Access to capital key in “dysfunctional” Florida insurance market

Florida’s insurance marketplace needs targeted legislative reform to address the numerous issues being faced by carriers in the state according to Demotech, while access to additional capital remains key for the “dysfunctional” marketplace.

Rating agency Demotech, Inc. has laid out some of the issues facing Florida’s property insurers, citing an urgent need to address litigation and stem rising reinsurance costs, as well as legislative reform being needed to help insurers get back to a stable operating base.

The Florida property insurance market has been stretched by a wave of litigation around property insurance claims, which have driven significant losses through to global reinsurance and insurance-linked securities (ILS) markets and caused an ongoing loss creep for events like 2017’s hurricane Irma that have had far-reaching ramifications.

Reinsurance carriers and ILS funds have been seeking to find a risk commensurate level of pricing for the coverage they provide to Florida’s insurance companies, with further rate increases anticipated at the June 2021 reinsurance renewals, which are only going to apply even more pressure.

“Florida’s residential P&C insurance marketplace faces convergence of existential threats in the form of increasingly unpredictable claims litigation, rising costs of risk capital and its persistently high exposure to natural catastrophe risks.  Targeted legislative reforms are needed,” Demotech explained.

“Without intervening public policy solutions, the residential property insurance marketplace will experience an accelerated trajectory of unsustainability,” Demotech believes.

Adding that, “Market conditions will force closures, adverse investment terms, investor lawsuits, market exits, and further consolidations.

“In Florida, the cost and availability of reinsurance has also been impacted by the need to enact meaningful and significant tort reform.  Concurrently, carriers focused on Florida have seen their attritional (net as to reinsurance) loss and loss adjustment expenses rise as they simultaneously address their retained cost associated with natural disasters.”

Florida’s insurers are set to face challenges in sustaining their ratings, Demotech says, warning that access to additional capital is going to be vital.

Capital will enable carriers to replenish surplus and report acceptable financial metrics, Demotech notes, while rate increases will be needed to offset the rising costs of reinsurance.

Importantly though, rates need to “reflect the frequency and severity of claims” Demotech also says, which to us is key, as the Florida insurance market (and reinsurance) has to cover its loss costs (as well as expenses, cost-of-capital and a margin) to become more sustainable.

Ultimately, Demotech warns that, “Absent meaningful and significant tort reform in 2021, more than ever, carriers must possess the financial wherewithal, managerial acumen, and access to additional capital to execute their business model in a dysfunctional marketplace.”

Capital does continue to flow to the Florida property insurance market, with some carriers raising debt in recent years, while others have been acquired and set on a path towards re-underwriting, or shedding, legacy portfolios, while transitioning to more profitable underwriting on a go-forward basis.

Access to efficient reinsurance capital, as well as private debt, will be a key lever as we move towards this years important mid-year reinsurance renewals and the Florida carrier market will no doubt be looking to reinsurance capital in all its forms, with catastrophe bonds set to play a role for some.

We’ve already seen our first Florida catastrophe bond priced of 2021, with the First Coast bond from Security First Insurance growing significantly, while pricing down.

Universal Insurance is also in the market for its first catastrophe bond this year, a Florida focused Cosaint Re transaction.

More Florida focused cat bond deals are anticipated this year, as under pressure carriers look to lock in multi-year reinsurance protection from the capital markets.

But for some, it is capital at the corporate level that is needed to help them secure their ability to go-forwards and we understand some changes in ownership are likely at certain Florida carriers, as new investors look to come in and adjust business strategies to something more profitable and sustainable.

Demotech has already affirmed the Financial Stability Rating of 22 Florida carriers, while its review of the remaining Florida carriers is ongoing, while one carrier, American Capital Assurance Corp, has elected to no longer participate in Demotech’s process and been placed under review by AM Best due to the ongoing nature of certain strategic initiatives.

There’s plenty of capital available to Florida insurance carriers, if they show the willing to take strategic steps to draw a line under the issues of recent years and move forwards in a different manner.

The opportunity in Florida remains attractive as well, if sufficient capital can be sourced and the operational model adjusted to better suit the dysfunctional marketplace.

With Citizens loading up on policies and looking to greatly increase its use of reinsurance and catastrophe bonds as a result, there will also be depopulation opportunities going forwards as well.

But most important is having capital and a solid baseline, where underwriting profitability takes into account the nature of the Florida property insurance market and its peak catastrophe exposure, enabling companies to thrive, rather than experience a slow decline as has been more typical of recent years.