Florida reforms bear long-term gain, leave short-term pain: Fitch

Florida lawmakers may have laid the groundwork for a healthy insurance market at points down the road, but can’t yet be sure they’ve done enough to keep Florida-focused homeowners carriers alive long enough to enjoy it, analysts at the  Fitch ratings agency have suggested.

Florida’s rampant claims litigation may ease over time, Fitch admits following passage of new legislation. Some carriers may eventually elect to bring new capacity to a reformed market, they further hope. But between now and then the carriers still clinging to life in Florida face some arduous reinsurance renewals and ever-present cat risks. What they can’t fund, Florida taxpayers will.

“It’s definitely helpful for the future, for claims costs and the litigation component of claims in Florida,” Fitch’s managing director for North American non-life insurance Jim Auden told Intelligent Insurer. “That it solves all the problems? No, it is going to take time.”

“The headline remains that in 2023 specialist companies might not see near-term benefits,” insurance group director Christopher Grimes added. “It is more of a long-term vision versus a short-term fix.”

In a mid-December special session, Florida lawmakers drafted legal reforms in a close fit to the long-running wish list of embattled Florida insurance carriers and their increasingly sceptical – and often scarce - reinsurance backers.

In key elements of the bill, lawmakers moved to curb the basis of Florida’s runaway litigation trends. The assignment of benefits (AOB) provisions and on one-way attorney fee rules that critics said had created an unholy alliance of contractors and lawyers will be scrapped outright.

But the proof needs to be in the capacity. Homeowners capacity in Florida is a fragile structure with the major national insurers all but missing entirely. The nation’s top five carriers combine for about half of each market aside from Florida, but neighbourhood 15% within the sunshine state, market watchers have noted.

“I don’t think they will commit more [capacity],” Auden says of the group’s likely near-term response. “So, do you get other primary market coverage to come in to cover the eleven that have left? And does it lead to a market in which during non-cat years the underwritings make healthy profits to offset the years with big storms? I’m not sure about that either.”

Their absence has left Florida dependent on small carriers with a tight focus on the Florida market. Those carriers are dependent, in turn, on major reinsurers. And reinsurance has not been easy.

Within only weeks to go to the year-end reinsurance renewals deadline and six months to the even larger mid-year deadline for hurricane reinsurance, Florida lawmakers appeared to have hoped to plug the gap.

Policymakers crafted their second state-backed reinsurance program of the year, FORA. Funded with up to $1 billion in taxpayer money, the program should allow insurers to buy some reinsurance coverage for the two most damaging hurricanes of the season at levels just below where the Florida Hurricane Catastrophe Fund (FHCF) kicks in.

But that new program may prove “pretty limited” in plugging the gap for the Florida-focused specialist insurers. “This is not the high excess coverage,” Auden noted.

“It is helpful to have the additional capacity,” Grimes admitted, “but you have to fill out an entire program … There will still be challenges.”

Those challenges, including those faced in the current race to 1.1 renewals, can easily eclipse hoped-for long-term gains from the legislation. Finding reinsurance coverage right now remains “the primary concern.”

“All the measures put in place could have some benefit,” Grimes said, “but it remains all about finding reinsurance capacity right now.”

Failure goes to the taxpayer, in the form of increased stress at the state insurer of last resort Citizens Property Insurance Corporation or the reinsurance back-up Florida Hurricane Catastrophe Fund.

Citizens has already seen its policy counts surge as Florida market vicissitudes felled carrier after carrier, leaving Citizens as the largest primary victim of Hurricane Ian end-September. Citizens’ policy counts are on track to rise by 52% in 2022 ahead of 46% further growth in 2023, Citizens noted in its 2023 budget. Private reinsurance needs will more than triple, the budget showed.

“Less capital to support claims and now more exposures,” Auden quipped of the bottom line.

The upshot: the next storm could go to Florida taxpayers.

“A storm hits, and they are likely to need to do post-event funding or assessments or a debt obligation,” Auden mused. “The state stands behind Citizens and the cat fund; there’s a greater chance they will have to do something more in the next big event.”

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