How Florida’s Strained Insurance Market is Facing COVID-19, Hurricane Season

From the threat of insurer ratings downgrades to mounting carrier losses because of excessive litigation to increasing insurance rates, Florida’s insurance market got off to a rocky start in 2020. Then came the COVID-19 global pandemic, causing further stress to the market and economic insecurity across all industries.

In a May 20 Insurance Journal webinar, “The Florida Market in the Face of COVID, Hurricane Season,” panelists Barry Gilway, president, CEO and executive director of Citizens Property Insurance Corp., and Jeff Grady, president of the Florida Association of Insurance Agents (FAIA), discussed the state’s insurance market challenges, now exacerbated by the coronavirus pandemic, and the uncertainties of this year’s hurricane season.

Gilway characterized Florida’s market issues as “not a surprising shift” given insurers went from $797 million in profits in 2014 to a net income loss of $340 million in 2019. That shift was thanks in part to the end of the state’s 11-year hurricane drought in 2016 and skyrocketing litigation from assignment of benefits abuse and first party lawsuits.

“The bottom line is this [market] has turned from incredible profitability, which by the way coincides virtually 100% with the increase in litigation in 2013 to 2019 from 27,000 ligation cases up to 89,000 litigated cases,” Gilway said.

Grady said the rampant litigation has caused a “manufactured crisis.” An excess of first party lawsuits, typically from roofing or water damage claims, have hit the books of Florida domestic carriers hard and they are now filing substantial rate increases or pulling out of certain areas of Florida where the litigation is out of control.

The abuse originated in the Tri-County region of Miami-Dade, Broward and Palm Beach and has since spilled over into what the industry now refers to as the SOLO counties – Seminole, Orange, Lake and Osceola.

“We used to say Tri County and [SOLO] means sort of the same thing – capacity shrinking, a greater reliance on the residual market – and it’s going to be like that for a while,” Grady said.

The pullback in capacity has hit agents too as they lose business, or, in some cases, have their contracts altogether canceled by carriers. Insurers “simply can’t” write business in some of these areas, Grady said.

Reforms passed by the Florida Legislature last year to stem AOB abuse have helped, Gilway said, but AOB lawsuits accounted for just about 30% to 40% of the first party litigation against insurers. There is plenty of first party litigation still happening.

“We’ve got to have legislative reform relative to first party claims,” he said.

Gilway anticipates that the policy count of Citizens, the state-run insurer of last resort, will grow because of shrinking insurer capacity and ever-increasing rate increases being approved by the Florida Office of Insurance Regulation (OIR).

Three companies this year – Capitol Preferred Insurance Co., Velocity Underwriters and Edison Insurance Co. – were approved for significant hikes ranging from more than 20% to nearly 40% after rate hearings, which are required by OIR for any filings over 15%. Multiple other insurers have filed for double-digit rate increases below 15%.

Gilway said state regulators have been supportive of companies’ needed rates, which he noted are “bad for customers, good for companies, bad for Citizens’ because we have a 10% rate cap and we have this widening gap in terms of our competitive nature.”

Further underscoring the stress on the market was OIR’s approval last month for Capitol Preferred to cancel more than 23,000 policies two weeks before the start of hurricane season. The regulator deemed it necessary because of the company’s hazardous financial condition.

The insurer was approved for a 33.5% rate increase on the shuttered policies.

“Really, really tough decision on the part of OIR but the right decision to make in my opinion under these circumstances,” Gilway said.

Grady said agents in the state are concerned for their customers who are being displaced in the midst of a pandemic, “which makes it even tougher.”

Given Capitol Preferred’s circumstances, however, it was the better of bad choices.

“I agree, the OIR was in a very difficult position,” he said. “It’s not lost on the regulator that dropping 24,000 policies off on the curb in the middle of Florida’s wind season, in the midst of a pandemic, probably not the best timing with 45 days to replace the cover.”

But, he said, “That just gives you a description of how hard that decision must have been. It was to save the other 75,000 [plus] policies that still have capital behind them and reinsurance in place.”

Reinsurance Challenges

How June 1 reinsurance renewals will impact Florida carriers is further fueling concerns for the state’s insurance market. Speculation of significant rate increases was brewing long before the June 1 renewal date and the onset of the pandemic.

AM Best estimated earlier this year that increases could range from at least 15% to 20%, based on market surveillance. The ratings agency said Florida companies that depend highly on reinsurance may be most impacted.

Florida’s litigation problem has scared off some reinsurers, who are also still dealing with losses from 2017’s Hurricane Irma. Gilway said there are companies that have seen more than 200% loss development from the storm. “So how does a reinsurer price in that scenario?”

While reinsurance rates were still unknown as of the webinar discussion, Gilway noted increase estimates of 20% to 30% with some exceptions running at 50% to 100%.

“The question in everyone’s mind is, how do you pay for this? How do you pay for it in the short term?” he said.

A hardening reinsurance market will likely lead to further rate increases for insureds and the potential for more carrier consolidation, Grady said.

“It appears as if there’s going to be pretty large rate increases due to reinsurance on top of the rate need that was there for litigation … on top of a pandemic where some people are not as economically capable as they once were,” Grady said.

And Now… COVID

There is no question the pandemic is already causing disruption in the Florida market, Gilway and Grady said.

“We have to remember it’s a meltdown of the entire financial system … and the entire financial marketplace, but it’s impacting here tremendously,” Gilway said. “It starts with the reinsurers – they are reeling from COVID-19.”

However, as the pandemic drags on, Grady said agents are not reporting a cancellation of policies, at least not yet.

“That’s probably in some cases due to the fact that someone’s given them a grace period or those that needed it have been extended. But even those that aren’t, they’re not seeing this rush of cancellations,” Grady said.

He said he is proud of the accommodations the Florida industry has made for policyholders, such as payment and claims flexibility, without a mandate by state regulators to do so. But it remains to be seen what things will look like in a few months. Most agencies are still not fully operational but are working remotely; 62% of FAIA members indicated in a survey they were unsure if they would reopen their physical offices in June.

“They’re in a kind of changed state dealing with the virus while also conducting business, and in some cases the business is a little challenging right now but they’re getting it done,” he said. “I actually believe that the virus is forcing people into working situations that they weren’t accustomed to [and] has been pretty good for some agencies who have learned how to do it… Now they’re doing it and they found out that they can.”

Many agents were able to get funds from the federal Paycheck Protection Program in anticipation of the downturn everyone believes is coming, and “they’re pretty well prepared to deal with it,” Grady said.

Coming Up… Hurricane Season

Entering hurricane season during a pandemic is a situation Florida’s insurance agents may not have anticipated, but transitioning to full-time remote work ahead of the season has been a prudent move, Grady noted, as the industry is ready to respond if a storm hits.

Agents also already have experience with handling catastrophes, even if this year there are more complicated circumstances.

“Florida agents, and even consumers, are fairly battle tested on the hurricane front. We are ingrained with a lot of hurricane preparedness,” Grady said. “Now you add on this layer of COVID-19 and the social distancing and all the other restrictions that are there… But, the industry during this pandemic has started adapting to some new technology and new ways of doing business that fit right into the hurricane season.”

As an insurer, Citizens had already ramped up its claim’s response efforts with aerial imagery, virtual inspection programs and online claims servicing before COVID. This year it is has added drive up claims options to allow for social distancing and immediate customer service.

Gilway does expect the litigation environment could be “more volatile” if there is a storm because of the pandemic, but Citizens is implementing protections to stem any abuse.

“An adjuster will not step on premises without responding to a whole stack of qualifications and acceptances relative to the risk associated with that,” he said. “I think all we can do at this point is be as innovative as we possibly can, understand appropriate concerns that our customer has and then attempt to respond to those.”

He added that technology, innovation and Citizens’ ability to adapt to the situation “makes litigation far less likely.”

“I’m sure every carrier has taken the same basic approach in making sure they cover themselves as much as they possibly can. Public adjusters will attempt to go after these claims, litigators will attempt to litigate, and only time will tell to see how successful we are and how effective we combat it,” he said.

Ultimately, Gilway is holding out hope there isn’t a major storm to hit the state this year, particularly South Florida, “because that is the event that could fundamentally change the overall marketplace.”

Moving Forward…

Gilway and Grady noted it isn’t all doom and gloom for the Florida market. Demotech’s eventual affirmation of the more than 40 Florida carriers it rates potentially saved about 1 million policyholders from having to find new coverage, and the insurer consolidations that occurred have made the market stronger.

Additionally, litigation numbers are down for the vast number of carriers thanks to the tail of Irma, Gilway said. However, he added there are still storm-related suits coming in from predominantly nine Florida litigation firms.

Grady said Citizens is also a much better “landing spot” for insureds seeking a new insurer than it used to be, though it shouldn’t be the preferred option. “It’s still a residual market and a market that is not meant to be preferable to the voluntary market,” he said.

But both Grady and Gilway warned that Citizens’ secure place in the market could easily change if companies continue to flee parts of the state because of litigation and the financial fallout from the pandemic becomes too painful for the industry.

“The effect on the markets, it’s going to be significant,” Gilway said. “It starts with reinsurance, the reinsurance profitability, it moves into the industry capacity and the capacity that the private carriers have available to them,” he said.

Grady and Gilway mentioned Demotech’s plan to review carriers’ final CAT programs, first quarter results and the financial projections for the balance of 2020. The ratings firm said in May it will also analyze the impact of COVID and the actual cost of reinsurance on carriers’ operations.

Demotech noted then that stakeholders should expect further changes to insurer business models and operating plans similar to what has already occurred with other Florida carriers.

Grady is concerned many of the companies that Demotech did not downgrade earlier this year have not improved financially and COVID expenses, unaffordable reinsurance rate increases plus more litigation won’t help the situation.

“You can’t tell me a lot of the companies that were on [Demotech’s] list before have significantly improved in this last quarter,” he said. “If what played out with the threat of ratings downgrade plays out again, I would not be surprised to see a few more companies cobble up together and hopefully not many failures.”

Gilway said legislative reform for first party lawsuits and Florida’s one-way attorney fee statute is critical to turning the market around. The changes wouldn’t have to go as far as the AOB reforms did, he said, but must ensure plaintiffs’ attorneys “have some skin in the game relative to litigation.”

He said without long-term changes Citizens’ policyholder count will grow, “the question is how much we’re going to grow.”

“If it’s not resolved, then the market is unsustainable, we’re going to grow,” he said. “It’s not going to change until we get some fundamental changes in the marketplace.”

Citizens’ is more prepared than it ever has been to handle policy growth both financially and operationally, but a healthy private market is essential.

“Our objective if we grow is to take [insureds] in as effectively as we possibly can, service the heck out of them and then work towards improving the overall flavor of the marketplace, the competitive nature of the marketplace,” Gilway said. “As soon as carriers start making money, as soon as they return to profitability, trust me, the population will soar because they can get thousands of our policies with no acquisition cost.”

Grady is hopeful lawmakers will take up these “important measures” next session so carriers and the market stay sustainable.

“If there’s anything good that comes out of these harder times for property carriers it’s maybe it gets the lawmakers’ attention and they finally do something to pass reforms that means that we can keep these guys stable and steady here in Florida and not rely on our state property market as much,” he said.

Watch: Florida’s Insurance Market Faces COVID, Hurricane Season and More


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