Florida has been facing an insurance claims abuse epidemic, more widely known as the assignment of benefits (AOB) issue which has driven up claims totals and means reinsurance and ILS players could face outsized impacts from smaller storms in the state.
Assignment of benefits (AOB) comes into play when an insured, in the case of the AOB epidemic in Florida a property owner (residential or commercial), signs over the right to act as the insured to an entity such as a contractor.
This has typically been seen in cases of water and wind claims, with roofers, plumbers and remediation firms taking over the rights to a claim, with their lawyers often chasing down insurers for higher and higher figures.
The AOB abuse that has become such an issue this year is related to water claims, which can become an especially prevalent issue for the insurance and reinsurance market after less severe hurricanes or tropical storms that soak the region, or cause surges to flow into properties.
AOB abuse has exploded across Florida in recent years, resulting in an escalation of legal costs with insurers often becoming the backstop for ballooning claims.
A problem for the ILS market and reinsurance providers could emerge during hurricane season, if insurers begin to claim on their reinsurance protection as their own losses from storms skyrocket due to AOB abuse in the claims process.
That could have the potential ramification of driving the industry loss from a hurricane or tropical storm far above the modelled expectation that the industry operates under, meaning reinsurance layers come into play for an event that they were never designed to.
Evan Glassman, CEO of parametric risk transfer specialist New Paradigm Underwriters, believes that parametric risk transfer could provide a valuable foil to the threat of AOB claims escalation, for insurers, reinsurers and ILS or collateralized markets.
“The problem with AOB abuse is that it could drive industry losses after a hurricane to exceed modeled expectations,” Glassman explained.
“That means reinsurers and ILS investors participating in the middle to upper layers of reinsurance programs for Florida carriers could experience losses in weaker storms than projected,” he continued.
A parametric risk transfer solution could help as it would pay-out based on the actual wind speeds experienced, or for storm surge the height of water seen to inundate built up areas.
In that way, a reinsurance or ILS capacity provider can put in place a hedge against AOB claims escalation occurring, by buying parametric protection.
A parametric risk transfer product would also be relevant to insurance carriers operating in Florida, as it can provide a useful corporate risk transfer tool (so insurance for an insurer) against the impacts of storms above a certain size or strength hitting the state.
This can be a capital protection play, rather than balance-sheet, which would also act as a potential hedge to any escalation of claims due to AOB abuse after the event.
Glassman explained; “Parametric Risk Transfer can be used to bring in supplemental capacity to fund these potential losses.
“Coverage can be Statewide, or can be lasered in around specific AOB hot spots and cedants underlying exposures. Coverage is transparently triggered, and settlement is completed within days of the storms providing immediate liquidity that can offset losses, and protect profits and assets.”
Many parametric covers like this can be backed by either rated re/insurers with balance-sheets, or increasingly by ILS specialists backed by capital markets investors.
The ability to structure them around hotspots, where AOB abuse has been seen to be rife, is key and would enable the parametric coverage to be matched with where the risk of escalating claims truly lies.
The use of parametric risk transfer to achieve risk protection for specific issues such as AOB is increasingly seen as an opportunity, as the transparency of the trigger and ease of setting up a responsive layer of coverage makes them eminently suitable for such use cases.
Lawmakers have tried to address the issue, but once again in May new legislation that would have addressed insurance fraud on water claims failed to get through the Senate before the annual session ended.
So, with no sign of any legislation to solve the problem, insurers, reinsurers and ILS players could look to the use of a parametric triggered risk transfer product as one way to ensure they have an injection of capital that can help them to deal with any ramp-up of claims after a hurricane this year.
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