Florida’s insurance regulator, in response to questions why lower reinsurance costs have not translated into reduced homeowners rates, said insurers have significant leeway in how they incorporate those costs into rates and any changes can take a significant amount of time to implement.
Insurance Commissioner Kevin McCarty, in a letter, sought to explain the role reinsurance costs play in the homeowners market after Chief Financial Officer Jeff Atwater questioned why there has not been a corresponding drop in homeowners’ premiums as prices for reinsurance has come down.
“If insurance companies can justifiably raise rates on Florida families because the reinsurance market drives the cost up, they can certainly lower the cost for Florida families when reinsurance prices fall,” said Atwater in a letter to McCarty last week.
In a letter responding to Atwater, McCarty said there are a number of reasons homeowners may not be seeing any premium reductions due to decreases in reinsurance costs. The reasons, McCarty said extend from both from the requirements and limitations of state regulations and the fact that each individual insurer has different reinsurance needs.
Florida has no firm rule that insurers must follow when calculating their reinsurance needs. It is up to each individual insurer to decide how much reinsurance to purchase, an amount that can vary from insurer to insurer based on its hurricane exposure, available capital, and other factors.
For example, lower reinsurance costs may give an insurer the ability to purchase additional coverage, thus improving its financial position when it comes to its catastrophic exposure. Financial rating firms such as A.M. Best may also require an insurer to purchase a certain level of coverage to secure or retain a financial rating.
“Several Florida property insurance companies are being required by their rating agency to buy more reinsurance than they initially planned to purchase,” stated McCarty. “This is likely to keep rates up and move addition premium and exposure to reinsurers.”
McCarty said that those factors and others explain why not every individual insurer will see a reduction in their overall reinsurance costs. He also said that even if an insurer sees a reinsurance cost reduction, it may have a minor effect on policyholders’ premiums.
“It is important to remember reinsurance costs make up only a portion of the total homeowners premiums and a reduction in reinsurance costs does not translate into a one-to-one reduction in premium,” wrote McCarty.
Another major reason that reduced reinsurance costs may not be felt by consumers is the amount of time it takes for those costs to be incorporated in policies. The majority of property reinsurance contracts in Florida are timed to begin with the start of the hurricane season on June 1 and expire on May 31 of the following year. Once those contracts are finalized, insurers must conduct an actuarial review to see if any rate changes are warranted on a statewide or territorial area, a process that McCarty said is “time-consuming.”
McCarty said that once that process is complete most insurers seek prior regulatory approval of the rates. Any changes must be filed with the Office of Insurance Regulation at least 90 days before their effective date. State law then requires insurers to give policyholders notice of the new rates at least 45 days before their renewal date.
McCarty did say that his office is working to get a better picture of insurers’ reinsurance expenses. For one, regulators have requested that in their recent rate filings insurers include the specific costs of their 2013/2014 reinsurance contracts.
Even with the complexity of the role of reinsurance within Florida’s market, McCarty pledged that regulators would continue to keep consumers’ interests in the forefront.
“I agree that it is necessary to provide economic relief to Florida families,” wrote McCarty to Atwater. “The OIR will remain vigilant in its review of rate filings in accordance with Florida law to ensure all possibilities for such relief are identified and passed along to consumers.”
A copy of the letter can be found here.