Florida’s new reinsurance programme is going to be tested by Hurricane Ian, says AM Best in a new commentary.
It was created in recent months by state governor Ron DeSantis as the Reinsurance to Assist Policyholders (RAP) Program, designed to provide $2bn of coverage for hurricane losses.
The reinsurance program’s $2bn coverage limit is for all participants in aggregate.
There are some important exclusions and limitations, including a limit on loss adjustment expenses to 10% of the reimbursed value—an important limit given that in Florida defence and cost containment expenses alone have been approximately 12% of losses.
AM Best said in its commentary: “Hurricane Ian will be the first test of this new program. Landfall in the Tampa/St. Petersburg area would have a significant impact, given the concentration of population in the area and the number of higher-value homes, so the potential for losses is high. Earlier this year, CoreLogic estimated $276bn at risk to wind losses and $126bn at risk to storm surge just on single-family homes, with additional losses possible on multi-family dwellings and commercial property.”
It added: “Although insured losses are always lower than total losses, given uninsured or underinsured properties and some losses are covered by National Flood Insurance Program (NFIP), Ian still has the potential to be a significant industry event. Some private insurers cover flood, but the NFIP has the highest penetration. Insured losses from Hurricane Andrew (1992), which made landfall as a Category 5 storm in South Florida, came to $15.5bn, which in today’s dollars would be approximately $30bn. Although the latest track shows Ian making landfall south of Tampa, landfall in the populous area around the city could lead to insured losses as high as those due to Hurricane Andrew.”
AM Best said that Insurers concentrated in Florida, or those writing at least 20% of gross written premium in the state, have been greatly affected by major hurricanes. The overall property loss ratio for this population spiked to 72% with Hurricane Irma in 2017 and was higher than 60% when Hurricane Michael hit a much less populated area in 2018. In total, these hurricanes also led to a drop of nearly 20% in policyholders’ surplus, limiting those insurers’ ability to cover future events.
Of the companies writing solely within Florida and writing at least $20m in premium, more than 80% of that premium is in the homeowners or farmowners line of business. Many of these insurers have a high premium-to-surplus ratio and depend heavily on reinsurance, including the new state-run program.
Christopher Graham, senior industry analyst at AM Best, said: “Property insurance in Florida is already a tough market and this impending hurricane looks to make conditions only more demanding. Reinsurance rates are already increasing and a catastrophic hurricane will likely put more pressure on reinsurers to raise rates.”
