Florida’s special session property insurance reforms: Opportunity lost?

Industry contacts have been raising concerns over the weekend, that proposed property insurance related legislation set to be raised during Florida’s special session of the legislature this week will not go far enough on litigation and won’t do enough to bring reinsurance market confidence back to the state.

Bills have been tabled and it’s clear there is a focus on stemming the tide of litigation and fraudulent claims in the state of Florida.

But the reforms are not considered as “significant” as Florida’s Governor Ron DeSantis had said last week, with many insurance and reinsurance industry sources calling for much more to be done in order to put an immediate stop to the tide of litigation in Florida’s property insurance marketplace.

With Florida’s reinsurance and risk transfer market said in disarray, as reinsurers have been pulling capacity from the state, pricing has been rising rapidly and capital market investors have been demanding higher returns for catastrophe bonds, many P&C carriers are struggling to put together their necessary reinsurance towers in advance of the coming renewal and hurricane season.

A range of bills announced over the weekend that will be debated during the special session this week cover issues related to legal fees, roof replacements, hardening homes to storms, consumer protections and also reinsurance.

There is a proposal for a $2 billion layer of reinsurance to sit beneath the Florida Hurricane Catastrophe Fund (FHCF), which is seen as one critical way to help Florida’s challenged P&C insurers garner the necessary reinsurance they need to get through the renewal and sustain their ratings, but whether that will change the private reinsurance and capital markets view of risk in the state of Florida is up for debate.

Prohibiting one-way attorney fees is included in some of the bills to be debated, which is without doubt a critical reform for Florida’s property insurance market.

But again, it is debated whether proposed legislation goes far enough to stop contractor loopholes and claims being inflated still.

Opinions are mixed on the proposed legislation to stem litigation and fraud, with some industry groups praising the wide-ranging approaches, but others saying it doesn’t go far enough and could take years for property insurers to pass on any benefits of the legislation to their customers.

A $2 billion Reinsurance to Assist Policyholders fund, is effectively a state-backed, lower-layer of reinsurance to sit under the Florida Hurricane Catastrophe Fund, so achieved the reduction in FHCF attachment many have called for, but without having to adjust the Fund itself.

However, this is only proposed for hurricane damages, so wouldn’t provide any backstop at all for the kind of non-peak or secondary perils and severe weather effects that have been such drivers of loss over the last five years for Florida’s homeowners insurers.

When it comes to buying reinsurance from the private market, it is just as much the non-cat weather losses that are making procuring reinsurance challenging, as it is hurricanes themselves.

This reinsurance fund measure seems likely to be one that comes in for significant debate over the coming days, as it is recognised that a number of Florida primary carriers would currently struggle or fail to secure sufficient reinsurance, leaving them open to rating downgrades.

Overall the bills appear to take a two-pronged approach, on the one hand looking to tackle fraud abuse and litigated claims, on the other the immediate reinsurance needs of carriers.

But whether a $2 billion reinsurance fund can be implemented and provide solace for carriers before the June 1st renewal date remains to be seen. Many suggest it is too little and too late, while unlikely to be implementable and make any difference to reinsurers appetite for providing the rest of Florida’s insurance towers by the critical renewals.

It was RenaissanceRe’s CEO who 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.

Plus, in the eyes of many reinsurers, it is immediate action on litigation and AOB abuse that is required for them to adjust their view of risk on Florida, meaning the private market layers would remain costly and in some cases perhaps even out of reach.

The reinsurers we’ve spoken with this weekend suggest the reinsurance fund proposal is a sticking plaster to save some of the worst performing carriers, which some of our contacts said may just be perpetuating a problem, rather than finding a way to really fix things in Florida.

Absent the significant reforms to litigation, fraud and assignment of benefits (AOB), which many are not currently confident is going to happen in this special session, our reinsurance market contacts say they are unlikely to dramatically change their views of risk in Florida, or their opinions on the stability of its insurance market.

One area missing from the bill details seen is any focus on Florida Citizens and changing how the insurer of last resort works, or its mechanisms for returning policies to the private market.

But that’s perhaps not surprising, given the market itself needs to be fixed before the last chance insurer changes in any significant way.

A section in some of the bill text on greater oversight of insurers by the regulator, as well as transparency on their operating data, is welcomed, but again not seen as a market-fix without the much deeper and broader reforms we’ve discussed above.

Critical to the success of the special session this week, is implementing changes that can build confidence in Florida’s property insurance market again, making access to reinsurance and the capital markets more easy and cheaper as well and enabling them to achieve the levels of rating they need to continue operating into the wind season.

To achieve that, meaningful reform that immediately stems litigation and fraud may be the only answer.

Artemis spoke with Demotech President and Co-Founder Joseph Petrelli, a leading organisation responsible for rating Florida’s insurance market, and already a sceptic on the likelihood of catastrophe fund (FHCF) reform helping to fix the market.

Petrelli told us recently that “Cat Fund reform is crumbs and Floridians need a feast,” saying that the focus has to be on immediate reform on litigation.

So it is eye-opening to hear Petrelli’s views on the proposed special session bills and how effective he thinks they may be.

It’s worth remembering that Petrelli’s firm was very early to push for meaningful reform of Florida’s property insurance market, saying in March that urgent reform to the legislation was required, warning that a number of carriers were facing downgrades over the weeks running up to the all-important reinsurance renewals.

The threat of downgrades to some of Florida’s property insurers persists and with the special session starting today, time is running out before Petrelli’s Demotech will have to take another rating view on them.

Petrelli explained the backdrop to his views on the proposed special session legislation, saying, “The fundamental issue adversely impacting consumers and primary insurers is the disparate disproportionate litigation in Florida’s residential property insurance marketplace. That is, Florida represents 9% of reported but unsettled HO claims in the country YET it has 76% of the litigated reported but unsettled HO claims in the country.

“When the legislature failed to address inducements or incentives to litigate during its regular session, on March 23, 2022, we became the first to call for a special session on the property insurance crisis. Absent meaningful and significant reform upheld by the courts, consumers will not see any rate relief.

“Similarly, the dysfunction in the marketplace has reduced the number of reinsurers with an appetite for Florida catastrophe reinsurance while simultaneously increasing the cost of the catastrophe reinsurance offered by the reinsurers remaining in the marketplace.”

Are the proposed bills sufficient in Petrelli’s view, or does the Florida legislature need to go a lot further and faster?

He told Artemis, “In its current form, it is my belief that the proposed legislation which will be under consideration during the May 2022 special session, when viewed in its totality will not diminish the incentives that fuel the explosion of litigation that is raising the cost of insurance for consumers.

“Had the proposed restriction on assignment of benefits been applicable to all property insurance litigation, that one paragraph bill would have been more effective. The problem is anything that encourages litigation. Roofs are simply the flavor of the day.”

Petrelli continued, “As to the cost of property insurance in any jurisdiction, claim frequency is the only brake available.

“Claim costs on the predominantly material damage coverages, think auto physical damage and Homeowners, will always be increasing.

“Whether its the cost of nails, tar paper, shingles, windows, tiles, equipment to install, equipment to deliver supplies, cost of gasoline for the truck that the worker takes to the job, the trucks themselves, the hourly rate of the skilled craftsmen who do the work or the cost of their employee benefits; nothing is headed down. Only a stable claim frequency can moderate the rate increases.

“Florida should have focused on reducing the incentives to litigate.

“Introducing new standards and imposing new requirements on insurers, or any else, will ultimately result in litigation to clarify intent. An opportunity to address root causes has been lost.”

A damning assessment of the prospects for meaningful property insurance market reform coming out of this weeks special session in Florida.

Petrelli’s view aligns with many of our insurance, reinsurance and insurance-linked securities (ILS) market contacts, who believe root causes need to be fixed immediately and that this could help to bring reinsurance capital back to the state on more accommodating terms to support insurers.

However, underlying all of this are loss costs and the need to cover them over the long-term and deliver profits to shareholders and backers.

Meaning paying risk commensurate pricing for reinsurance is going to remain a challenge for Florida’s insurance community, especially after the next series of hurricane landfalls in the state.

Florida is a peak catastrophe zone and no amount of reform is going to make reinsurance capital view it as any less risky than the loss experience and model outputs suggest.

Which is why fundamental and immediate reform is critical, to stem runaway litigation in Florida and enable carriers to fill out the, in some cases, gaping holes in their reinsurance towers at this renewals, to secure their all-important ratings.

Read our coverage of Florida’s property insurance crisis below:

Florida Citizens CFO says risk transfer markets in “disarray”.

“Really significant” property insurance reforms for Florida: DeSantis.

Florida “flash point” as reinsurance market begins to throw in the towel: ALIRT.

FedNat details Florida downsizing plan, says Monarch to be acquired.

Florida Special Session to focus on fraud, AOB abuse & affordability: CFO Patronis.

More insurers seeking rate hikes of 23% to 49% in Florida.

Cat Fund reform is crumbs, Floridians need a feast: Demotech’s Petrelli.

Florida litigated claims rise again, but “hope” in Special Session: CaseGlide.

Florida – “The theatre is on fire,” FHCF change won’t solve it: RenRe CEO.

Swiss Re not optimistic on Florida reinsurance pricing: CFO Dacey.

To ensure progress in Florida reinsurers could pull capacity: Assured Research.

Full placement of Florida reinsurance programs to be challenging: AM Best.

Florida Governor sets property insurance special session for end of May.

“Cause for concern” as AOB & litigated claims rise in Florida: CaseGlide CEO.

Ida insolvencies continue, as Florida runs out of road: ALIRT.

Florida property insurance market “in collapse”, special session uncertain.

Florida renewal “one of the toughest in recent memory” – JMP Securities.

Demotech calls for Florida market reform with rating downgrades likely.

No quick fix as Florida property insurance reforms fail to pass.

Another one bites the dust – Florida’s insurance failures continue.

Assignment of benefit (AOB) claims rising for Florida P&C insurers.