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Opinion: Florida’s good fortune should not lead to reinsurance gambling

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Using the phrase “Florida’s good fortune” might seem oxymoronic in the context of the insurance market, given that homeowners are facing spiralling insurance premiums, insurers are facing a white-knuckle ride to their 1 June reinsurance renewal and reinsurers are looking to cut peak exposure.

But the state has also made it through almost 15 years without a truly devastating hurricane loss. Irma in 2017 was the costliest in recent years, but it did not result in many fatalities, and damage, while widespread, was not ground-razing.

This has let the state’s insurance infrastructure build up its resources to the point where the two major subsidized schemes (state insurer and reinsurer) actually have upfront funding for the claims they could be obliged to pay out (even if some is in the form of debt that would have to be paid back). This might not seem a luxury, but in Florida insurance funding terms, it probably feels like it.

It is in this context – and with the backdrop of low interest rates and rising (re)insurance premiums – that lawmakers and overseers are considering or discussing some radical changes to state re/insurance practice, including the prospect of scaling back reinsurance cover for Citizens.

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Citizens and FHCF in spotlight 

Firstly, staff at Florida Citizens Property Insurance face spending the next couple of months in limbo during what is usually a critical time in the ramp-up of their reinsurance placement process. This follows a board meeting held in December during which some of the board governors questioned whether they should consider saving the premium it would ordinarily spend on reinsurance and running higher levels of debt through this hurricane season.

It’s important to note this was just a questioning and probing for more information from the board, so even if the organisation buys less coverage this year, it is far from a given that it will diverge from its longstanding strategy to have cover in place entirely.

Staff presented more cost-benefit analysis on reinsurance or other options to the board at their request in a recent white paper. In turn, staff sought an affirmation of support for the standard reinsurance placement from the board, saying that certainty sooner rather than later would help them secure the most cost-efficient cover. But the organisation said that no special meetings will be organised and the next discussion on the issue will have to wait until a 23 March scheduled meeting.

Meanwhile, the state’s reinsurance scheme already let its own much smaller retro programme lapse in 2020 given the hardening market.

This year, the focus is on where and how the Florida Hurricane Catastrophe Fund capital should be deployed

This year, the focus is on where and how the Florida Hurricane Catastrophe Fund (FHCF) capital should be deployed. Florida Senator Jeff Brandes has mooted the idea of lowering the FHCF’s retention to attempt to return a projected $1bn in savings to insurers by enabling them to use its subsidised cover instead of expensive first-layer private reinsurance.

The underlying thrust of each challenge to the status quo effectively comes down to political reluctance to spend upfront money on insurance premiums that could act as some form of salve on current problems, even if this comes at the cost of levying additional hurricane taxes further down the line.

From the political point of view this means they could claim a “win” now of saving premium dollars that would otherwise be sent offshore to Bermuda (and also London, Europe and within the US, but Bermuda inevitably gets used as the political football).

But as the FHCF’s own COO put it during a recent committee hearing, the flip side of that decision is that more risk is ultimately concentrated in Florida, instead of being shared out.

Some exiting premium is unwanted by reinsurers

For the reinsurance sector, one of these two prospects is far more problematic than the other. The prospect of Citizens halting or majorly pulling back its reinsurance buy would remove premium dollars from the system, but more importantly remove them from a player that is more operationally robust than many of the tiny private firms in the state.

It is a brute reminder that government-backed businesses might be large clients, but they are far from being relationship-style clients that other private insurers would be.

On the other hand, while a lower FHCF trigger point would also remove hefty premium dollars from the market, reinsurers have been withdrawing capacity from low attaching first-layer risk in general, so it might be the case that the exiting premium represents business the private market no longer wants.

But that in itself signals what the real problem is with the Florida market – the private market is retreating from risk in the Sunshine State.

If you accept that in a state like Florida some level of socialised insurance is always going to be required, is it really the minnow level of storms that the FHCF should be paying out for in the long term? These should be the more regular, predictable storms that private insurers can cover, not the surprise shock losses.

The fact they are retreating from what should be more normalised risk points to the state’s broader underlying problems. This includes that the market is made up of lowly capitalised firms that are set up to run service arms as their more profitable dividend-yielding business. Add onto this high levels of litigated claims and low retentions and you see insurers and reinsurers wearing repeated claims, such as from roof repair bills that have driven what arguably should be homeowner repair costs onto insurers.

With around $11bn of cash on hand and up to $17bn of potential liabilities, if the FHCF was set to trigger around $4bn of industry losses instead of $7bn-$8bn currently, then its surplus could be quickly eroded by two years of events such as 2018’s Hurricane Michael.

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Likewise, Citizens would have to exhaust its surplus before it could start charging state residents assessments. In its December board meeting, members had signalled that they were open to the idea of not going “all out” to protect state residents from post-event hurricane taxes, and in using their public advantage of having this method of financing open to them.

This comes as their budget is struggling due to constraints on the rates they can charge, as its portfolio is once again ballooning with policies returning from the private markets.

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But others with longer experience in this market than me point out that it took a long time for the local market to recover from the pain of the 2007-2008 hurricane seasons, precisely because it was starting from scratch. The advantage of being in a more stable position post-event is not to be underestimated, and is a boon that Irma should have highlighted, if it hadn’t been for all the legal costs and AOB abuses that overshadowed the success in making it through that storm.

Ultimately, the 8% rate-on-line that Citizens is budgeting for this year doesn’t sound too bad when you consider the organisation received almost the equivalent of four years of premium rebated following Irma (a one-in-10-year type storm).

Broader reform still sluggish

It is too early to know if any other proposed reforms on the political agenda this year will gain traction in taking much more of a substantive stab at fixing underlying issues.

Some fresh proposals do pick up on broader reform issues first raised last year, including a Senate bill put forward by Senator Jim Boyd (SB 1728) that would restrict contractors touting to help homeowners claim for repair costs, and limit roof repair payouts.

Both the House and Senate are putting forward bills that would attempt to set a higher bar for policyholders to transfer into Citizens’ portfolio, to put a brake on its rampant growth.

But with some of last year’s broader reforms still being contested in the court system, this shows that even any action that succeeds this year will take time to have its effect on the ailing system.

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