Demotech: Investor Interest in Florida Will Diminish Without Legislative Action

As the first insurer rating agency to review and rate independent, regional and specialty insurers, we have a unique understanding of niche markets and serve as a trusted resource to third parties seeking to utilize regional and specialty companies.

The majority of these insurers focus on their niches in their communities. They utilize local agents, local claims adjusters, and their employees are from the area. Among the more than 400 insurers we rate are 42 carriers focused on residential property insurance in Florida. Demotech rated carriers operating in Florida collectively write approximately 66% of the residential property insurance market.

These insurance companies that continue to protect Floridians while expanding their geographical footprint have encountered back-to-back record storm seasons in 2019 and 2020. Diversification to other catastrophe prone jurisdictions exacerbated rather than ameliorated recent operating results. The catastrophic events led to a marked increase in the number of claims to be evaluated, additional litigation and increases in the cost and availability of reinsurance.

Having seen the ebbs and flows of market conditions in Florida’s residential insurance marketplace since 1996, and after coordinating and participating in recent meetings with the companies we rate, it is our belief that future efforts to re-capitalize insurance companies impacted by numerous storm events will be challenging if those insurers’ investors and the reinsurers of those carriers do not believe that meaningful reforms have been instituted to enhance the likelihood of an operating profit.

In response to the financial impact of the increased cost of reinsurance, excessive levels of litigation associated with otherwise routine claims, and re-evaluations of the impact of claims associated with events in 2019 and 2020, Demotech provided direction to carriers during the first nine months of 2020 on the fortification of their balance sheets and policyholders’ surplus at levels commensurate with sustaining a Financial Stability Rating (FSR), and positioning themselves to have acceptable year-end 2020 financial metrics.

Demotech rated insurers contributed $500 million in new capital to enhance policyholders surplus, whether from the impact of storms, increases in the claim costs of newly reported claims or to address adverse loss and loss adjustment expense development or otherwise sustain their FSR certification for year-end 2020. We will soon be evaluating whether or not this dollar amount was sufficient.

In late January and early February 2021, we conducted a series of meetings to discuss anticipated year-end 2020 balance sheets, operating results, recapitalization plans, and any revisions to their business plan or model in anticipation of year-end financial statements that were due March 1, 2020.

We discussed market conditions and financial results with more than 125 senior level executives, founders, shareholders and other professionals protecting Floridians.

The agenda we utilized was extensive and included information related to:

• Anticipated Year-end 2020 Statutory Financial Results
  • Underwriting
  • Net income (loss)
  • Projected surplus
  • Projected RBC
  • Affiliated receivable
  • Status of outside auditor review
  • Significant or extraordinary footnote(s)
    • Going-concern comment
    • Subsequent events
• Anticipated Year-end 2020 Loss and LAE Reserves
  • Status of actuarial review
  • Projected development position (Schedule P, Part 2, Summary)
  • Adverse development cover (if applicable)
  • Projected actuarial opinion summary position
  • Catastrophe loss further development
• Anticipated Year-end 2020 Capital and Corporate Structure
  • Total capital additions for 2020
  • Source of added capital
  • SAP #72 – fully funded
  • Changes in investor/ownership interests
  • Personnel – officers and board members
  • Holding company financial update
• Anticipated Year-end 2020 Business and Operational Plans
  • Modifications to strategic business model
  • Corporate or capital structure planned modifications
• Anticipated Year-end 2020 Reinsurance Issues
  • Confirmation of remaining CAT reinsurance program
  • Expectations and timing for the coming CAT Reinsurance Renewal
  • Changes or modifications to existing quota share programs

As the results of any given calendar year reflect the activity of past years as well as the underwriting and claims activity of the current year, our discussions included prior period influences as well as thoughts about 2021 and beyond.

While it appears the legislative reforms passed in 2019 related to assignment of benefits had somewhat of a positive impact, the 42 Florida-focused property insurers that Demotech reviews and rates have been impacted by many other negative factors.

C-Suite Concerns

The more than 100 C-suiters operating in Florida shared the following concerns with us:

• It is common for a First Notice of Loss (FNOL) to be a notice of litigation, denying an insurance company an opportunity to resolve the claim without third party interference;
• Expansion of the contemplated purpose of the one-way attorney fee statute;
• An aggressive plaintiff’s bar that is confident of a high level of judicial support;
• Significant increases in the cost of reinsurance purchased in the private sector;
• Incremental reinsurance cost associated with the Florida Hurricane Catastrophe Fund’s cash build-up program, where the Cat Fund continues to collect a hefty “upcharge” despite it being in the strongest financial position in its history. Suspension or rescission of the cash build-up program would mean immediate savings for insurers;
• Consumer and producer dissatisfaction with the premium levels necessary to secure adequate rates reflecting the current status of Florida’s property insurance marketplace.

To varying degrees, the provisions of proposed Senate Bill 76 could bring relief to these concerns. However, absent meaningful legislative reforms such as those in SB 76 that are upheld by the judiciary, the primary response available to insurers is frequent rate increases. Re-underwriting books of business and identifying and canceling individual risks that exacerbate the cost of reinsurance are other tools that have been put in place. These activities tend to end up repopulating Citizens.

Absent meaningful reform, insurers focused on the Florida property insurance marketplace will not be an investment of choice. If Florida-focused insurers are viewed as investments with limited opportunity for profitability, this will lead to the repopulation of Citizens, which exposes Floridians to a financial assessment should Citizens have a meaningful shortfall.

Legislators and consumers should note that reforms will not translate into rate decreases. Rather, meaningful reforms are needed to moderate the rate of increase that consumers face at renewal.

We reach this conclusion because the insurance companies who provide homeowners insurance are paying for repairs, and the cost of the materials is unlikely to be reduced in the future. Similarly, the hourly wages and cost of employee benefits of the skilled artisans who effect the repairs will increase over time, not be reduced.

Likewise, the cost of reinsurance is unlikely to be meaningfully reduced anytime soon. The flip side of Florida’s glorious weather and attractive climate is its geographical position as a catastrophe prone jurisdiction. It has been called the most difficult property insurance marketplace in the world — well before the expansive litigation and judicial decisions that occurred under the previous administration.

This said, meaningful reform will reduce the rate of increase in the premium being paid by consumers, attract investors to form insurance companies, and introduce a degree of competition that the residential insurance marketplace has not experienced in five to 10 years.

Related:

• ‘Desperate’ Times: Stakeholders Urge Florida Lawmakers to Enact Insurance Reform
• Florida Legislative Session 2021: Insurance Bills to Watch
• Florida’s Property Insurance Market Is ‘Spiraling Towards Collapse’ Due to Litigation: Report
• Florida Legislature Weighs Options to Address Rising Homeowners Insurance Costs
• Florida Market Stabilization Critical to Reducing Citizens’ Exposure: Study
• Hurricane Irma’s ‘Last Gasp’: 3-Year Claims Deadline Put to the Test
• Florida Supreme Court Suspends Attorney Behind Thousands of Insurer Lawsuits

Topics Florida