Ratings agency Demotech is currently reviewing the 2019 fourth quarter earnings and year-end financials of the Florida insurers it rates after indicating in January that several Florida domestic insurers could receive rating downgrades. Demotech President Joseph L. Petrelli provided the following comments on the current state of Florida’s residential property insurance market in response to a request for an update from Insurance Journal.
Although it is premature to provide Insurance Journal with details on Demotech’s assignment of Financial Stability Ratings (FSRs) based upon our review and interpretation of year-end 2019 financial statements, our perspective on the current state of the residential property insurance market in Florida will materially impact our interpretation of the year-end 2019 operating results of the more than forty Florida-focused carriers that we review and analyze on at least a quarterly basis. We provide some thoughts on that aspect of your request, for your consideration.
As we see the situation, market forces as well as carrier specific financial metrics have created an environment that results in the Island named Florida. Insurers have been impacted by:
- Insurer investor capital exiting rather than entering Florida
- Current holding company debt, infused to support growth, permit the strengthening of loss and loss adjustment expense reserves without a diminution of surplus, or otherwise support the implementation of business models, are at burdensome levels given the natural disasters of 2016 through 2019, and the impact on both annual profitability and balance sheets.
- The cost of catastrophe reinsurance has been, and will be in the future, a financial shock to the income statements of carriers.
- The cost of reinsurance, i.e., dollar amount of cessions, impacts the net dollars carriers retain to honor or defend the meritorious claims of their policyholders, and operating expenses, etc.
- Although carriers can “true up” reinsurance costs by making the necessary filings with the State of Florida Office of Insurance Regulation, the financial impact of paying higher reinsurance costs is short-term and the financial benefit of “true up” accrues over a longer term. The mismatch in timing adversely impacts carriers, given the other conditions.
- Over the past few years, the cumulative impact of rate revisions at a percentage change that eliminates the time and expense of a hearing, i.e., less than 15%, has had cumulate impact on carrier rate adequacy, and their concomitant ability to withstand current conditions.
- In an operating environment characterized by frequent disruption of claims procedures, such as the AOB decision, Sebo, Johnson, Joyce, and other decisions revised the claim settlement landscape and set insurers and the actuaries they depend upon on their heels.
- Over the past several years, the revised rules of engagement on claims settlement, set by the judiciary, have had their impact magnified by the natural disasters of 2016 through 2019 by increasing the number of claims subject to the revised rules of engagement.
- The Rapid Cash Build-up program that favorably impacts the financial stability of the Florida Hurricane Catastrophe Fund (FHCF) adversely impacts the financial stability of the fine insurers that FHCF reinsurers.
Although Florida’s 2019 legislative session made progress to reverse the trajectory of claims associated with assignment of benefits, the 2020 session has seen several bills stall:
- Senate Bill 1334- an omnibus bill.
- An amendment to temporarily restore TEACO, the lower layer catastrophe fund coverage to compete with private reinsurers as well as temporary suspension of the rapid cash buildup factor.
- Senate Bill 914 – to address the contingency fee multiplier.
- Senate Bill 924 – bad faith reform.
In 1996, the State of Florida, Department of Insurance, Government and Industry Relations Division asked Demotech to rate the independent, regional and specialty carriers that would focus on depopulating the Florida Residential Property Casualty Joint Underwriting Association, which became Citizens Property Insurance Corporation. We familiarized ourselves with the unique operating environment created by the existence and operation of the FHCF and Citizens.
Over the past two and one-half decades, Demotech has actively monitored the impact of natural disasters, judicial and legislative impact on the unique eco-system that Florida built in the mid-1990s. Private sector impacts, whether macroeconomic, such as conditions in the reinsurance marketplace, the introduction of catastrophe bonds and insurance linked securities, or the impact of judicial decisions and revisions in carrier and reinsurer claim protocols, procedures or practices have materially impacted business models, operating results and balance sheets of carriers.
It seems to us that the eco-system developed in Florida was constructed to permit the executive and legislative branches to assert some degree of control over the cost of reinsurance, which is a significant component of the ultimate cost to consumers. Periodically, that same eco-system has been tweaked to exert some degree of direct control over the cost of insurance to consumers.
Our concern is that an eco-system built to respond to the impact of natural disasters has been besieged by a series of judicial decisions, eviscerating claim settlement procedures, protocols and practices. A bunker built to withstand an atomic blast is intact but has been infiltrated by snipers. The ability of the eco-system to protect Floridians has been compromised by a small number of Floridians who have revised the rules of engagement through judicial decisions and/or utilize litigation as a tool to create claims protocols, practices and procedures in Florida that do not exist in any other US jurisdiction. This converts the peninsula of Florida to the island of Florida.
In this environment, although very few carriers are likely to fail, many will be downgraded until the operating environment in which they have the overwhelming majority, often all, of their production, presents them with a realistic opportunity to earn a pre-tax operating profit.
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