers also appear likely to endorse a whittling down of the size of the exposure of the Cat Fund, the state's backup insurance for private carriers and Citizens. Back in 2007, state legislators greatly increased the size of the Cat Fund in an effort to offer cheaper reinsurance to private carriers — and thereby require them to lower their rates.

But the turmoil in the credit markets has raised ongoing fears that the Cat Fund would be unable to borrow the money it needs to pay off claims. Despite having nearly $8 billion in the bank, the Cat Fund would be unlikely to come up with the additional $18 billion it would need to cover claims associated with a major storm the size of Hurricane Katrina or Hurricane Andrew.

The legislation in both chambers would lower by $2 billion a year for the next six years the amount of coverage offered by the Cat Fund in what is called the Temporary Increase in Coverage Limit (TICL). This was the extra level of reinsurance created in 2007 and it is an optional coverage for private carriers.

Another way to dissuade private carriers from purchasing reinsurance provided by the Cat Fund is to make it more expensive. One idea would create a "cash build-up" premium intended to boost the money collected for the mandatory coverage provided by the fund. Both the House and Senate are also proposing to increase the cost insurers would pay for reinsurance in the TICL layer. Both changes would likely result in rate hikes for private insurance companies.