TURMOIL… Again?

Please forgive my writing about something that so many others have already written about and about which you may already have adequate knowledge, but…Florida’s residential property insurance marketplace is in turmoil…again!

Extending back to post Hurricane Andrew, later the 04/05 storms, the ill-advised HB-1A and perhaps other less notable periods, it’s happened many times before.

So, you may be asking… “if it’s happened before and we already know it’s happening now, why are you writing about it?”  Quick answer: because what’s happening now is much worse than what’s happened before and what happened before was only three years ago.

Let’s compare.

In February of 2017, just three years ago, Demotech cautioned that 10 to 15 Florida property carriers would be downgraded “if” they did not take immediate action.  By the middle of the following month, only 30 days later, only one downgrade was issued. Another imperiled carrier avoided a downgrade when it sold to Florida Specialty, which later imploded. The others, however, were successful in adding roughly $200 million in expense reserves and another $155 million mostly in capital contributions.

But that was then.

Today’s ugly truth is contained in a letter Demotech President Joe Petrelli sent to Barry Gilway, President of Citizens Property Insurance Company (Citizens) and to the OIR. Gilway had previously reported to his board that any potential for a decline in Citizens policy count would be impeded by its own competitive rates and plummeting private market profitability.  Hitting the proverbial nail square on its head, Gilway cited the usual suspects: “Virtually all companies continue to be impacted by excessive litigation and more recently by increased reinsurance pricing.”  (See Note #1 below)

In 2017 $200 million in reserves and $155 million in capital contributions did most of the shoring up. But, in third quarter 2019 underwriting losses were $378 million for carriers representing 79% of the market and, according to Petrelli’s letter, capital contributors are tapped out.  Having just put up $155 million only 36 months ago, who can blame them? (See Note #2 below)

So, what does this mean?

It means somebody better find a solution and fast!

Petrelli’s letter outlined what carriers could do to “improve their financial stability.” What it did not do was foreshadow the less conventional methods some carriers might employ to shed policies.

Way back when lawmakers implemented moratoriums on cancellations and non-renewals, some of the more creative approaches to still get off policies was to raise rates under a Use & File approach–versus the usual method of receiving OIR approval first.  Under Use & File the carrier can implement the increase immediately and if the OIR later disapproves, any excess premium must be refunded.  Refunding on this basis is so expensive carriers never use the “Use & file” approach.

Well, almost never.   (See Note #3 below)

Some carriers are rumored to be implementing rates so high under the “Use & File” approach that policyholder’s won’t pay the premium—thus, forcing agents to move the business to another carrier, probably Citizens, since its’ rates are not only competitive but capped at 10% annually. And, just like under the previous moratoriums, since policyholders won’t pay the substantially higher premiums, no expensive refunds will be necessary.

Another approach just as punitive for agents, albeit less sneaky, is to simply cancel agency contracts–again, forcing agents to move  policies to other carriers, probably Citizens.  Agencies have already reported cancellations of entire books of residential business, ranging from 7,500 policies to something just shy of 10,000. Yeah, that’s right…10,000!  And, where could 10,000 policies go in a market bracing for downgrades? Only one place, in my opinion…Citizens!

Scary thing is agents who’ve been bitten once, are far less likely to voluntarily move policies out of Citizens to a market where their contracts can be summarily cancelled again. And, while the voluntary market is always the most preferred, Citizens has two distinct advantages: one, it doesn’t cancel agency contracts as a means to improve its portfolio, and; two, it doesn’t have to worry about a downgrade from Demotech or any ratings agency. Forced takeout’s will become the norm.

And, don’t forget…downgrades aren’t like an A student getting a B on a report card.  With Demotech, the only rating less than “A” is an “S” for “Substantial.” An “S” will not meet federal requirements that mortgaged homes be insured by “A” rated carriers.

Unless Demotech receives dispensation from the secondary mortgage market (Fannie/Freddie), numerous “S” ratings will leave hundreds of thousands of affected policyholders in default of their home loans. (See Note #4 below)

That’s beyond turmoil!

How do we put a stop to it and avoid more turmoil in the future?  Easier said than done, but.. here’s what ultimately needs to happen:

1. carriers, legislators and regulators need to work towards and achieve an environment where rate adequacy is paramount and needed increases are expedited and, when due to reinsurance, automatically passed through, and…
2. we all need to work together to rid Florida’s insurance system of the prolific and specious litigation that continues to drag it down.  (See Note #5 below)

Yes, litigation is the culprit. During the rate hearing for Capital Preferred Insurance Company last Friday, February 2, 2020, CEO Jimmy Graganella testified that his company’s average claim without attorney representation is $12,000, just for the indemnity portion, no adjustment expenses. With an attorney involved the “indemnity” is double that at $24,000.  And…36% of all claims have an attorney involved up from just 4%.  An increase of 900%!

Recent rate hearings affirm what we all know.  For every one dollar of premium collected for water losses, carriers are spending $1.77.  And, since the supreme courts decision allowing attorney fee multipliers in almost every suit against an insurance company, 1st party lawsuits have sky rocketed.

A recent carrier filing revealed the following: in 2016 the company was sued 148 times; in 2017 it was sued 450 times; in 2018, 832 times; and, in 2019 it was sued 1,094 times on substantially the same number of claims–an increase of over 700%!

SB-914, which passed the Senate Banking and Insurance Committee on Jan. 21, would alleviate the prime litigation incentive, “attorney fee multipliers.”  Stay tuned for my next article explaining exactly how “fee multipliers” work and why they are behind this current  turmoil.

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NOTE #1: articles by Amy O’Connor with the Insurance Journal decipher Petrelli’s letter and spell out what Demotech believes carriers need to do in the “long-term” to improve their financial stability, as follows:

• Submission to OIR of a well-documented and thorough filing to “true up” their reinsurance costs
•  A marked and immediate decrease in the interest rate applicable to the accumulated debt in their holding company
• Securing actuarially sound rates at the earliest possible date
• Access to sufficient capital to move loss and loss adjustment expense reserves to an adequate level

See: More Than a Dozen Florida Insurers Facing Ratings Downgrades

See: An Update on Florida Insurer Downgrade Situation: Demotech Commentary

See: Ratings Agencies Disagree Over Financial Strength of Florida Family Insurance.

NOTE #2:  As contrasted to the recent (2020) announcement from Demotech that investors are apparently not interested in recapitalizing troubled carriers, it stated that downgrades would not occur in 2017 “due to recommitments and recapitalization to meet the requirements of maintaining an FSR of A or better.”  See 2017 article by Amy O’Connor with the Insurance Journal.

NOTE # 3:  Capital Preferred Insurance Company has implemented a “Use & File” increase as discussed during its’ hearing on 2/7/20.  You can hear the explanation for such an increase and what the carrier says it will do if it is disapproved, by watching the entire hearing here.

NOTE #4: For a review and background of Demotech ratings, a history of Demotech itself and Catastrophe Reinsurance Reporting see Guidance on Financial Stability Ratings.

NOTE #5: In an article by Peter Schorsch, January 29, 2020 a survey by The Tyson Group showed:

• 75% of polled voters say that limiting lawyer fees will stop greedy lawyers from taking advantage of homeowners.
• 73% agree that reducing lawsuit abuse will help keep the costs of living down in Florida
• 76% said excessive litigation and out of control attorney’s fees are driving our insurance rates up and making it more expensive to buy a home or afford insurance coverage
• 74% supported the need for legislation to address this issue and limit frivolous lawsuits

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