Rating agency Demotech has announced it will suspend its recommendations for Florida property insurers after two recent court decisions, Johnson and Sebo, have intensified the impact from the assignment of benefits (AOB) epidemic.
The rating agency has advised Florida insurers to review their protocols, saying the court decisions had revised claims procedures, practices, and protocols from industry standards that “previously existed to a “Florida only” standard.”
Demotech has also warned that “some carriers face potential downgrades” in meeting the requirements underlying the assignment of Financial Stability Ratings (FSRs).
But there’s still time for carriers needing to address changes to balance sheets; the rating agency has pointed to the Statutory Statement of Accounting Principles Number 72 (SSAP 72) which gives insurers the chance to take care of financial matters before publication of annual financial reports on March 1 of the following year.
According to Demotech, carriers had rigorously addressed weather events with catastrophe reinsurance programmes but “no carrier can be prepared for the impact of the Johnson and Sebo cases, which were less than 100 days apart, being superimposed on the challenges associated with an AOB protocol unlike that of any other jurisdiction.”
Demotech said in its ratings of carriers it will now take into consideration “the carriers’ responses to the challenges raised by AOB and the Johnson and Sebo cases in the execution of their business plans.”
The firm advised Florida insurers to “focus on addressing AOB and the implications of Johnson and Sebo on its business model.”
The rating analysts highlighted that judicial decisions “significantly alter the claims procedures, practices, and protocols underlying historical operating results” and so current financial data could be obsolete.
Pricing insurance policies would have to be reviewed, given the changing environment, said Demotech, as changes to claims procedures, practices and protocols mean prices based on previous experience may no longer be accurate.
In 2012 The Florida Supreme Court declared the cap on legal fees unconstitutional, and in January 2017, overturned lower court rulings related to legal fees awarded to a law firm whose fees had been capped in a claim bill authored by the legislature in 2012.
Assignment Of Benefit fraud refers to the epidemic of unscrupulous lawyers and contractors who have been cashing in on insurance policies by offering to pay out home owners in exchange for being assigned their AOB provision, and then exaggerating and maximising the insured’s claims.
This trend has risen sharply since 2012, XL Catlin reported that “in the case of homeowner policies, AOB lawsuits skyrocketed nearly 100% between 2005 and 2014, during the no-landfall hurricane seasons post-hurricane Wilma; and are said to have cost insurance companies millions of dollars.”
Any change to Demotech’s view on primary Floridian insurers could have ramifications for way in which they buy reinsurance, with the likelihood being an increase of some sort.
Although the Florida insurance industry has taken measures to respond to this trend, such as partnering with other involved parties to form the Consumer Protection Coalition, to attempt to ensure homeowners maintain control of their insurance policies, it’s clear that Florida property insurers will now have to take this aspect of AOB inflated claims into consideration in their pricing and protocol reviews