Challenges Facing the Florida Insurance Market: A Reinsurer’s Perspective

By Maria DiMaggio and Oliver Frase | July 30, 2019

Hurricanes Irma and Michael served as a reminder that Florida, more than any other state, is at risk of one of the most intense natural perils, namely hurricanes. The existence of a stable insurance market providing its customers with a wide choice of affordable insurance is essential for the Florida economy to prosper.

Nonetheless, the Florida insurance market faces various challenges, the most critical from a reinsurance perspective being:

The litigious environment that is driving unprecedented social inflation threatening the affordability and availability of private insurance and impairing (re)insurers efforts to address existing insurance protection gaps with innovative products.

The need to enhance and consistently enforce building codes reflecting the latest scientific developments to create more resilient communities that will save lives and mitigate damage from catastrophes.

Social Inflation Impacts Private Insurance

A recent Insurance Information Institute report found that litigation related to assignment of benefits (AOB) increased by 70% from 2013 to 2018 – increasing even in years without a major hurricane. In fact, many homeowner AOB water claims are related to non-weather water damage. This, and other unfavorable litigation and loss adjustment cost trends, led to a strong rise in non-catastrophe loss ratios in the Florida homeowners’ insurance market and, consequently, approved rate increases to counter the exponential growth in social inflation costs associated with homeowner property losses.

Social inflation also drove the loss adjustment expenses from Hurricane Irma to unprecedented levels, thereby increasing the loss burden to reinsurers considerably beyond original projections. This reversed the trend of falling reinsurance costs since 2012 during the latest June 1 renewals with many catastrophe reinsurance programs having to pay significantly higher premiums to reflect the new levels of social inflation observed in the Florida homeowners’ insurance market.

Social inflation driven by excessive litigation resulting from AOB abuse, amongst other causes, threatens the affordability of homeowners insurance and, in the worst case, the availability of private insurance products. This has already been observed in the southeast of Florida where various private homeowners insurance carriers have ceased to write new homeowners insurance policies, thus reducing choice for customers.

The link between water-related losses and AOB-driven litigation has caused concerns in the marketplace as to how social inflation could adversely impact innovative flood options aimed at encouraging higher flood insurance take-up rates among Florida homeowners.

Currently, too many Florida homeowners who are at risk of flooding are uninsured. There are about 2.5 million homes in FEMA flood zones in the state of Florida, yet, FEMA says that as of February 2018, only 46% of the homes located in a 100-year floodplain are insured against the peril. For those homes outside the 100-year floodplain, the risk of damage from flood is still high, but as coverage is not required by federal-backed lenders, the take-up rate is even lower.

This leaves an “insurance gap” that can – in the worst case scenario – put a homeowner and an entire community at risk of financial ruin.

H.B. 7065 – A Much Needed Reform

The recently passed property insurance AOB reform bill, H.B. 7065, should bring much needed relief for the Florida insurance market. It addresses the abuse of post-loss AOBs by clarifying insureds’ rights related to the execution, validity and effect of AOB agreements, allowing insurers to include provisions in their insurance policies that prohibit or restrict the use of post-loss AOBs, and enables insurers to monitor and limit the cost of emergency repairs to reasonable amounts. It also introduces a more equitable method to establish which party, if any, will get attorney fees awarded, reducing the incentive for excessive use of litigation to resolve disputes.

The reform bill is an important first step to address the unsustainable levels of social inflation in the Florida homeowners insurance market. However, there is still a great deal of work ahead in terms of educating consumers about their new rights under H.B.7065 and for insurance companies to adapt their homeowner claims procedures to the new law while keeping their customers at the forefront of their mind.

We expect that AOB reform will result in stabilizing insurance costs and that, over time, Florida will be able to address the other factors that are driving social inflation. And only then will the legal reform unfold its full potential to curtail the exponential growth in social inflation thereby further stabilizing insurance costs, enhancing consumer choice and enabling innovation such as private flood solutions.

Building Resilient Communities to Thwart Flood and Wind

While homeowners insurance, including adequate wind and flood coverage, is critical to helping rebuild after a loss, it’s also important to try to minimize the loss before it occurs. Communities need to think about building resiliently to withstand today’s natural perils as well as the future impacts of climate change. Resilient communities may be able to rebound more quickly following a natural catastrophe, resulting in more lives saved and a quicker return to normal for the local economy.

Following Hurricane Andrew, Florida implemented statewide building codes needed to respond to a new level of storm devastation. In 2018, Hurricane Michael exemplified the value of resilient buildings post-storm as homes constructed to Florida’s building codes helped save assets and, more importantly, save lives. In contrast, the older buildings in the Florida Panhandle that were built prior to the 2002 building codes were not as able to withstand Hurricane Michael and, instead, experienced major structural damage or total loss.

Education is vital to help homeowners understand the ways they can fortify their homes. Non-profit organizations and many insurance agents and reinsurance companies have stepped up efforts to provide Floridians with the information they need to make resilient choices when it comes to repairing or (re)building a home.

From litigation reform to helping homeowners understand all the ways they can protect themselves, their homes and their financial wellbeing, the reinsurance industry will continue to work toward creating a strong and viable Florida insurance market.

About Maria DiMaggio

Maria DiMaggio is a VP and Property Treaty underwriter in the Reinsurance Division of Munich Reinsurance America, Inc. She can be reached at: MDiMaggio@munichreamerica.com.

About Oliver Frase

Oliver Frase is a senior VP and Property Treaty underwriter in the Reinsurance Division of Munich Reinsurance America, Inc. He can be reached at: OliverFrase@munichreamerica.com.

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