Analysts at insurance research firm ALIRT have warned that the industry should remain attentive to the experience of residual market mechanisms in the most catastrophe-prone US states, which it says are an “important bellwether of availability and affordability trends.”
In a new report, ALIRT assessed the residual homeowners market trends in four key US states, in light of the “extreme dysfunction” that has plagued the Florida market in recent years.
In Florida, state intervention is substantial and national group appetite quite low, while the cohort of smaller dedicated homeowners carriers has dwindled due to insolvencies and market exits.
Analysts acknowledged that the troubled Florida market has perhaps “over-sensitized” the market to similar crises elsewhere, but maintained that the recent uptick in catastrophe activity across the US requires greater examination of other state mechanics.
In California, for instances, consecutive years of devastating wildfire losses have spurred a new round of regulatory activism in an attempt to maintain coverage capacity and affordability for both habitational and commercial property risks.
This has led to an annual moratorium on cancellations/ non-renewals in impacted fire zones and an expansion of the FAIR Plan, which dramatically increase the exposure of the current FAIR Plan, and which ALIRT says could have “adverse and unintended consequences.”
“The participation of national insurance groups remains strong but could ebb as the state’s FAIR Plan becomes a more attractive alternative via the recent introduction of richer product offerings and substantially higher limits,” analysts explained.
In contrast, regulatory activism remains low in states such as Louisiana as the market keeps to its mandate as a temporary insurer of last resort, despite experiencing capacity dislocations in its property market due to a series of costly hurricanes in 2020-2021.
Absent further large cat losses, ALIRT therefore anticipates that Louisiana Citizens should see an easing of demand over time through both depopulation and an upswing in private market capacity/appetite.
The final state examined by ALIRT – Texas – appears to exhibit the healthiest property insurance market, with broad national insurance group participation, low residual market share, and minimal regulatory intervention.
While Texas is one of the country’s most catastrophe-prone geographies, ALIRT notes that its exposure to large Gulf hurricane losses is mitigated somewhat by the relatively lightly populated coastline
“The experience of a state’s residual market mechanisms, where they exist, can prove an important early warning system for the direction of future market performance, including the relative participation rates and – importantly – financial performance of individual insurance companies,” ALIRT concluded.
“Large national insurance groups and super regional insurers, given geographical and often product diversification of risk, traditionally have the financial wherewithal to withstand operating losses in any one jurisdiction,” it continued.
“Smaller insurers, however, especially ones established to fill property insurance vacuums in more problematic states – such as Florida and to a lesser degree, Louisiana and California – have much less financial capacity to withstand large or loss events. This can lead to the types of insolvencies experienced in these three markets. For this reason, ALIRT continues to monitor residual market experience.”
