Flight from Florida: investors put state insurers on notice

“No-one wants to invest in Florida, no-one wants to write in Florida and a lot of these insurance programmes are going to end up in Citizens, the government programme. And all of this has to do with loss costs, social inflation, litigation increasing exorbitantly and not being able to get a handle on it and insurers not being able to make money in the state.”

This was the view of Sarah Morgan (pictured bottom left), vice president property reinsurance at Ariel Re, as she took part in an Intelligent Insurer panel session titled “Is Florida’s re/insurance market finally nearing collapse?”.

Her fellow panellists were Tim Mardon (pictured top left), global head of property reinsurance, SiriusPoint; Gerry Glombicki (pictured bottom right), senior director in the insurance team, Fitch ratings agency; Mark Friedlander (pictured top right), director of corporate communications and expert on the Florida insurance market, the Insurance Information Institute (Triple-I); and Brad Adderley (pictured centre), partner, Appleby.

The demise of the market has been a topic of conversation in re/insurance circles since Hurricane Andrew hit in 1992. But the shine has truly come off the sunshine state in more recent years as the number of factors blighting the market has weighed heavily on investors.

Above average concerns

Triple-I research published in August 2022 suggested two key drivers of the current property insurance crisis: rampant roof replacement fraud schemes and excessive litigation filed against Florida property insurers. Friedlander said that in 2022 the market is on track for about 130,000 property claim lawsuits filed against Florida insurers, which is roughly 80 percent of the total of property claim loss suits filed in the US.

Glombicki highlighted another telling figure from the same Triple-I analysis. “In 2022 Mark’s organisation estimated the premiums for the average Florida homeowner at $4,231, which is nearly three times higher than the national average of $1,544. That tells you that there is something going on in the Florida market.”

Loss activity in terms of the frequency and severity of hurricanes is “obviously the biggest root cause” of the market crisis, said Mardon.

“The litigation issues exacerbate every claim by a factor. But the other concern is climate change, which I think is a long-term issue, but over the last five or six years we’ve seen elevated loss activity in the US and Florida in terms of hurricanes but also ancillary perils.”

Mardon said that the combination of high exposure to hurricanes and the litigation problem makes Florida “the most challenging state to insure and reinsure”.

Another pressure point, flagged up by Morgan, is attritional claims, which she said were increasing in excess of expected levels. “A lot of this has to do with economic and social inflation that’s currently happening. It’s outstripping the rates that the companies are able to get.

“Gerry mentioned the high cost of premiums, but you don’t have investors lining up to enter the Florida market despite that because the system is broken on all levels and no-one wants to invest in it until the thieves are sorted,” she said.

Morgan added that 75 percent of the Florida market that’s been cited in the US media is shutting down writing new business or not renewing. “There’s a lot of different pockets happening that could tip the market into collapse,” she said.

“The current situation is almost like a perfect storm,” said Adderley, as he stressed that “everything is going wrong at the same time”. Add galloping inflation into the mix and underwriters are presented with a uniquely difficult situation.

The exodus of investors is strange if you consider that the Bermuda reinsurance market went from captives to commercial reinsurance, helping to solve Florida’s issues by previously writing the cat risk there, he said.

“But now, as you heard, investors and insurance-linked securities (ILS) players are shying away from the market,” said Adderley. “You’ve even heard Bermuda reinsurers saying: ‘I’m not running cat risk any more’.

“The Bermuda market came about because of cat risk and the Florida market, now you have people retrenching and withdrawing from it. It’s a very interesting story, where the people who helped solve the problem are walking away from solving the problem.”

A chance to make money

Although Florida’s geographic location makes it uniquely prone to concentrated storm exposure, Glombicki said there hasn’t been much hurricane activity since 2017 and 2018, when hurricanes Irma and Michael respectively caused devastation.

“If a major cat were to hit the Florida market that would certainly accelerate all these pressures and bring them more to the forefront.”

Adderley agreed, saying: “‘If there were a storm’ is an interesting comment because it would then add to my ILS players’ thinking. They all tell me yes, come January 1 renewals, they could raise a lot more capital. But if there are losses in the next three months then some of the investors think they will walk away from the ILS market.

“It would be interesting to see what the investor response would be if there are significant losses. How does the investor market respond to that, knowing full well you have a chance to make more money? Or do they take the view that they’ve been burned so much over the last seven years that they’ve had enough and they don’t want to put more money in?” he asked.

Investors would be right to be cautious under the current circumstances as the market teeters on the brink.

Morgan said: “It goes back to the point about Citizens and the Florida Insurance Department being the backstop for companies that are being downgraded, potentially going insolvent. This backstop, set up in July 2022, would be tested in the instance of a major storm to see who would survive and how it works, and whether it would break the industry even more.

“That would potentially be another reason for investors to withdraw from the market, with the uncertainty of how that would work, who would survive and who would be left after the dust settles.”

For more from our expert panel on the trouble with the Citizens backstop and how the market could still be protected, read the companion article “Citizens backstop: precarious plan unlikely to save Florida market” and watch the full panel discussion here.