The Intelligent Quarterly from the publishers of The Insurance Insider

Winter 2017 / 2018

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Fragile state

David Bull

At a glance, one might think the Florida homeowners' insurance market conveyed an image of strength and stability when the 2017 Atlantic storm season officially opened on 1 June.

State-backed insurer Citizens has its lowest exposure base in years and a strong reinsurance programme designed to protect its surplus and minimise the risk of assessments.

After years of capital build-up, the Florida Hurricane Catastrophe Fund has reached a position where its liquid resources exceed its claims-paying statutory obligation of $17.0bn.

And the Sunshine State's private homeowners' carriers have just completed a reinsurance renewal that offered broader coverage at cheaper prices, and the ability to buy more vertical and horizontal limit to respond more flexibly than ever before.

But a closer look reveals a marketplace with visible fissures that could be opened right up if the wind blows hard this year - despite a decade without a hurricane strike before last year's relatively modest Hurricane Matthew.

Citizens is predicting a 2017 underwriting deficit after falling to net loss for 2016, its first in more than a decade.

The carrier is not alone. In the private sector, 40 percent of Florida insurers suffered underwriting losses in the first quarter of this year, according to a report in early June from JLT Re.

That came after the sector posted a combined ratio of 100.9 percent for 2016, with 21 companies reporting combined ratios over 110 percent, and 11 above 125 percent.

Demotech, the only agency that rates many of the state's homeowners' insurers, pulled its guidance on the Florida market earlier this year and warned of downgrades because of the deteriorating operating environment.

Assignment of benefits
As our sister publication The Insurance Insider has widely reported, the main culprit is a surge in losses related to water claims where there has been a so-called assignment of benefits (AOB), which has sparked a mass of litigation.

The numbers are alarming. Citizens estimates that around 50 percent of all of non-sinkhole, non-catastrophe claims in its personal lines account (PLA) are now going to litigation.

Excluding Citizens, the top 25 Florida homeowners' writers saw the average number of lawsuits they received rise from 385 per company in 2015 to 931 last year.

And after hopes of AOB reform were dashed during this year's Florida legislative session, there are mounting concerns about the impact the crisis could have on the market if a major hurricane hits between now and the end of October.

Sources have warned that AOB could become a "huge factor" in hurricane-related claims, creating an "absolute tsunami for the industry and for losses".

The practice has seen unscrupulous vendors and contractors push homeowners to transfer their policy rights in relation to claims, many of which have ended up inflated and in litigation.

Edie Ousley, vice president of public affairs at the Florida Chamber of Commerce, tells Insider Quarterly that AOB is essentially a "fraud tax on homeowners".

Others have described the situation as a "cottage industry" for attorneys, with specialist firms even holding seminars teaching vendors how to effectively game the system.

According to Citizens president Barry Gilway, inaction in the legislative session has left the insurance industry exposed to potentially dramatic fallout in the aftermath of a major hurricane.

"It's common sense. Citizens is seeing about 50 percent of all claims going to litigation right now - if that continues and then you have substantial claims activity as a result of a hurricane it would be a panacea for those law firms that have a business model to generate excessive settlements," he says.

"That's not going to change, it's going to multiply in the event of a hurricane. All the CEOs I speak to have the same concern, and it's troubling."

Sources also warn that a mass of AOB litigation after an event could cause significant issues for reinsurers, with the potential for spiralling disputes where underlying claims are dramatically inflated.

Meanwhile, Gilway cautions that the spate of AOB-related claims and related litigation is spreading beyond the Tri-County region, where it has been most concentrated, to other parts of Florida.

And his fear is that even without a major storm the natural consequence will be a repopulation of Citizens.

That would undo the good work of recent years, during which the so-called insurer of last resort shed hundreds of thousands of policies and shrank its exposure level from a high of $512bn to $117bn, dropping to a market share of only 4.9 percent measured by multi-peril business (see table).

"I can't see how these private companies can continue to do business at the same level in the Tri-County area given the litigation numbers," says Gilway.

For Citizens that means an almost inevitable swelling of its PLA as it takes back unprofitable multi-peril business at a time when it has continued to offload better-performing policies from its coastal and commercial portfolios.

That would almost certainly have an impact on the entity's reinsurance buying, which has shrunk over the last couple of years in line with its exposures.

For private carriers, the implications of the legislature's failure to enact AOB reform are just as troubling.

Demotech spared the sector from the multiple downgrades it had threatened after several of the more vulnerable carriers took action to shore up their balance sheets, through capital infusions, reserve strengthening and additional reinsurance purchasing.

But the agency warned that the reprieve could be temporary if there wasn't a meaningful improvement in the AOB situation.

Lines of attack
Demotech president Joe Petrelli says that despite the absence of AOB reform, there are still avenues for carriers to address the issue before the window for legislative change opens again next year (see box-out).

He notes that the Florida Office of Insurance Regulation (FLOIR) has been actively approving upwards rate revisions to provide carriers with relief from the additional costs of AOB.

Indeed, after Florida's insurance commissioner Dave Altmaier stated earlier this year that homeowners' rates could require increases of 10 percent a year just to keep up with AOB claims inflation, the regulator has encouraged significant price rises.

After People's Trust requested an average increase of 14.5 percent in Florida, the FLOIR granted a higher 16.0 percent uplift.

Separately, Homeowners Choice was allowed to increase its rates by 8 percent after filing a request for a 3.3 percent price rise.

Petrelli adds that insurers can also push for new policy wordings that can help address the AOB issue.

"I don't think all is lost. There's been rate relief for the additional cost of AOB and I hope there will be some movement on policy wording. It's not just the legislature that can address it," he says.

"It might even be that a regulatory solution in the form of policy wording is the best solution - it might be better than a legislative fix. The policy wording is going to be critically important in the long run whether there's a storm or not," the Demotech founder continues.

Citizens and a number of private companies have already begun attempts to implement policy wording amendments.

Citizens is also introducing a managed repair programme at 1 July and an "unprecedented" water mitigation plan that would pay out up to $3,000 with no deductible for water mitigation.

The voluntary claims management initiatives are designed to enable the carrier to "get in and control the process", explains Gilway.

The approach of engaging in a claims situation before an AOB takes place is also being adopted by many of the more proactive homeowners' carriers in the state.

The CEO of one Florida insurer tells Insider Quarterly that his firm deployed a strategy of early engagement after Hurricane Matthew struck late in the 2016 season.

"For us it was a good test of whether AOB would be an issue in the wake of a hurricane," he says.

In fact, only a very small proportion of the claims his carrier faced resulted in AOB - an outcome he attributes to the speed with which the insurer contacted affected policyholders and paid claims.

"We were able to get out the next day with a mobile response unit and we were crowding out the folks looking to get the benefit assigned," the executive reports.

Petrelli agrees that insurer preparedness is key to controlling the threat of AOB post-hurricane.

"If the insurer is on-site, involved in the process, then there's little reason to invite a third party to participate," he suggests.

And the homeowners' insurer CEO observes that the dynamics after a major event may be different from the attritional water claim scenarios that have proved to be a breeding ground for the AOB crisis.

"One of the things that drives roofers and other contractors to get involved in the manufacturing of claims is [whether] they believe there is enough work [or not]. But after a hurricane there's more than enough work to go around. Demand surge pricing indicates that if anything there's a labour shortage," he suggests.

That could mean less of an incentive to seek an AOB post-event.

Higher deductibles relating to wind coverage also change the dynamics after a hurricane.

Another Florida carrier CEO tells this publication that a more pre-emptive strategy is most effective against AOB.

"We just decided to stop writing in the Tri-State area. When we have issues, guess where they always come from? Miami Dade," the CEO says.

The approach of repositioning portfolios or raising rates in Florida has been adopted by a number of carriers.

Several have cut back exposures in the areas that have seen the biggest deluge of water claims.

Heritage reported a 30 percent drop in claims from the AOB-afflicted Tri-County region around Miami in Q1 - a feat that CEO Bruce Lucas said was directly attributable to underwriting actions begun last year.

"We have initiated two rate increases that are targeted to the Tri-County and results have been positive thus far, as there has been a slight decrease in our policy retention rate countered by an increase in average premium per policy," he told analysts on an earnings call.

The firm said its efforts to improve its loss ratio had made it more of an attractive risk for reinsurers.

Flight to quality?
There was much talk of a "flight to quality" at the 1 June Florida property cat renewal, as carriers perceived that better risks were being targeted by reinsurers, leading to oversubscription of their programmes.

The Insurance Insider reported that the pace of softening increased compared to last year, with pricing typically off in a range of 5 to 7.5 percent. But as JLT Re North America executive vice president Bob Betz noted in the firm's recent renewals report, while rate reductions accelerated overall, individual experience was determined by cedant size and performance.

He noted that carriers suffering underwriting losses - and particularly those with capital surplus of less than $25mn - came under increased rating agency pressure.

"At a time when markets are focusing on performance, these carriers generally saw less favourable outcomes in both price and reduced line size," said the executive.

Florida insurance executives questioned by Insider Quarterly confirm that reinsurers have been paying much closer attention to their clients' AOB strategies.

"They're interested in having nuanced conversations. They recognise there's no silver bullet legislative fix, so they ask what you're doing right now with the way the game is currently played to proactively address this," says one.

However, some sceptics question how much differentiation there was at the recent renewal, with most cedants able to improve pricing and coverage amid strong appetite for Florida risk from traditional and non-traditional reinsurers.

They also query the extent to which the potential impact of AOB after a storm has been reflected in pricing.

One comments: "I don't think there's a single carrier that hasn't received more favourable terms. That would indicate that if reinsurers are really concerned about the AOB impact then the competitiveness of the marketplace has offset that concern."

With hurricane forecasters recently revising predictions to a more active 2017 season, the AOB mitigation strategies of insurers and reinsurers assuming Florida homeowners' risk could soon be put the test.

And if a storm hits, smaller homeowners' carriers that have been afflicted by elevated attritional losses or outsized Matthew claims in recent quarters may be left exposed again.

Take III


A number of sources in the Florida market had questioned the optimism among industry advocates that AOB reform measures would make it through the 2017 legislative session, after similar attempts had failed last year.

But even the most pessimistic must have been surprised when the flagship Senate Bill 1038 didn't even make it onto the agenda of the Senate Banking and Insurance committee (SBIC).

The principal target of the industry-drafted bill was the state's one-way attorney fee statute, which opens the door for unscrupulous vendors and contractors to take on claims from homeowners, safe in the knowledge that their legal fees will be covered in any subsequent litigation with an insurer.

A proposal with comparable provisions did successfully pass through Florida's House of Representatives.

SB 1038 met an insurmountable barrier though in the form of Republican senator Anitere Flores, who would not let it be heard in the SBIC, but instead placed two bills on the agenda sponsored by Democrat Gary Farmer, who used to run Florida's trial-bar lobby.

The case was picked up by national press including the Wall Street Journal, which criticised the process in an editorial.

Despite the setback, Florida's Chamber of Commerce, which has led lobbying efforts alongside the Consumer Protection Coalition, is continuing to press for reform.

"We will continue to beat the drum. It is absolutely vital that lawmakers address this issue," says the Chamber's vice president of public affairs Edie Ousley.

"It's no secret that the Florida Senate, particularly the banking and insurance committee, has been cosy with trial lawyers. For a conservative body that espouses to support jobs and families, instead of taking advantage of opportunities to stamp out fraud and abuse they chose to entertain legislation drafted by a trial lawyer," she tells Insider Quarterly.

She insists that raising public awareness is key to garnering sufficient political support to force the issue through the rest of the year in the build-up to the 2018 session, which starts early in January.

"[Florida] has been dealing with a tsunami of non-hurricane related claims and the majority of those are AOB-related claims, wrought with fraud and abuse. Because of those shady activities, Floridians are paying the price through increased homeowners' premiums," Ousley states.

By convincing politicians of the impact AOB claims are having on the cost of insurance for their constituents, she believes there could be progress next year on reform.

Barry Gilway of Citizens adds that communication with the public about the impact on the cost of their policies is critical to successful reform.

"Until we get the message to consumers that they're paying for this and that it's going to hit their pocket book I'm not sure they'll get it," he says.

"All we can do is work harder and earlier as a group next year to get behind this message, and I believe the message is getting through to a lot of the legislature."


This article was published as part of issue Summer 2017

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