Florida held a special legislative session last week to try to save the homeowner’s insurance market. While they accomplished some positive long term improvements, unfortunately, they did little to address the looming capacity crisis.
This means a lot of Floridians are going to find themselves either a) without insurance or b) with insurance that may not be able to pay a claim next year.
This feels like a topic for a Good, Bad, and Ugly list. Spoiler alert: the Ugly section is the longest!
1) Legal reforms passed by the legislature will reduce fraud and free roofs in Florida. This is a big win for the market. Longer term, it will reduce rates and increase availability.
2) Several changes were made to make Citizens less competitive. These include limiting eligibility to residents who can’t find another policy within 20% of Citizens’ rate and requiring flood coverage that the private market doesn’t require. Over time, this will reduce Citizens market share.
In my piece last week, I suggested Citizens needs to be a market of last resort, not first. These changes make that more likely.
3) Demands by carriers to force depreciated roof coverage on policyholders were denied. While this would have helped loss ratios, and there are times where it would make sense, taking away coverage unknowingly from insureds is not a solution to the problem.
If customers want to willingly trade full replacement roof coverage to save money, they should have that choice. However, everyone knows, if it became the default option, most homeowners would have no idea they were underinsured until after they had a claim.
1) Notice how most of the benefits I mentioned were focused on the long term. The problem is we have to get to the long term in one piece first.
If you can’t get insurance next year, you don’t give a damn about the long term!
2) For example, Citizens did not change its cap on home values. With the rise in home prices over the last five years, many more residents will trip over the $700,000 eligibility limit. This means they will get kicked out and forced into a market with limited capacity.
3) Nothing was done to address the solvency of the Florida Hurricane Catastrophe Fund (FHCF). It doesn’t sound like they are even planning assessments. There wasn’t so much as a mention of the much needed bond raise.
4) The new state provided reinsurance (FORA) doesn’t accomplish anything other than move money from one pocket to the other. This provides subsidized low layer reinsurance to the market.
The problem is the market doesn’t need low layer reinsurance. It needs high layer reinsurance to ensure solvency after a big storm.
Honestly, if a carrier doesn’t have the surplus to retain their share of a $6B industry loss, then they don’t have enough surplus to be in the risk business.
5) Nothing in the legislation will bring new admitted capacity to the market. That is because the long term benefits don’t offset the immediate problem around reinsurance affordability.
1) The legislature ignored the elephant in the room. Reinsurance prices in Florida will be up at least 50% next year.
That matters more than anything else they did. Why?
2) Because most local Florida insurers are struggling to remain solvent and they have only stayed alive for the last ten years by arbing cheap reinsurance.
Now that they have to pay a much higher price for reinsurance, they are left with two choices: one, try to pass along the higher prices or two, drop a ton of customers to reduce their exposure.
The problem with trying the first strategy is the OIR is unlikely to approve your rate increase, so there’s that. The trouble with the second is it dumps a whole lot of customers into Citizens.
3) Of course, Citizens is doing everything they can to make it harder for people to get in. So where will these people go?
They may have to wind up in the excess & surplus market and pay a lot more. That’s assuming they can even get someone to explain to them what that is.
Their other option is to call their state Senator and read them the riot act. I’d wager that’s the more likely outcome.
4) As for the insurers, if they can’t afford reinsurance, they really don’t have much option but to close the doors. If you don’t buy tail cover, Demotech will downgrade you. You can try to shrink your way to survival, but that math is very tough given how little surplus most of these carriers have.
Let’s not also forget they can no longer honestly rely on FHCF to keep providing them cheap low layer reinsurance (they will pretend it can, I’m sure, but if you were investing your own money, you wouldn’t want to rely on the FHCF as a going concern).
5) So where does that leave us? With a lot of homeowners rushing towards Citizens like shoppers after a Black Friday deal.
More carriers will fail. More market share for Citizens. More financial calamity risk for the state. And everyone crossing their fingers and toes for no storms next summer to buy more time.