The Florida market: death from a thousand cuts

It’s not hurricanes that are really hurting Florida’s insurers, or even climate change—the problems are, at least partly, manmade. Moral hazard and attritional losses have helped bring Florida to crisis point.

That was the message from a recent discussion about the state’s market titled “The Florida insurance market crisis” at Intelligent Insurer’s Re/insurance Lounge, the online, on-demand platform for interviews and panel discussions with leading players in the market.

To consider the problems facing the insurance industry covering the state, and the possible solutions, key players coming at the market from a range of different perspectives joined the panel: Glenn Clinton, who has 30 years of property and casualty underwriting experience in both insurance and reinsurance, and is a managing director for US property reinsurance at insurance-linked securities fund manager ILS Capital Management; Matt Junge, head of property solutions for the US and Canada and head of property underwriting, US Regional and National, at Swiss Re, leading a team responsible for underwriting, pricing, and analysis of property treaties for clients across the US; Adam Schwebach, a reinsurance broker at Willis Re, focused on the Florida property market and a long-term Tampa resident; and Karen Clark, a pioneer in catastrophe risk modelling and the founder of Karen Clark & Company, which provides catastrophe risk modelling and management solutions to the industry.

Property and politics

On one thing, at least, everyone agreed: Florida is impossible to ignore. Accounting for about 10 percent of the global catastrophe reinsurance market, it brings together a unique mix of high property values and extreme weather exposure.

“In my mind, Florida is the centre of the reinsurance world,” said Schwebach.

“It has tremendous risks but that also creates tremendous opportunities for the companies and the reinsurers that are willing to participate in it.”

However, it is one where participants face unique issues in terms of policy, too: what Clinton terms “government interference”, typified by the Citizens Property Insurance Corporation. At one time, the state-backed insurer covered the lion’s share of policies in the state with 1.5 million policies, and it is now growing again.

For Clinton, one quote sums it up: “Florida is a highly politicised mix of public and private insurance incentives. It is neither a well-regulated nor a well-controlled market.

“Throughout my entire career, I’ve never been 100 percent sure about it because it was cruising along fine before Hurricane Andrew showed up, but after that it’s been very, very hard,” he added.

No safe spaces

Hurricanes are not the only challenge that insurers face. The first issue that adds to insurers’ problems is attritional losses and, particularly, convective storms.

Junge said: “So much attention is paid to the hurricane risk, but severe convective storm losses have been surprising in the last few years, and if you look at the chart on the frequency and the severity of them they just keep increasing.”

“This goes to the heart of profitability for many businesses,” Schwebach noted.

“We’re spending more time with our clients thinking about the attritional side of their business. The severe convective storm side has become troublesome for a lot of people because it’s death by 1,000 paper cuts,” he said.

“More people are meeting to think long and hard about how they want to handle that exposure.”

For some companies, according to Clark, the answer has been to look for business outside the state, but there are no easy answers.

“A lot of them are moving outside Florida and had started moving into Louisiana, Texas, and other South Eastern states, but over the past few years they’ve been whacked by severe convective storm losses and now most recently, of course, the big winter storm we’ve just had,” she said.

“Now some of them are saying—and I love this quote—maybe I should retreat back to the coastline.”

Making a bad situation worse

The other big challenge is litigation and third party involvement, which has become a major issue for Florida across cat claims and attritional losses.

Clark outlined that for the insurers she works with, the percentage of litigated claims rose from 2 percent for Hurricane Matthew in 2016 to 8 percent for Hurricane Michael in 2018. As she explained, that’s important because the average severity of a litigated claim is three to six times higher than a non-litigated claim. Assignment of benefits (AOB) claims are also rising—again about three times more expensive than traditional claims.

Both are feeding into higher claims but also increasing higher loss adjustment expenses, as insurers battle to hold down costs.

“We’re seeing in some storms for some companies that loss adjustment expenses, which used to be predictable at around 10 percent, could be as high as 30 percent,” Clark said.

“This is not the natural hazard crisis, but really the manmade one.”

The result is that losses such as those from Hurricane Irma, which seemed at first relatively small, soon escalated.
Schwebach added: “A reinsurer told us recently that, from their perspective, Hurricane Irma hit them in 2017, 2018, 2019 and 2020, given the amount of development that continued on that loss.”

Sunshine on the horizon?

None of this is insurmountable—given the political will. As Clark pointed out, insurers have access to far better modelling than in the past, and rate increases ease some of the pain. The passing of the Assignment of Benefits Bill in 2019, which introduces new hurdles for and limits AOB claims, has also helped.

“I know that’s not going to solve everything, but it’s great progress,” said Junge.

More needs to be done, however, in terms of tort reform and to rein in the growth of Citizens. When and if that will happen remains uncertain, and insurers and reinsurers covering Florida may need to grin and bear it a bit longer, the panel agreed.
Schwebach said that action in Florida tends to be reactive rather than proactive. “Unfortunately, the state of Florida tends to be one where we get action when there’s been enough pain,” he said.

“When the fourth quarter financials come out for the Florida domestic companies there will be a lot of pain there. The question is, is that enough to prompt some really effective legislative reform?”

To view the full Re/insurance Lounge session click here.