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More insolvencies possible without immediate Florida reforms: AM Best

8th December 2022 - Author: Matt Sheehan

Analysts at AM Best have warned ahead of the second special session of Florida lawmakers that further insurer insolvencies are possible if “immediate and substantive” long-term reforms aren’t realised.

Source: Rebecca Blackwell, AP

Governor of Florida, Ron DeSantis, has called the session in order to work with the Legislature to introduce more competition and policies that will aim to lower prices for consumers, among other issues.

It follows an earlier special session this year when the state passed reforms designed to alleviate rising insurance costs, increase insurance claim transparency, and crack down on frivolous lawsuits.

In a new report on the Florida market, AM Best notes that many market participants fear an acceleration in the state’s already declining capacity amid recovery from Hurricane Ian.

This could drive up costs and worsen the state’s already precarious insurance market, which has seen six insurers declared insolvent since late February.

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Additionally, reinsurance companies had been drastically reducing property catastrophe exposures in the state even prior to 2022 and may continue to pull back from the Florida property market or further increase pricing significantly, making reinsurance reach the limits of affordability.

“The outcome of the special legislative session could affect the capital allocation strategies of reinsurers that have to decide where to invest their dollars in the coming year,” said David Blades, associate director, industry research and analytics.

“Although claims stemming from Hurricane Ian at this point are lower than that of 2017’s Hurricane Irma, the rising reinsurance costs could reach a breaking point for many primary insurers in June 2023, when Florida property catastrophe reinsurance programs are scheduled for renewal.”

The market disruption has also resulted in substantial growth for the state-backed Citizens Property Insurance Corporation, which AM Best notes is not immune to rising claims costs and will be further strained by its own losses from Hurricane Ian.

“Public policy initiatives need to consider how to make Florida attractive to national insurers and reinsurers, to incentivize them to expand their appetite for Florida risks,” explained Sridhar Manyem, director, industry research and analytics, AM Best.

“Absent that, a lack of competition may continue to fuel affordability issues for primary insurers with respect to reinsurance and consumers in need of basic homeowners’ coverage.”

As the commentary notes, the state is dependent on Florida-focused specialist insurers, which have weaker balance sheets than larger national carriers, and are overly dependent on reinsurance for balance sheet protection and short-term capital.

“Without changes to reduce the costs in the system and to better manage the impact of catastrophes, Florida specialist carriers may find it difficult to survive,” AM Best said in conclusion to the report.

Governor DeSantis has already acknowledged that many businesses would likely have failed without the introduction of reforms following the first special session back in May.

The reforms included a $2 billion reinsurance fund and new rules on coverage denials and attorney fees, as well as $150 million for hurricane retrofitting, and rules that require insurers to provide a reasonable explanation for denying coverage.

However, these measure did receive some criticism from within the re/insurance market for not going far enough, so it appears that Florida may be listening to market feedback and exploring further options in the wake of the devastating impacts of Hurricane Ian.

In particular, Florida Chief Financial Officer (CFO) Jimmy Patronis has highlighted the need for more fraud prevention, calling for legislation to prevent public adjusters from taking advantage of Floridians under financial duress and eliminating assignment of benefits (AOB) claims altogether.

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