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Florida’s ‘artificial’ insurance structure is ‘untenable’ – ALIRT

18th May 2022 - Author: Luke Gallin

The efforts of both the Florida government and the state’s insurance department to provide its citizens with affordable property insurance has created an “artificial structure” which is “untenable,” according to ALIRT Insurance Research.

florida-stormFor the past three decades, the state’s government and insurance department have made numerous efforts to create a viable and affordable property insurance market for a region extremely vulnerable to storms, and which in more recent times has endured rising litigation-related losses.

As noted by David Paul, Principal analyst at ALIRT, this has included state-run carriers / joint underwriting associations, a state-run reinsurer with subsidised rates, a surplus notes program, a program to depopulate Citizens Property Insurance, global insurance assessments, and various legislative fixes.

But while these efforts did attract some entrepreneurs that were able to capitalise new Florida-focused homeowners’ insurers at a low cost, the research argues that what has ultimately happened, “is a Rube Goldberg machine of sorts that has to be continually readdressed as one or another prop gets knocked out of place.”

“Over the past year, it has become increasingly clear that this whole artificial structure is untenable,” says Paul.

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In the last 12-months alone, four domestic Florida-focused insurance firms have become insolvent, while a myriad of others have either scaled back considerably or withdrawn from the market completely.

While market failures in Florida are certainly nothing new, the research finds that this trend has accelerated in recent years, stating that of the roughly 80 small domestic carriers established to write homeowners business in the state over the past 30 years, more than 25% have gone out of business.

“But this new phase of what’s proven to be a rolling property insurance crisis seems to mark a flash point,” says Paul. “The international reinsurance market, on which this market depends for its survival, is beginning to throw in the towel.”

It’s a valid point which alludes to the fact numerous reinsurers have announced a reduction in their appetite for Florida property risks ahead of the important June reinsurance renewals season.

As a result, there’s a fear that some lower layers of property reinsurance towers may struggle to get filled at the mid-year renewals. Initial data from our latest reinsurance renewals market survey (take part here) supports this notion.

For domestic insurers in Florida in real need of reinsurance coverage, a lack of appetite from the reinsurers for lower layers, driven by risk aversion and a lack of adequate rate, means they risk entering the 2022 hurricane season without enough protection to meet the requirements of rating agencies. So, certain carriers might have to enter the season with more risk on their balance sheets and less protection, or look to other forms of additional financing to ensure they can operate.

“Without this support, the now smaller number of primary insurers will be forced to cut back coverage or assume substantially more risk. And all this in an era of surging material and social inflation, which only exacerbates loss trends,” says Paul.

As the challenges mount, Florida governor Ron DeSantis has called for a special session to consider legislation to improve the affordability of property insurance within the state. It’s understood that topics to be discussed include new anti-fraud homeowner squads, funding for a fraud-related campaign designed to educate the public, amendments to qui tam law, financially encouragements, and importantly, adjustments to laws surrounding assignment of benefits (AOB).

According to Paul, Florida’s property insurance sector has four main issues to deal with, including wind-related losses and material inflation, which are outside of the state’s control, and a hyper-litigious trial bar and attendant social inflation, which the state has the power to control.

“Whether it has the will to adopt the legislative changes necessary to right a property insurance market that is now keeling badly awaits to be seen. What has become increasingly clear is that it may now have run out of creative fixes,” says Paul.

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