Florida: a market in crisis—but is it too big to fail?

It’s big, but is it beautiful? Florida is a massive market for insurers and reinsurers, but it could be time to walk away. The market’s in crisis. Big cat risks, attritional losses, government interference and moral hazard mean some have had enough. Does Florida have a future and, if it does, what will it take for those abandoning the market to come back?

Those were among the questions considered during a recent discussion 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 fate of insurance in the state key players coming at the market from a range of different perspectives took part: 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.

Ground zero for cat risks

Abandoning the Florida market is not a decision to take lightly. As Clark outlined in opening the discussion, the market is critical for property reinsurance, and particularly catastrophe risks.

Since 1900, a third of all hurricane landfalls in the US have been in Florida, including half of all category 4 and threequarters of all category 5 hurricanes.

“If you combine that with the fact that at latest count there’s nearly $5 trillion of property values in the coastal counties alone, with nearly $2 trillion concentrated in the tri-county area, you’ve got the perfect setting for very large losses—and by that I mean in the order of a $100 to $200 billion of insured loss potential,” said Clark.

“When you’re talking about insured major losses, Florida is ground zero.”

Despite this, Florida has actually been relatively lucky. It’s “dodged a few bullets” in recent decades, as Clark put it: Hurricane Irma was at one point heading for Miami as a category 4 or 5 hurricane; it made landfall near Naples as a category 2. Category 5 Hurricane Michael hit the Florida Panhandle, again missing Miami.

Schwebach agreed. Until Irma, the state had a decade or more without a hurricane striking the state. Companies in the state were profitable, and it attracted new capital. Damage from Hurricane Irma proved relatively easy to recover from, and even afterwards, the industry saw declines in reinsurance costs in 2018.

“We were feeling relatively lucky,” he remembered.

It was then, however, that the market began to see litigation having an impact. As a result, reinsurance costs started to increase and, in 2020, renewals in Florida were “a magnitude higher” than anyone expected, according to Schwebach. That’s putting a strain on the market.

“We’ve now had a year for companies to take a very hard look at their portfolios to see if they can shrink a little, and that’s actually a big part of what we’re seeing—Florida carriers are shedding Florida risk where reinsurance costs are prohibitive,” he said.

It’s likely to lead to a reduction in demand for Florida cat reinsurance, he added.

Market interference

Clinton is one of those who’s already had enough of Florida cat risk. Being in the reinsurance business for over three decades, he has no illusions as to its importance. He recognises that it’s by a long way the most expensive cat market in the world, accounting for perhaps 10 percent of the global market.

“Despite whatever misgivings you may have about it—and they’re justified—it’s a market you just can’t ignore,” Clinton said. It is, however, a market he currently avoids—at least on the cat risk side.

As part of a $300 million insurance-linked securities (ILS) fund, Clinton has considerable flexibility in what he takes on from a reinsurance point of view, and last year he decided he’d had enough, despite rate increases.

There were two reasons. First, according to Clinton, the market has been systemically underpricing cat risk in the last couple of years—partly because of cheap, plentiful ILS money.

Second, the moral hazard: insurers, regulators and legislators are aware of the problems, but unable or unwilling to address them.

“They know exactly what the problem is down there: that the law lobby is outspending the insurance lobby by a very large margin, and when people have claims they’re not going to the claims department of their insurer, they’re going to their lawyer,” he said.

“All the rate in the world will not write you out of moral hazard.”

Clinton doesn’t see it getting better any time soon, because insurance has become a “political football” in the state. That’s manifest in the state-owned residual insurer Citizens Property Insurance Corporation which, while a long way from its high point of about 1.5 million policies, is again growing, with its 10 percent limits on rate increases.

“I’m just jaded,” said Clinton. “I honestly believe as long as you’ve got government interference in a marketplace, it’s never going to get actuarially sound rates.”

And all this is before even considering the impacts of climate change and population growth, potentially worsening storm losses and new perils such as floods.

Hotting up

Not all the panellists were so downbeat. First, as Schwebach pointed out, while increased rates might not solve everything, they help a lot, and make the market a lot more manageable for many companies. At the same time, while it’s true that politicians have tried to use Citizens to curry favour with voters by limiting their premium increases, there’s much greater recognition of the issue today than in the past—and at an earlier stage.

“It’s not to say it’s a perfect situation, but politically to have that visibility on the problem this early on is a great change from what we’ve seen historically,” Schwebach pointed out.

Junge was also more positive. Swiss Re’s risk appetite in Florida is stable, he said—and climate change may bring opportunities as much as challenges.

“Insurers want to provide good coverage to their policyholders, and flood is another way that they can provide an additional service,” he said. They also have access to far better data today on properties—and far better models on risks (as Clark pointed out)—to make this possible.

However, to make the most of the opportunities will require the whole market, including primary insurers, to embrace the data available—including the insight reinsurers can bring.

“As a reinsurer, we have the ability to see across dozens or hundreds of clients and identify trends that maybe an individual company is not seeing itself,” Junge said.

A decade ago that was a nationwide trend of increasing all other perils claims, most notably convective storms. That latter risk (as the panel also discussed) is a key feature of the current increasing risk in Florida.

Despite history bearing it out, there was considerable resistance to reinsurers’ claims of a trend—and that continues today.
New data and new models giving insights to risks are still met with resistance. It needs to change if the industry is to cope with the challenges ahead, the panel agreed.

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