Florida's property insurance market is “ collapsing & # 39; & # 39; and requires immediate attention if there is any chance to protect the market, consumers and ultimately the state's economy, according to an analysis to be presented to the Florida Legislature shortly.
The report points the finger at the & # 39; process economy & # 39; of the state as the leading cause of the insurance market woes – and considers it a more direct cause than the many weather events Florida has suffered.
Among the findings:
- Litigation costs are 17% higher for Florida insurers than in other countries prone to disaster.
- The fees paid to attorneys by Florida carriers are much higher than the damages paid to the insured.
- In 2019 alone, Florida insurers paid nearly $ 3 billion in litigation costs, which translated into higher premiums for policyholders.
- While the number of claims after storms is a cost factor, claims not related to disasters make up about 60% of all disputes.
- Florida consumers are paying a "hidden tax" to fund the lawsuit that averaged about $ 680 per family in 2020.
The report, "Florida's P&C Insurance Market: Spiraling Towards Collapse," was written by Guy Fraker of Cre8tfutures Innovation System & Consultancy. Fraker has been working with the insurance sector for 30 years, including in the field of motor insurance and autonomous vehicles, and with primary carriers, reinsurers and related sectors.
To explore how the market reached crisis point, the report identifies four Florida laws passed between 2011 and 2019 to further the litigation crisis. They are statutes governing commission contracts, mandatory replacement cost coverage for residential roofs, multi-year statute of limitations to file an initial notice of loss, and one-time attorney fees.
Two Supreme Court rulings have also compounded matters.
This process environment has carriers that are steadily bleeding capital and surpluses. Fraker's report says the roughly 6% of homeowners' claims that are filed equates to the cost of a "good solid Cat 3 hurricane" every 12 months.
“This market is at a critical turning point. The longer and more widely these trends persist, the more likely the state will experience a recovery measured over the generational time horizon, ”the report warns. "The time for that to hope some theoretical breakpoint does not come about is over. "
Fraker was commissioned last year to conduct Florida market analysis by insurers, lawsuit reform groups, and others. Florida State Senator Jeff Brandes, a member of the Senate Banking and Insurance Committee who has raised the alarm about the Florida real estate insurance market, helped lead the effort.
Fraker & # 39; s study argues that the state's private P / C insurance market "is facing a confluence of existential threats in the form of increasingly unpredictable dispute resolution, rising risk capital costs and persistently high exposure to natural disaster risk" ; s. "
The report states that "targeted law reforms are needed to maintain the viability of the insurance industry while servicing properties owned by the Floridians and the Florida economy," adding that "without the intervention of public policy solutions, the home insurance market will fail. "
Fraker said in an interview with Insurance Journal that he agreed to prepare the report on behalf of "the Florida economy and Florida consumers, not the industry (or) other stakeholders."
In compiling the report, Fraker said he interviewed corporate insurance leaders, regulators, lobbyists / attorneys, prosecutors attorneys, law firms, construction and roofing companies, consumer attorneys, reinsurers, rating agencies, as well as investors and a climate scientist. He also analyzed trial reports and looked at thousands of regulator documents.
While Florida has seen three consecutive years of major hurricanes from 2017 to 2019, insurers have insisted that the insurance issues are linked to an exponential rise in lawsuits.
The results of Florida domestic airlines showed a continued decline in surplus over the past five years, culminating in a one-year underwriting loss of more than $ 1 billion through the third quarter of 2020.
Florida Insurance Commissioner David Altmaier told the Senate Banking and Insurance Committee on Jan. 12 that airlines were on track to nearly double their losses in 2020 compared to 2019 as their surpluses fell from $ 6.7 billion to $ 6.1 billion in just the first three quarters of the year. The combined ratio for Florida domestic businesses was over 100% in the third quarter of 2020 and has been on the rise for several years.
Carriers writing property risks in the state have responded by withdrawing capacity in certain areas, including South Florida and more recently central Florida, along with requesting rate increases. Altmaier said insurers submitted 105 rate requests for increases of 10% or more in 2020, and 55 of those requests have been approved; only six tariff increases were approved in 2016.
Florida's last resort insurer, Citizens Property Insurance Corp., has seen a flood of new policyholders over the past year as consumers struggle to find coverage in the private market.
The problems are also beginning to affect the ability of Florida insurers to get reinsurance capital in the disaster-prone state.
"These losses have a direct impact on the surplus position of our sector," said Altmaier. "As capital and surplus deteriorate, companies lose the flexibility to write additional business … that affects consumers."
Fraker blames a confluence of several events that "led the market from stabilization to total collapse".
Fraker said four individual Florida statutes regarding assignment agreements, mandatory replacement cost coverage for residential roofs, multi-year statute of limitations to file an initial notice of loss, and one-time attorney fees statute were passed between 2011 and 2019 & # 39; individual and in an isolated form without really thinking about how they could ever get into a relationship. "
In addition, two rulings of the Florida Supreme Court: Joyce v FedNat (2017) which has set a contingency multiplier, should not be reserved for rare and exceptional circumstances; and Sebo vs. American Home Assurance (2016) where the court moved to use the Concurrent Causation Doctrine that allows a secured cause of loss (such as wind) to be combined with damage caused by an unsecured cause of loss – helped move the market towards a crisis.
“The combination of these policies and court decisions is an ideal combination for significant financial exploitation,” the report states. "The number of claims after each major storm became the fuel and architecture for an economic engine separate from Florida, generally referred to as & # 39; litigation & # 39 ;."
Insurers have filed more than 200,000 lawsuits since 2013, many of which stem from non-catastrophic water damage and roofing claims, and many of them with benefit agreement allocation. After reforms were implemented in 2019, there was a dip in AOB lawsuits, particularly for citizens, Fraker notes. However, by the third quarter of 2020, prosecution attorneys had set up work around AOB with a "Demand to Pay", filing a first batch of lawsuits against carriers instead.
According to Fraker, the costs of this lawsuit cannot be underestimated. He found that while there has been a clear impact of catastrophic storms on the frequency of claims, non-catastrophic claims account for about 60% of all lawsuits filed against Florida domestic companies, while 40% of lawsuits are related to catastrophic losses.
In analyzing more than 3,000 insurance cases, Fraker found that litigation costs are 17% higher for Florida insurers than other countries prone to disaster. The fees paid to attorneys by Florida carriers for this trial amount on average to more than 750% of the damages paid to the claimants / insured. In one case investigated by Fraker, the prosecution received 21,041% of the damages as a fee.
According to the report, insurers have paid out more than $ 12 billion in fees to attorneys since 2013 and were involved in more than 221,000 lawsuits between 2014 and 2020.
The cost of all of these lawsuits equates to approximately $ 3 billion in costs “imposed on Florida property owners,” the report said. In 2019 alone, Florida policyholders paid between $ 2 billion and $ 2.7 billion in costs allocated to suits in the form of increased premiums.
Fraker said only 8% of damages are paid to insured, while prosecutors 'attorneys receive about 71% of insurance litigation cash flow "because they are allowed to, not because prosecutors' attorneys are motivated to do harm."
Insurers' defense costs range from 237% to 307% of the claim, or 21% of the total process.
“The economy of P&C litigation in Florida may have its roots in the hurricane's recovery. However, like any emerging economy, the state's process economy needed nurturing and protection to become an established name, '' says the report. But unlike an economic system balanced by governance relevant to all stakeholders, Florida litigation economy comes almost entirely at the expense of insurers, and ultimately the state economy and resident consumers. As a result, the value of businesses, the value of jobs and disposable consumer income is destroyed or severely degraded. "
Prognosis of disputes
It's not just Florida insurers who are paying the price of the lawsuit. Reinsurers and investors are paying close attention to the Florida market as it is no longer profitable and they are now seeing a negative return on their investments.
Fraker quoted a director he spoke to for the report as saying, "I'd rather invest in time stocks in the West Bank than in the Florida insurance industry."
"Understand that this additional tax proxy provides zero benefits to the community, county or state as these billions are diverted away from the Florida economy," notes the report.
There is also likely to be no relief from rate hikes for consumers, as reinsurance rates for carriers are rising and uncertainty about future litigation costs make it difficult for the industry to create a reliable model for litigation, the report notes.
Florida airlines already pay 30% to 35% more in reinsurance premiums than other hurricane-prone states, and the high litigation costs are more of a concern. Fraker said insurers underestimated preliminary damage assessments immediately after a hurricane by an average of 300% due to unforeseen litigation costs and that this also affects reinsurance rates.
For both reinsurers and domestic carriers considering 212,000 lawsuits since 2015, the inability to create a reliable model of litigation is "the last push off the cliff for the Florida P&C market".
Fraker said because "there is no way to reliably predict the dollars and cents of this litigation storm," he created a new financial construct called the litigation probable maximum loss (LPML). It is similar to the probable maximum loss (PML) model that companies use when modeling catastrophic storm damage, but the LPML predicts the range of litigation frequency and severity based on thousands of data points on insurance disputes extracted between 2016 and 2020 .
“ The output of forecasting litigation costs through this construct is an assessment of litigation frequency and severity uncertainty, which significantly affects Florida reinsurance rates, which then becomes a cost burden for Florida domestic airlines and ultimately for the Florida & # 39; & # 39; consumers, the study notes.
Florida consumers are the ultimate victims of what is happening, says Fraker, as they are essentially paying a "hidden tax" to fund the lawsuit. This hidden tax averaged $ 487 per family in 2019, and is growing at an annual rate of 25.6%, which equates to about $ 680 per family in 2020. That "tax" is paid to fewer than 2,500 attorneys and contractors in the state.
Meanwhile, the story of plaintiffs' attorneys that insurance companies caused this crisis due to poor claims handling procedures is a "catastrophic public relations failure" on the part of the industry, Fraker said.
"The reality is, whether it is a catastrophe claim or not, 92.5% of all claims are closed within a year; 80% of claims that take more than a year involve third party representation," he said. The carriers in the market have retention rates of 95.2 to 98.3 policyholders, he noted.