Deregulation of the commercial lines business began in earnest during 1998 and 1999, and nearly half of the states now have statutes that allow deregulation as to rate and/or form. In its broadest sense, deregulation is considered to foster a more competitive market environment leading to lower rates combined with products that can be tailored to meet the needs of insureds.

Florida's entry into deregulation began under Gov. Charlie Crist during 2010 with the passage of SB 2176. This bill deregulated what have been referred to as "more sophisticated" lines of business, including excess/umbrella, D&O, intellectual property, patent infringement, and property risks rated under highly protected risk rating plans. Commercial auto was also included, but was limited to fleets exceeding 20 vehicles. 

During Florida's most recent legislative session, deregulation was expanded by HB 99. Passed almost unanimously by both houses, this bill added non-residential property and multi-peril policies, excess property, burglary and theft, general liability and fiduciary liability to the lines of coverage deregulated. The limitation on commercial auto was also removed. Simply put, the bill provides that insurance companies writing these types of commercial insurance will no longer be required to file with, or obtain approval from, the Florida Office of Insurance Regulation before the insurer can charge the rate it desires. This sounds very similar to one of the basic principals of surplus lines—freedom of rate.

Playing Field Is a Little More Level
So what impact will HB 99 and commercial lines deregulation have on surplus lines in Florida? While it does not remove the distinction between standard and non-admitted markets, it does blur the lines. From a practical standpoint, more competition will exist between the two market segments because now both have freedom of rate. While the admitted market did seem to hold all the trump cards, especially with the guaranty fund as a backstop, the playing field was leveled a bit for surplus lines with the elimination of the due diligence requirement for the deregulated lines effective Oct. 1, 2011.

Unlike laws in many other states, the Florida legislation carries no floor for eligibility such as premium thresholds, class restrictions or limitations, capped rate deviations, or sophisticated buyer or exempt policyholder qualifications. In Florida, deregulation applies to both the small and large account. As such, this gets very close to the old saying, "Let the buyer beware," at least in the sense of price.

Use of the surplus lines market could be reduced should the standard market broaden its appetite for classes of business typically reserved for surplus lines.  Without rate limitation, it becomes much easier for the standard market to competitively underwrite a difficult class of business should it choose to do so.  

Competition Is Good, but Profitability Must be Maintained
Competition is a good for the commercial buyer. What needs to be kept in mind is that while deregulation is often equated with lower pricing and increased availability, the availability should come at rate levels that will provide an adequate return and profit to the insurance carrier, be it standard or surplus lines. As Scott Harrington commented in his paper "Insurance Deregulation and the Public Interest" in 2000, " … a well functioning competitive market anticipates insurer specialization according to the expected claim costs and expense characteristics of buyers. The non-standard market reflects insurer specialization to achieve greater refinement in cost based classification." In theory, this statement would seem to accurately reflect the Florida market as we move through the commercial lines deregulation process.

In general, too much regulation can have a negative impact on the competitive nature of the insurance market. For example, consider the Citizens Property Insurance Corp. experience in Florida. Excessive regulation of the voluntary market has limited competition and forced insureds to be served by a growing residual market with inadequate rates.

Competition in the Florida market has been brisk for the past several years, and will continue to be so. Deregulation of commercial lines brings a new dynamic to the marketplace. This will challenge the surplus lines market to be creative and to continue to apply its specialization in underwriting and pricing the more difficult or higher-hazard classes of business profitably. For years the surplus lines market has been fostering the principles of deregulation in the sense of tailoring products to meet the needs of insureds in a cost-effective manner. There is no reason for this to change with deregulation. It should only become more evident as surplus lines continue to embrace these principles.