Having previously warned that the Florida insurance market has spent the last 30 years kicking the can of its problems down the road, a road that is now running out, ALIRT analysis now suggests the market is at a “flash point” moment, where it risks reinsurance capital pulling-back even more significantly.
Principal analyst David Paul from ALIRT Insurance Research previously wrote that, “Florida has been kicking the can down the road on its property insurance market for the past thirty years. It may now be running out of road.”
In his latest missive on the Florida property insurance market, Paul notes that, “This new phase of what’s proven to be a rolling property insurance crisis seems to mark a flash point.”
Adding a stark warning that, “The international reinsurance market, on which this market depends for its survival, is beginning to throw in the towel.”
He makes this statement on the back of a number of reinsurers announcing a sharp reduction in their appetites for assuming Florida property risks in the run-up to the critical June renewals.
We’ve heard similar from some in the insurance-linked securities (ILS) market as well and it seems certain, especially lower-layers of reinsurance towers in Florida are going to be particularly challenging to fill, at least without far higher rates-on-line being paid than would have been anticipated just a few months back.
In some cases, it’s expected some layers of property reinsurance towers may not get filled at all, which we’re already seeing in the early data from our latest reinsurance renewals market survey (take part here).
What the pull-back from some markets and the general risk aversion many reinsurers have to lower-down layers of Florida focused reinsurance towers means, is that those really needing reinsurance support could find securing sufficient to meet rating agency requirement a challenge, may have to go into hurricane season with more risk and less protection, or find that additional financing may be needed in other forms.
Paul from ALIRT states, “Without this support, the now smaller number of primary insurers will be forced to cut back coverage or assume substantially more risk. And all this in an era of surging material and social inflation, which only exacerbates loss trends.”
Of course, we have the special legislative session coming up before the end of the month, which holds some promise of resolving a few of the more pressing fraudulent claims, assignment of benefits (AOB) and litigation related issues.
The special session may also lead to some changes in the Florida Hurricane Catastrophe Fund (FHCF), such as lowering the attachment of that form of reinsurance, which could serve to replace some of the evaporated private market capacity for under-pressure property insurers in Florida.
However, the effects of legal progress made during the special session may take months and years to really flow through to benefit insurance carriers portfolios, while they have significant litigated claims on their current and legacy books to deal with as well.
So, no overnight fix is expected and as RenaissanceRe’s CEO said, absent meaningful change his firms appetite for risk in Florida is unlikely to change significantly.
As Paul from ALIRT rightly notes, in Florida’s property insurance market “The exposure to wind-related loss (whether catastrophic or secondary) is only one side of coin,” with litigation and fraud being the other.
While wind-related losses and inflation are outside of the Florida property market’s control, although they should both be priced for, litigation and social inflationary effects from fraud are firmly within it, Paul explains.
But there still aren’t any guarantees we see the kind of meaningful change that will rectify the marketplace.
As Paul warns, “Whether it has the will to adopt the legislative changes necessary to right a property insurance market that is now keeling badly awaits to be seen. What has become increasingly clear is that it may now have run out of creative fixes.”
With Florida’s property insurers reliant on reinsurance to protect against major storm and hurricane losses, as well increasingly for frequency events throughout the year, access to capital is critical both at the excess layers in the tower, as well as the quota share reinsurance agreements carriers tend to leverage for growth.
Rates have been “clearly insufficient” through recent years, Paul believes, something that the “aggressive growth of insurance- linked security (ILS) capacity,” exacerbated.
But when reinsurance costs are higher, Florida tends to see more insurer insolvencies, as evidenced in 2007 to 2011, as well as the last few months.
“Because reinsurance costs reduce net revenue and ultimately profitability for the ceding company, Florida domestic insurers must choose between paying significantly more for reinsurance protection or buying less coverage and “rolling the dice” on potentially solvency-threatening catastrophe losses,” Paul wrote.
As reinsurance rates continue to move higher in 2022, “This, along with the other frequency/severity factors discussed, does not bode well for the cohort’s future financial performance.”
While reinsurance is critical, so too are profits though, as property insurers in Florida need to build surplus to demonstrate their viability over the longer-term.
“While an agent/broker may gain solace in the fact that his insurance partner has purchased substantial reinsurance coverage, it nevertheless remains the case that such an insurer may be hard pressed to report operating earnings and therefore build up surplus over time.
“In essence, such a carrier may run the risk of a long but inevitable slog towards insolvency if it is not able to secure outside surplus funds,” Paul explained.
Paul and the ALIRT team expect the insolvencies seen so far among Florida’s insurance community will not be the last, especially if there is storm activity this hurricane season, and if AOB issues persist.
Paul writes that, on Florida, “It may well be time for a root and branch recalibration of this market.”
Adding that, absent meaningful legislative change and likely more rate increases the challenging situation is likely to continue and concluding that, “ALIRT’s analytical work shows, at very least, that the downward trajectory in the financial health of the state’s homeowners insurers continues apace.”
Read our coverage of Florida’s property insurance crisis below:
FedNat details Florida downsizing plan, says Monarch to be acquired.
Florida Special Session to focus on fraud, AOB abuse & affordability: CFO Patronis.
More insurers seeking rate hikes of 23% to 49% in Florida.
Cat Fund reform is crumbs, Floridians need a feast: Demotech’s Petrelli.
Florida litigated claims rise again, but “hope” in Special Session: CaseGlide.
Florida – “The theatre is on fire,” FHCF change won’t solve it: RenRe CEO.
Swiss Re not optimistic on Florida reinsurance pricing: CFO Dacey.
To ensure progress in Florida reinsurers could pull capacity: Assured Research.
Full placement of Florida reinsurance programs to be challenging: AM Best.
Florida Governor sets property insurance special session for end of May.
“Cause for concern” as AOB & litigated claims rise in Florida: CaseGlide CEO.
Ida insolvencies continue, as Florida runs out of road: ALIRT.
Florida property insurance market “in collapse”, special session uncertain.
Florida renewal “one of the toughest in recent memory” – JMP Securities.
Demotech calls for Florida market reform with rating downgrades likely.
No quick fix as Florida property insurance reforms fail to pass.
Another one bites the dust – Florida’s insurance failures continue.
Assignment of benefit (AOB) claims rising for Florida P&C insurers.
View all of our Artemis Live video interviews and subscribe to our podcast.
All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance video content and video interviews can be accessed online.
Our Artemis Live podcast can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.