The Florida property insurance market crisis that has unfolded through recent years won’t be fixed by minor reforms to the Florida Hurricane Catastrophe Fund (FHCF), according to Demotech President and Co-Founder Joseph Petrelli.
Speaking with Artemis, Petrelli explained that lawmakers need to address the critical issues of litigation and fraud, or else the perception of risks in the Florida marketplace won’t change and capital providers are unlikely to be encouraged back en-masse.
Petrelli’s firm has been early to push for meaningful reform of Florida’s property insurance market, saying back in March that urgent legislative change was required and warning that a number of carriers were facing downgrades over the weeks running up to the all-important reinsurance renewals.
Downgrades came and at the same time market conditions have continued to worsen for Florida’s P&C insurance carriers, as reinsurance market price hardening persists and may even have accelerated, as evidenced through recent cat bond spreads.
Petrelli gave us a history lesson on the timeline that has taken the Florida property insurance market into its current crisis and how Demotech’s view of it has adjusted over time.
“Recall that in 1996, in an effort to ensure that “take-out” companies depopulating the (then) Florida Residential Property Casualty Joint Underwriting Association were acceptable to the secondary mortgage marketplace, Albert LeQuang, Freddie Mac, recommended us to the (then) Florida Department of Insurance,” Petrelli commented.
“Since that date, we have grown from reviewing 0% of the Homeowners’ insurance (HO) marketplace to 60%, with Citizens at about 10%. In other words, Demotech has a long-term perspective on the conditions in the marketplace that other rating agencies may not possess.”
From then, through to year-end 2016, P&C insurance carriers reviewed and rated by Demotech had positive unassigned surplus, so effectively were reporting net earnings.
Since 2017, that picture has changed dramatically, with many carriers reporting losses and in some cases those losses becoming amplified and creeping higher over each subsequent year.
Petrelli explained to Artemis, “Unfortunately, the Sebo, Johnson and Joyce cases, and one-way attorney fees then exacerbated the onslaught of disparate litigation that resulted in Florida having 79% of the litigated open HO claims in the US despite but 9% of the open HO claims.”
Then, earlier this year, “Florida’s legislature adjourned without passing meaningful and significant legislative reform necessary to move the litigation rate of the residential property insurance market place toward the national average,” Petrelli said.
While some wanted to wait to see the results of Senate Bill 76, a reform bill focused on property insurance that was signed in June 2021, but that is now proving to have little effect on litigation rates in Florida.
Petrelli felt a more urgent need for action, concerned that without more concrete steps being taken Floridians were facing a steady increase in their property insurance rates, with no certainty over the SB76 bill stemming this rate tide.
“We knew something needed to be done, and done now,” Petrelli said, going on to explain that his March letter to Florida’s Governor Ron DeSantis, Speaker of the House Chris Sprowles, and Senate President Wilton Simpson called for a special legislative session.
That session was only confirmed at the end of April and now promises that an unknown agenda of items related to reforming Florida’s property insurance marketplace will be heard by lawmakers.
Demotech views previous attempted reforms, such as those to address assignment of benefit (AOB) abuses from 2019 as a “dismal failure”, Petrelli told us, adding that 2021’s SB76 reform would only score a ‘D-‘.
Summing up to say, “With an open claim litigation rate on homeowners’ insurance resulting in 79% of the nation’s homeowners’ insurance lawsuits yet only 9% of the nation’s open claims, it is unequivocally clear that Florida has an unresolved litigation problem that prior reforms have failed to mitigate.
“It is also clear that the litigation problem, not natural catastrophes, has adversely influenced the operating results of insurers while exacerbating the cost of the reinsurance programs critical to carriers focused on a catastrophe prone jurisdiction.”
Petrelli then asked, “Where does this leave the participants of the special session, and what must be accomplished to mitigate the underlying cause of the rate increases paid by consumers due to legislative inaction?”
Further stating that, “If Florida is 9% of the country’s open HO claims, then significant and meaningful legislative reform must move Florida toward being 9%, not 79%, of the country’s litigated HO claims.
“It is litigation, not the Cat Fund, which must be addressed in a consequential and relevant manner.”
There is still no agenda for the Special Session, although the Florida Hurricane Catastrophe Fund (FHCF) is one area expected to be in focus, as a lever the state can use to reduce some pressure for its P&C insurance carrier cohort.
It was Bermuda reinsurance firm RenaissanceRe’s CEO that recently said changing the cat fund attachment levels, to benefit insurers, would not change his firms view of the Florida market or the risk there.
Reinsurance market participants are calling for much broader changes than that, like Petrelli, and the Demotech President summed it up well, in this call for meaningful action and reform from lawmakers.
“Cat Fund reform is crumbs and Floridians need a feast,” Petrelli exclaimed.
“Governor DeSantis has courageously set the table. It is time for the legislature to utilize the necessary ingredients to satisfy Floridians.”
Read our coverage of Florida’s property insurance crisis below: