Florida market


Handle with care: Florida continues to challenge reinsurers

Glenn Clinton

ILS Capital

Matt Junge

Swiss Re

Adam Schwebach

Willis Re

Karen Clark

Karen Clark & Company

Florida accounts for some 10 percent of all cat risk globally—making it a big deal for Bermuda’s reinsurers. But the market remains a difficult place to write profitable business, as a panel of experts discussed.

“As long as you’ve got government interference in a marketplace, it’s never going to get actuarially sound rates.”
Glenn Clinton, ILS Capital

The threat of catastrophe losses from hurricanes may be re/insurers’ main concern when writing business in Florida but, in fact, there are many arguably bigger challenges that are manmade, and thus potentially preventable.

On top of some of the world’s most costly cat risks, attritional losses, government interference and moral hazard mean the market is at crisis point—and some carriers have had enough.

That was the message from a recent discussion about the state’s market at sister publication Intelligent Insurer’s Re/insurance Lounge, the online, on-demand platform for interviews and panel discussions with leading players in the market.

The panel featured Bermuda-based Glenn Clinton, who has 30 years of property and casualty underwriting experience in both insurance and reinsurance, and is a managing director for US property reinsurance at insurance-linked securities (ILS) fund manager ILS Capital Management; Matt Junge, head of property solutions for the US and Canada and head of property underwriting, US regional and national, at Swiss Re; Adam Schwebach, a reinsurance broker at Willis Re, focused on the Florida property market and a long-term Tampa resident; and Karen Clark, the catastrophe risk modelling pioneer and founder of Karen Clark & Company.

Property and politics

“Severe convective storm losses have been surprising in the last few years.”
Matt Junge, Swiss Re

On one thing, at least, everyone agreed: Florida is impossible to ignore. Accounting for about 10 percent of the global catastrophe reinsurance market, it brings together a unique mix of high property values and extreme weather exposure.

“In my mind, Florida is the centre of the reinsurance world, an area that has tremendous risks but also creates tremendous opportunities for the companies and the reinsurers that are willing to participate in it,” said Schwebach.

However, it is a place where participants face unique issues. Clinton is one of those who’s had enough of Florida cat risk. He has no illusions as to its importance; he recognises that it’s by a long way the most expensive cat market in the world, accounting for perhaps 10 per cent of the global market.

“Despite whatever misgivings you may have about it—and they’re justified—it’s a market you just can’t ignore,” he said. It is, however, a market he currently avoids—at least on the cat risk side.

As part of a $300 million ILS fund, Clinton has considerable flexibility in what he takes on from a reinsurance point of view and last year he decided he’d done with it, despite rate increases.

There are two reasons. First, according to Clinton, the market has been systemically underpricing cat risk in the last couple of years—partly because of cheap, plentiful ILS money.

Second is the moral hazard, with insurers, regulators and legislators aware of the problems, but unable or unwilling to address them. “They know exactly what the problem is down there—the law lobby is outspending the insurance lobby by a very large margin, and when people have claims they’re not going to the claims department of their insurer, they’re going to their lawyer,” Clinton said.

“All the rate in the world will not write you out of moral hazard.”

He doesn’t see it getting better any time soon, because insurance has become a “political football” in the state. That’s manifest in the state-owned residual insurer Citizens Property Insurance Corporation which, while a long way from its height of about 1.5 million policies, is again growing, with its 10 percent limits on rate increases.

“I’m just jaded,” said Clinton. “I honestly believe as long as you’ve got government interference in a marketplace, it’s never going to get actuarially sound rates.”

Abandoning the Florida market is not a decision to take lightly, however. As Clark outlined in opening the discussion, the market is very important for property reinsurance, and particularly catastrophe risks.

Since 1900, a third of all hurricane landfalls in the US have been in Florida, including half of all category 4 and threequarters of all category 5 hurricanes.

“If you combine that with the fact that at latest count there’s nearly $5 trillion of property values in the coastal counties alone, with nearly $2 trillion concentrated in the tri-county area, you’ve got the perfect setting for very large losses—and by that I mean in the order of a $100 to $200 billion of insured loss potential,” said Clark.

“When you’re talking about insured major losses, Florida is ground zero.”

Despite this, Florida has been relatively lucky. It’s “dodged a few bullets” in recent decades, as Clark put it: for example, Irma in 2017 was at one point heading for Miami as a category 4 or 5 hurricane; it made landfall near Naples as a category 2. In 2018 category 5 Hurricane Michael hit the Florida Panhandle, again missing Miami.

Hotting up

“The action in Florida tends to be reactive rather than proactive.”
Adam Schwebach, Willis Re

Not everyone is as downbeat as Clinton. As Schwebach pointed out, while increased rates might not solve everything, they help a lot, and make the market a lot more manageable for many companies.

At the same time, while it’s true that politicians have tried to use Citizens to curry favour with voters by limiting their premium increases, there’s much greater recognition of the issue today than in the past—and at an earlier stage.

“It’s not to say it’s a perfect situation, but politically to have that visibility on the problem this early on is a great change from what we’ve seen historically,” Schwebach said.

Junge was also more positive. Swiss Re’s risk appetite in Florida is stable, he said—and climate change may bring opportunities as much as challenges.

“Insurers want to provide really good coverage to their policyholders, and flood is another way that they can provide an additional service,” he said.

They have access to far better data today on properties—and far better models on risks (as Clark pointed out)—to make this possible.

No safe spaces

“The average severity of a litigated claim is three to six times higher than a non-litigated claim.”
Karen Clark, Karen Clark & Company

There are other unique challenges, such as attritional losses and, particularly, convective storms.

“So much attention is paid to the hurricane risk but severe convective storm losses have been surprising in the last few years, and if you look at the chart of their frequency and severity they just keep increasing,” Junge said.

As Schwebach noted, this goes to the heart of profitability for many businesses.

“We’re spending more time with our clients thinking about the attritional side of their business. The severe convective storm side has become troublesome for a lot of people because it’s death by a thousand paper cuts,” he said.

“More people are meeting to think long and hard about how they want to handle that exposure.”

For some companies, according to Clark, the answer has been to look for business outside the state, but there are no easy solutions.

“A lot of them had started moving into Louisiana, Texas, and other south eastern states, but over the past few years they’ve been whacked by severe convective storm losses and now most recently, of course, the big winter storm we just had,” she said.

“Now some of them are saying—and I love this quote—maybe I should retreat back to the coast.”

Making a bad situation worse

The other big challenge is litigation and third party involvement—which has become a major issue for Florida across cat claims and attritional losses.

As Clark outlined, for the insurers she works with the percentage of litigated claims rose from 2 percent for Hurricane Matthew in 2016 to 8 percent for Hurricane Michael in 2018. As she explained, that’s important because the average severity of a litigated claim is three to six times higher than a non-litigated claim. Assignment of benefits (AOB) claims are also rising—again they are about three times more expensive than traditional claims.

Both are not just feeding into higher claims but also increasing higher loss adjustment expenses, as insurers battle to hold down costs.

“We’re seeing in some storms that for some companies, loss adjustment expenses, which used to be predictable at around 10 percent, could be as high as 30 percent,” she said. “This is not the natural hazard crisis, but really the manmade crisis.” The result is that losses such as Irma, which seemed at first relatively small, soon escalated.

Schwebach added: “We had a reinsurer tell us recently that, from its perspective, Hurricane Irma hit them in 2017, 2018, 2019 and 2020, given the amount of development that continued on that loss.”

Sunshine on the horizon?

None of this is insurmountable—given the political will. As Clark pointed out, insurers have access to far better modelling than in the past, and rate increases ease some of the pain. The passing of the Assignment of Benefits Bill in 2019, which introduces new hurdles for and limits AOB claims, has also helped.

“I know that’s not going to solve everything, but it’s great progress,” said Junge.

More needs to be done in terms of tort reform and to rein in the growth of Citizens. When and if that will happen remains uncertain, and insurers and reinsurers covering Florida may need to grin and bear it a bit longer.

Schwebach said that action in Florida tends to be reactive rather than proactive. “Unfortunately, in the state of Florida we tend to get action when there’s been enough pain,” he said.

“When the fourth quarter financials come out for the Florida domestic companies there will be a lot of pain there. The question is, is that enough to prompt some truly effective legislative reform?”

To view the full Re/insurance Lounge session click here.


Images: Shutterstock.com/Mouse family, Dudarev Mikhail

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SPRING 2021


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