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“Significant increase” in litigated Florida claims in Q1: United (UPC)


The litigation issue and resulting loss inflation and amplification continues for Florida homeowners’ insurers, with the latest report from United Insurance Holdings (UPC Insurance) suggesting that the issue is worsening in 2021.

florida-beach-imageUnited (UPC) reported on Friday that it has experienced a “significant increase in litigated claims volume from Florida homeowners’ during the first quarter compared to prior periods.”

This has resulted in a need for the insurer to harden its reserves for some prior accident years.

Because of the wave of litigation seen in Q1 2021, United (UPC) said that it led to, “actual loss reserve development exceeding our expectations across most accident years.”

So because of this “higher-than-expected frequency of litigation in Florida”, the Florida headquartered, expansive catastrophe exposed primary property insurer said that it will now strengthen its reserves for unpaid loss and loss adjustment expenses on prior accident years by some $30 million (approximately $24 million after tax), which will be reported within its first-quarter 2021 results.

A recent report from the Florida Office of Insurance Regulation showed that, while Florida homeowners’ filed only 8% of property insurance claims in the US in 2019, some 76% of lawsuits against property insurers were filed in Florida.

That’s a staggering statistic and shows the scale of the litigation problem in Florida’s insurance market, which has of course had significant ramifications for reinsurance markets and ILS funds over recent years.

But it seems the loss creep from previous catastrophe years is set to continue and while for homeowners’ insurers, the ability to make additional claims on reinsurance to cover this loss creep is waning, or gone in many cases, the fact litigated claims trends continue to rise suggests the Florida market is not out of the woods and also points to more firming at the June renewal season.

The Florida Office of Insurance Regulation’s report suggests that it is litigated claims that are driving up property insurance rates, and so reinsurance costs for insurers.

Florida is said to have been the source of over 60% of all property insurance lawsuits in the United States since as far back as 2016, perhaps before.

The state’s lawmakers continue to push for legislation to stem the litigated claims tide, but Florida’s property insurers continue to experience relatively significant loss creep and 2017’s hurricane Irma remains one of the main drivers of this, we understand.

“We anticipated the unfavorable trend of litigated homeowners claims in Florida continuing in 2021, but the actual number of new lawsuits filed during the first quarter was extremely disappointing and requires us to re-estimate our ultimate loss liabilities due to the overall increase in loss severity,” Brad Martz, President & CFO of UPC Insurance explained on Friday.

United (UPC Insurance) also reported current year catastrophe losses for Q1 2021 of roughly $24 million before income taxes (approximately $19 million after tax), after factoring in expected reinsurance recoveries.

These first quarter catastrophe losses featured claims from Winter Storm Uri, as well as seven additional PCS catastrophe events and two non-PCS catastrophe events, the insurer said.

United and its UPC subsidiary are among the best capitalised insurers in the Florida marketplace, meaning they can likely absorb the additional hit from continuing litigation related loss creep and claims inflation from prior years.

But for other Florida property insurance specialists this may not be so simple, as there are companies with far lower surpluses, some whose surplus is so low and so leveraged that their future currently seems unsustainable.

As a result, all eyes are turning to how Florida’s property insurance market achieves two things.

First, solving the litigation problem, through legislative change and so stemming the tide of claims inflation and loss creep at its source.

Second, enabling some of its insurers to continue operating in a sustainable manner, as right now there are a number whose ability to maintain ratings appears challenged at best, while some others may need much more proactive remediation, recapitalisation, or to be taken private in some form.

The other option is for Florida’s Citizens Property Insurance Corporation to assume more risk, from those primary carriers that just don’t have the financial surplus and wherewithal to continue underwriting new business, especially with another hurricane season around the corner.

But total insured values (TIV’s) that could potentially flow Citizens way are enormous and it might be hard for Citizens to assume all the risk from those Florida carriers that are in ill health without significant increases to its own funding and also reinsurance, which does make the depopulation or takeout process something we’re likely to see much more of, if indeed the Florida property insurance market develops this way.

Solving the litigated claims crisis won’t be enough to save all of Florida’s property insurers, we believe. There’s a strong chance that Citizens has to become some kind of conduit for taking risk out of private companies and than channelling it back to them through its depopulation again.

Hopefully that can be achieved in a more fluid manner, meaning Citizens doesn’t have to sit as the insurer of last resort on these policies for too long and they can be passed onto those with the capital and ability to manage them privately much more quickly this time around.

Of course, all of this has ramifications for the upcoming June 2021 reinsurance renewal season and the fact insurers are reporting more prior year loss creep at this late stage is not going to help them in moderating potential rate increases.

Also read:

Access to capital key in “dysfunctional” Florida insurance market.

Florida Citizens growth suggests takeout opportunity returning.

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