Caroline Muspratt says Florida's move to offer cheaper reinsurance will hit Lloyd's insurers

While insurers are benefiting from high premiums in Florida in the aftermath of the hurricanes of the past few years, homeowners there are suffering from astronomical rates when it comes to insuring their properties.

The Sunshine State is said to have the highest insured coastal exposure at nearly $2 trillion as home buyers flock to buy beachside properties, and Florida's population is expected to grow by roughly 50% over the next 25 years.

Insurers say they need to put up rates to cover the greater risk of damage and the increasing value of property, but the state authorities recently stepped in to try to bring down the cost for its citizens.

The state has doubled its reinsurance cover and increased the capacity of the Florida Hurricane Catastrophe Fund to around $32bn, which will allow it to offer insurers cheaper reinsurance.

Analysts have said that the move reduces the size of the property reinsurance market in Florida by about $4bn, which could have an impact on several Lloyd's insurers like Amlin, Hiscox and Catlin.

One insurer, Advent, played down concerns when it reported its full-year results recently by saying that its Florida-related reinsurance premiums represent less than 2% of overall premium income for 2007 - but nevertheless it felt the changes in Florida were worthy of a whole paragraph in its results statement.

The new legislation also means that insurers that write car insurance in Florida, and offer home insurance only in other states, will be required to offer home insurance in Florida as well.

While this might come as a relief to residents, it could affect company profits. Equally, some insurers could decide to pull out of the car insurance market in Florida to make sure they don't have to offer home insurance. This would reduce the choice for homeowners with less competition on price.

Other insurers, which already offer property cover in Florida, are changing their mind and retreating from the market.

The state has, in fact, put emergency regulation in place to prevent companies from dropping customers as a result of the new legislation.

But insurers are fighting this in court and many have indicated that they will pull out of the market when the emergency rule no longer applies.

The state is already trying to offer lower, "subsidised" policies via state-run insurance company Citizens, but there are frequently complaints that this creates an incentive for more people to buy or build coastal properties in Florida, either as holiday homes or investments.

While Florida appears to be doing the right thing for its citizens, it risks taking too heavy-handed an approach and in the long run, just making things worse.

The state wants to reduce rates for homeowners, but it should be careful not to force them down too much or customers may find their cover is inadequate, or that so many insurers have fled the market, they could find it difficult to get cover at all. IT

Caroline Muspratt is insurance correspondent at The Daily Telegraph