If the Assignment of Benefits (AOB) epidemic sweeping Florida continues unchecked, insurers with weaker capitalisation could see rating downgrades or be put out of business entirely, while reinsurers’ credit risk skyrockets, Bevis Tetlow, Chair of Hiscox Re’s North America business warned.
Florida insurers have been struggling to keep their head above water as attritional loss ratios deteriorate faster than insurers can adjust their premium rates.
And the 13 law firms responsible for driving AOB activity in the region are said to be gearing up operations by opening new offices in Orlando and Pinellas – to survive the increased AOB onslaught, re/insurers will need to step up their proactive game.
Last year’s average third-quarter combined ratios for Floridian homeowner insurers came to over 100% due to loss ratio deterioration resulting from fraudulent water claims, Tetlow explained; “At the same time, net incomes decreased by 64%, with 20 Florida domestic carriers experiencing surplus reductions. Fourth quarter combined ratios, including Hurricane Matthew losses, are expected to deteriorate further.
“This has the potential to affect reinsurers by increasing credit risk from third and fourth quarter premium payments and hurricane claims inflation. Whether or not AOB has the ability to inflate hurricane claims remains open to debate.”
Floridian Reinsurers are advised to take measures to self-protect by selecting carriers who have already undertaken measures to reduce their risk of AOB fraud.
Some such measures include setting up claims teams who can close claims quickly through a well-resourced internal team instead of using third-party adjusters, policy language can be adjusted to require insureds to sign an AOB waiver, carriers can also choose to only work with qualified contractors to undertake repairs.
Insurers could also raise awareness with educational campaigns for customers, highlighting pitfalls of assigning away rights, Tetlow suggested.
The Consumer Protection Coalition said payouts for water claims received by Citizens Property Insurance Corporation over the last three and a half years, where litigation was involved, has doubled from $10,000 to $20,000 and The Florida Justice Reform Institute added that from 2010-2016, “the number of AOB lawsuits rose by 300%.”
These figures demonstrate the severity of the problem, which re/insurers in the region need to tackle head on, if they hope to maintain profitable Floridian business.
Assignment of benefits (AOB) is when a homeowner signs over the representation of their insurance claim, typically to contractors who receive a fee from lawyers to sign people up. The lawyers then file an inflated claim along with an inflated legal bill.
This sets up an expensive trap for insurers, who are left with sky-high payouts whether they chose to settle the claim immediately, or fight the fraud in court.