Florida reforms show signs of working but reinsurers remain coy on biggest cat market

Following extensive regulatory reforms, the property market in Florida is on track to return to health, with claims and litigation falling and new insurers launching. But reinsurers remain wary of a market that is the biggest catastrophe insurance market in the world—but one which has caused significant pain for the industry in the past.

“Florida is something of a dilemma for reinsurers,” one source told Intelligent Insurer. “On the one hand it is very appealing and if you are serious about cat you cannot ignore Florida. On the other hand, many have painful memories. Will these reforms really work? Maybe it is too soon to tell.”

That point was illustrated by the recent visit that Mike Yaworsky, Commissioner of the Florida Office of Insurance Regulation, made to Bermuda to woo reinsurers last month. He spoke at the 30th anniversary celebration of the Association of Bermuda Insurers and Reinsurers—and highlighted the importance of reinsurers to the Florida market. In particular, he noted Bermuda carriers paid $13 billion, or about a quarter, of insured losses caused by Hurricane Ian in Florida last year.

Brokers too are bullish on Florida—and keen for reinsurers to listen. The consensus seems to be that reforms are working—and that the market can again become attractive. “There is a lot of positivity around the reforms, and we see opportunities as a result,” said Steve Hofmann, co-president of Aon’s US Reinsurance Solutions.

“We see the commissioner as doing things right, things that should create a sustainable market.”

He added: “Given the growth of the Florida market, the reforms had to happen. It is the number one peak cat zone in the world, the biggest catastrophe insurance market. So far, they seem to be working but reinsurers are watching closely.”

Good changes

Adam Schwebach, executive vice president and branch manager of Gallagher Re’s Tampa office, offers a similar view. In particular, he highlights the elimination of one-way attorney fees as an important change. This move alone should drastically reduce the insurance companies’ costs. Florida’s insurance regulators estimate homeowner claims account for 9 percent of all claims in the US, but 79 percent of all insurance litigation.

The prohibition of Assignment of Benefits (AOB) represents another key and important change, Schwebach said. AOB was blamed for inflated levels of fraud as some contractors and restoration firms would inflate claims, often without the knowledge of the insured. Regulators also eliminated the insured’s ability to file a bad-faith claim based solely on the appraisal award or acceptance of judgment. Finally, insurers may now include mandatory binding arbitration provisions within their policies.

Schwebach praised the regulator and politicians in Florida for going as far as they did with the reforms. “The extent of the reforms took guts to do, but they have changed Florida’s property market,” he said. “The one-way attorney fees have been a problem in the state in different guises for some 17 years. AOB has always been a problem. But we have already seen the difference. Litigation rates are steadily dropping—what we now need is for reinsurers to buy into the market again.”

He accepts this could take time. The most concrete proof that the reforms have worked will come only in the aftermath of another big loss, he said, while stressing that no-one in Florida wants that. “I am very confident that the right changes have been made. Once reinsurers return that will, in turn, help lower insurance premiums. The regulator can then see that as a success.”

Reinsurance layers

Despite a wariness among reinsurers, there was enough capacity in the last renewal—albeit at the right price and while being selective layers. Another unique feature of the Florida property market is the role of the Florida Hurricane Catastrophe Fund (FHCF), which was created after Hurricane Andrew in 1993 and covers a portion of insurers’ losses above their deductible.

Effectively, reinsurers must choose to offer coverage either on the top layers of insurers’ programmes, above the fund, or below. Unsurprisingly, most prefer the top layers at present. “They pulled back on the lower layers, but the capacity was there last year,” Schwebach said. “We are expecting a more stable renewal this year; we would like to see reinsurers gravitate down in 2024. We would like to see rates and terms and conditions improve. Maybe another year with no loss will encourage them back in and change will happen.”

Despite capacity available at a price, some insurers have taken matters into their own hands in recent years by forming their own captives. These have worked well for many, since limited loss activity now means they have cash sitting in these structures. “That has worked well for them,” Schwebach said.

Hofmann at Aon agrees that there has been less competition on layers below the FHCF than on higher layers. “The Florida model remains a bit of a challenge for reinsurers as you also have to work out where to play in relation to the FHCF,” he said. “That said, things are changing.

“The mid-year renewal was a lot better than 1/1 this year. Clients were more prepared through the use of captives. The reforms have created a lot more optimism, but it is now just a matter of time.”

Perhaps the ultimate proof that the industry believes the reforms will work can be seen in insurers moving into the market. Schwebach said he knows of six new carriers that are up and running and that could double over the next 12 months, from what he has heard.

Insurers that have reportedly launched include Edison Insurance, TypTap Insurance, Florida Peninsula, SafePoint Insurance, Slide Insurance, and American Traditions.

These launches represent a success for the regulator and politicians that championed the reforms. Even more of a positive impact will be seen if more reinsurance capacity returns—this would increase competition and drive down premiums. “That will benefit all parties,” Schwebach said. “Perhaps more of a surprise is that we are not seeing new classes of reinsurers forming.”

The reasons for that are well debated. The most common reason cited is that investors remain wary of an industry that has failed to post reliable profits for so long—and that, with interest rates so high, they have ample other options in much less volatile sectors. But that does not mean it won’t happen. Rumours of new business plans and carriers abound—and Florida will be an almost inevitable target if operating in the cat space.

“The truth is that reinsurers cannot ignore Florida—whatever has happened last year, they will return, and if new players enter that market, others will follow, and the competition will heat up,” one reinsurer admitted to this publication. “That is how the industry works when we have a little success. What we really need is discipline.”

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