AOB reform to rationalize Florida cat bond loss development: Cadwalader

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The legislative bill designed to reform the assignment of benefits (AOB) system in Florida could benefit the catastrophe bond market, with loss development potentially rationalised thanks to reduced litigation and enhanced claims disclosure, lawyers at Cadwalader, Wickersham & Taft LLP explained.

cadwalader-logoThe passage of HB 7065 through the House and now Senate in Florida and its subsequent signing into law capped five years of attempts to stem litigation and AOB abuse related costs and promises to significantly reform the assignment of benefits (AOB) system, reducing litigation in the process.

Lawyers Matthew Feig and Robert Cannon at Cadwalader, Wickersham & Taft LLP (CWT) noted that the bill’s reforms have ramifications for the insurance-linked securities (ILS) and collateralised reinsurance space.

“Assignment of benefits in Florida has been a concern for the ILS market as related litigation has become a significant factor in losses and claims development for a number of outstanding catastrophe bonds,” the pair wrote in a recent client note.

The bill will give policyholders rights to cancel an assignment of benefits agreement and require notice to be provided to the policyholder if a vendor enters into litigation on their claim.

It also closes vendors’ access to policyholders’ unique one-way attorney fee rights, putting the vendors in a more appropriate business-to-business position where the loser pays the prevailing party’s attorney fees.

In addition it should lead to the provision of enhanced transparency over claims, which could help in the ILS market’s efforts to establish loss estimation for Florida ILS contracts and catastrophe bonds.

Feig and Cannon said, “The Act could rationalize loss development for Florida catastrophe bonds as incentives for opportunistic litigation would be reduced while requiring the provision of detailed claims information; consequently, predictability of claims and losses for such bonds could improve.”

After the experience of hurricane Irma, the ILS market and investors in reinsurance-linked instruments including catastrophe bonds will hope that the bill shutters the seemingly unstoppable loss creep that has been seen, for future storms.

Of course, this also has potential ramifications for future reinsurance and ILS pricing in the state of Florida, although so far it’s unclear to what extent this could change the marketplace over time.

It does appear some rate benefits are set to slow increases, after taking into account the improved AOB outlook after enactment of the legislation but perhaps more important to the ILS market is the fact their could be greater certainty in loss development and models may prove closer to the reality after the catastrophe event impacts have been calculated.

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