Non-weather water & AOB losses push Citizens to Florida rate rise

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Florida’s Citizens Property Insurance Corporation said that a recent surge in claims related to non-weather water losses in South Florida has increased its costs enough to offset the lower cost of reinsurance and other risk transfer, resulting in the need for a proposed statewide average rate increase of 7.9%.

Map of FloridaThe Florida Citizens Board of Governors will be asked on Wednesday to approve a 2019 rate package that reflects these skyrocketing nonweather related water losses, which the insurers says is a “troubling trend that appears to be spreading to other parts of the state.”

The proposal calls for a statewide average increase of 7.9% across all personal lines policyholders, for homeowners, condominium owners and renters.

The rate increases will differ depending on the experience of claims inflation due to non-weather water, with inland homeowners multiperil policies expected to see an average increase of 8.3%, while coastal property policies could see rates  rise by an average of 9.5%.

It’s a clear sign of the issues in Florida related to assignment of benefits (AOB) and non-weather water claims, which have caused significant claims inflation and are now resulting in more losses flowing through to reinsurance capital from the most recent major storm, hurricane Irma.

In fact, some of the loss creep related to hurricane Irma which has hit collateralized reinsurance, ILS funds and retrocessionaires is related to claims increasing due to non-weather water, as well as the practice of reopening claims with added non-weather water included, which is sometimes the case thanks to the AOB epidemic in the state.

Florida Citizens notes that reinsurance and depopulation efforts have helped it to lower its policy count from nearly 1.5 million in 2012 to around 443,000 as of May 2018,  helping the state-run insurer to pay claims following a 1-in-100 year storm and a second 1-in-41 year event without the need for any assessments.

Alternative reinsurance capital and the ILS market has been a significant contributor to helping Citizens to be in better financial shape, with the lower cost of risk transfer helping the insurer to reduce its costs, while the depopulation has also seen risk shifted to the ILS market in bulk.

But Florida Citizens still needs to ensure that its rates are actuarially sound and cheaper risk transfer alone has not been sufficient to ensure rate increases are not required. The proposed rate increases are designed to do so, taking into account the inflation of claims caused by non-weather water related issues.

“These losses are significant enough to offset previous progress made toward rate adequacy and the decreased cost of reinsurance and other risk transfer products, resulting in the need for a corresponding rate increase,” Citizens explained in a statement.

Legislation caps rate increases at 10%, but Citizens clearly feels significant increases are needed, for example Broward County will see 9.9% rises for multiperil policies.

Assignment of benefits (AOB) is causing significant inflation of claims in Florida and these rate increases are the latest sign that the Florida market is underpriced, on an actuarial basis, which could also help to hold up reinsurance rates more in the state.

Citizens explained the impact AOB has, saying, “Nonweather water loss claims submitted with an AOB cost on average of three times more than claims without an AOB and are more frequently litigated.”

AOB abuse is said to be on the rise in the state, particularly south Florida, and while the majority of cases are located there Citizens also notes that it sees a trend towards AOB abuse spreading more widely as well.

The way insurers handle claims is becoming all-important in Florida, with reinsurance providers and ILS funds preferring to partner with insurers that have a strong track record of resolving claims quickly, avoiding AOB abuse and settling before litigation occurs.

It’s one reason that reinsurance renewal experiences are diverging in Florida, with some insurers that have handled AOB better experiencing better renewal terms than those for who AOB has been more of an issue.

Citizens proposed rate increases suggest that Florida reinsurance rates are unlikely to tumble much further, while the experience of hurricane Irma loss creep is also certain to make reinsurers and ILS markets more keen to prevent further rate deterioration at future renewal seasons.

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