The cyclical nature of the Florida property insurance market is just one of the challenges facing those operating there, with issues around claims litigation, assignment of benefits (AOB) and its exposure to hurricanes and severe weather all making for a marketplace that is difficult to navigate.
But the challenges faced in recent years, in particular the significant loss creep seen with hurricane Irma and the explosion of AOB issues in the state, mean that investors aren’t exactly lining up to back insurance and reinsurance strategies focused on Florida property risks it seems.
Speaking during a recent webinar held by Florida focused rating agency Demotech Inc., executives from reinsurance broker and capital advisory TigerRisk Partners explained some of the difficulties the Florida insurance and reinsurance market faces.
Marc Lauricella, Partner and Head of Capital Group at TigerRisk, explained that, “The Florida property market is one of typical cycles. The advent of Andrew changed the face of reinsurance and brought in stability. It helped create the cat model and that created certainty around hurricanes.
“Which also brought in new capital and that backed-off reinsurance rates and the insurance cost associated with it.
“But, as investors look at the Florida marketplace now, there is less certainty in the market.”
He went on to explain some of the challenges faced, which include social inflation, loss multipliers and loss adjustment expense inflation, attorney fees, litigated claims.
“It’s bringing in a new source of loss, that is hard to model, hard to quantify, therefore investors are pulling-back,” he explained.
One thing that would encourage investors back into the Florida insurance and reinsurance market in greater numbers would be higher pricing.
Lauricella said, “If there was greater ability to charge a lot more rate, they would probably be lining up and willing to take that potential uncertainty, but given the current market we’re not seeing that right now.”
Adding up the Florida market catastrophe losses of the last few years, the social inflation that has followed it and then taking into account climate change, with the changing nature of storms and severe weather in the state, means prices haven’t kept up with the level of risk in Florida over the last decade or more.
“Every storm we see today appears like it’s something new and different we’ve never seen and part of that is the social inflation that’s dramatically increasing losses,” Lauricella continued.
Adding, “If we could get a handle on some sort of tort reform that manages that, it would certainly help the market and bring the interest back for investment into the state.
“As long as loss creep is a big part of a cat event, it’s going to continually dent that market.”
While attritional losses in Florida are increasing, Lauricella said that social inflation is overwhelming that.
All of which has ramifications for reinsurance and the operating environment for Florida carriers.
“So the reinsurance market is also changing, not just in terms of prices but in terms of coverage. Insurance clients are now looking to buy more and different contracts, for different coverages.
“The investment community is interested in supporting Florida and there’s still an opportunity here, but there needs to be some sort of tort reform. Without that, we have difficulty seeing a way forward for a stable market,” he explained.
Stability is important for Florida’s insurance marketplace, Lauricella said, adding that “Without a stable market, everything we’re talking about gets very, very complicated.”
Also participating in the Demotech webcast, David Unsworth a senior Florida broker at TigerRisk said, “Without those changes coming through to stem the tide of unfair claims and fraudulent claims, the reinsurance market is going to continue to price for that.
“A change where they don’t pick up these fraudulent losses will result in them becoming more comfortable with the cat risk, the modelled risk and that will translate itself into lower reinsurance costs that then benefit the insurance carriers.”
Highlighting that hurricane Irma has changed the perception of risk in the state of Florida, Unsworth added, “The continued development of a cat loss three years ago still bleeding into the reinsurance towers focused their attention on what they hadn’t been pricing for when they were providing that coverage a few years ago.”
On how this could change pricing in the Florida market, Lauricella said the expectation is for relatively stable pricing now, in terms of trajectory, although he did note that, “There is some new reinsurance capital coming into the market.”
“We’re seeing a continuing hardening market going forwards, not just in Florida but worldwide. It’s US, it’s 1/1 transactions, it’s a lot of global business, from casualty to marine, aviation, all that seems to be going into an increased pricing environment for a time,” he explained.
But looking ahead to June 2021 reinsurance renewals in Florida, Lauricella explained that without more losses the market could be relatively flat.
“If it’s a fairly mundane cat season and there’s no major issues in the financial markets, we would expect a fairly flat year-over-year cat reinsurance renewal,” he commented.
Echoing the comments made are some of the leading insurance-linked securities (ILS) players, who have retrenched away from Florida property risks in recent years, as a result of the loss creep and claims inflation issues seen.
Pricing is certainly better at this time, but some ILS players will be looking for more year-on-year increases in 2021 to make the Florida market a more appealing venue to deploy their investor capital into.