Florida CFO: Why Aren’t Florida Property Rates Falling Along with Reinsurance?

Florida’s top financial officer is questioning regulators on why reports of significantly lower reinsurance costs worldwide are not translating into reduced premiums for homeowners around the state.

Chief Financial Officer Jeff Atwater in a letter this week to Insurance Commissioner Kevin McCarty questioned why after a decade of rising homeowners premiums due primarily to rising reinsurance costs, those premiums are not being reduced due to a corresponding drop in reinsurance expenses.

Atwater cited an Insurance Insider poll of brokers and catastrophic reinsurance underwriters that found a consensus emerge that reinsurance rates are down on average by some 15 percent to 20 percent.

As a result, wrote Atwater, Florida residents should see some premium relief after a decade where insurers argued for the need for higher rates based on rising insurance costs.

“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.

Atwater wrote that “Floridians not only deserve an explanation for why they have not seen any savings to date, they also deserve to quickly begin seeing property insurance savings in their bills.”

Office of Insurance Regulation Spokesperson Amy Bogner said McCarty has received Atwater’s letter and is in the process of formulating a response.

[On Monday, Aug. 12. McCarty responded to Atwater in a letter explaining the relationship between reinsurance costs and homeowners insurance premiums.]

Florida Hurricane Catastrophe Fund Executive Officer Jack Nicholson said from his perspective reinsurance prices have declined driven by new sources of capital, most notably from large pension funds. Nicholson said that pension funds are viewing the reinsurance market as a place to diversify their holdings, meaning they are willing to accept a lower rate of return on their investment than other traditional investors.

Those lower reinsurance rates were one reason that state lawmakers earlier this year discussed lowering the Cat Fund’s annual $17 billion financial obligation to the market so that it would be less dependent on issuing bonds to raise money.

“The argument was that Cat Fund rates could go up, but since private rates were down, you could take $1 billion or $2 billion off the top of fund’s obligations and the costs would be offset,” said Nicholson.

While lawmakers eventually decided to make no changes in the Cat Fund citing the potential for any increase in rates, the issue of reinsurance costs has not gone away.

Rep. Ray Rodrigues (R-Fort Myers) last month also questioned McCarty as to why homeowner rates have continued to increase despite lower reinsurance costs.

McCarty said that each property insurer is required to make an annual rate filing that includes a factor for reinsurance costs. McCarty, however, pointed out that there are many factors that go into each individual insurer’s reinsurance expenses beyond costs.

Under the state’s rating law, there is no set rule on how much reinsurance an insurer must purchase and at what costs. In fact, under the law, insurers can even purchase reinsurance coverage to insurer potential damages from a one-in-250 year storm. While insurers rarely would purchase that level of coverage, McCarty said there are other reasons insurers might purchase more reinsurance than needed.

For example, insurers might purchase more reinsurance to reinforce their overall financial strength rather than reduce rates.

Additionally, insurers seeking to earn or retain a score from a rating agency such as A.M. Best may be required to purchase additional reinsurance. Then there are other factors such as changes in computer models that might reveal the need for more reinsurance.

“We would anticipate a filing to reduce rates if the only thing that changed from last year is that their reinsurance costs are lower,” wrote McCarty. “This is not likely to be the case across the board, but may be true for some insurance companies who are actively competing for market share in some parts of the state.”