Can Florida insurance market handle another hurricane?

Despite warnings from two leading insurance rating agencies that Hurricane Milton weakened or threatened Florida's troubled home insurance market, local experts say the market can manage losses from Milton and are ready to cover yet another hurricane, if one should come.

AM Best and Fitch Ratings each issued reports last week warning that Milton could stretch liquidity of Florida-based insurers that are primarily focused on protecting in-state homeowners.

"Hurricane Milton poses a significant threat to the Florida property insurers concentrated in the state that lack diversification and therefore are acutely susceptible to significant catastrophic events," said AM Best in a news release promoting a report issued before Milton hit Florida on Oct. 9.

Fitch Ratings declared, "The Florida homeowners' insurance market's precarious position will weaken further with the destruction generated by Milton." It raised concerns that Florida insurers are reliant on reinsurance — insurance that insurers buy from the global market to ensure they can pay all claims during active hurricane seasons. And it also said they have low surplus levels and concentrate their business in Florida. Those factors raise "questions as to their ability to raise capital following large loss events," it said.

Critics have for years taken a dim view of Florida-based insurers' heavy reliance on reinsurance, rather than surplus, to remain viable.

But experts closer to Florida's insurance industry cast doubt on AM Best's and Fitch Ratings' assertions. One reason is the two companies don't rate most of the domestic Florida insurers whose financial strength they question, said Paul Handerhan, president of the Fort Lauderdale-based consumer-focused Federal Association for Insurance Reform.

"So AM Best and Fitch don't have direct access to their reinsurance programs or financials," Handerhan said.

While cautioning that loss estimates haven't been released yet from catastrophe modeler Karen Clark and Company, Florida experts said the state's insurers have sufficient reinsurance capital to weather not only hurricanes Milton, Helene and Debby but another Milton-sized storm if one emerges late in the 2024 storm season.

Karen Clark, president of the catastrophe modeling firm that bears her name, said that "Florida insurers and the reinsurers that protect them use sophisticated tools to understand the probabilities of hurricane losses of different sizes." The Florida Office of Insurance Regulation, she said, requires insurers to respond to storms up to a 1-in-130-year probability of occurrence, "which would be a much larger industry loss than Milton will cause."

She added, "So the losses from Hurricane Milton should not be a surprise, and the event should not have adverse effects on the health of the market."

Extra reinsurance available for rest of season

Joe Petrelli, president of Demotech, the only rating firm that reviews the financial health of most Florida-based property insurers, said that insurers can purchase additional reinsurance capacity if they use up what they purchased to get them through the year.

"Carriers will have catastrophe reinsurance in place for another event so it should not be an issue," Petrelli said Friday.

Florida's insurance regulators will make sure of it, he said. "I am certain that the Florida Office of Insurance Regulation has inquired or is inquiring about remaining and available catastrophe reinsurance protection at this time," he said.

Officials of the Florida Office of Insurance Regulation did not immediately respond to the South Florida Sun Sentinel's request to address the AM Best and Fitch Ratings reports.

Handerhan said in June that companies are required to have enough reinsurance to pay off losses from two major storms. A second major storm, he said, would force many to buy additional reinsurance in the middle of the season to ensure it would have enough capital to cover a third major storm.

On Friday, Handerhan said most companies pre-purchased reinsurance coverage for third and fourth hurricanes this year. And, despite Helene's size, he voiced doubts that the state has weathered two major storms.

Hurricanes Debby and Helene "either impacted rural areas of Florida or were predominantly flood events," he said. Property insurers don't pay for damage resulting from hurricane-caused storm surge.

Many companies will be forced to tap into their reinsurance coverage to pay for Milton damages, which Fitch Ratings estimated would cost insurers between $30 billion and $50 billion, Handerhan said. But Helene and Debbie did not cause high-enough insured losses to qualify them to take reinsurance payments, leaving it available for another event, he said.

"I do not see any insolvency risks on the immediate horizon." he said.

No Citizens assessment after policyholders dodged a bullet last year

Still, the idea of Florida-based insurers going insolvent isn't exactly far-fetched these days.

Nine companies went bankrupt between 2021 and 2023. Most were felled by losses to their surplus from previous hurricanes, excessive non-weather-related claims, and resulting litigation.

While state law prevents its insolvency, state-owned Citizens Property Insurance Corp. last year came dangerously close to imposing surcharges on Florida insurance consumers.

Because of payouts from Hurricane Ian in 2022, the surplus in the company's personal lines account had dwindled to $420 million — the projected payout in a 1-in-4-year storm. If claims from any single storm had exceeded the $420 million, the company would have had to collect $770 million from its own customers and another $729 million from nearly all of the state's insurance customers.

Citizens solved the problem this year by combining three lines of business into one and committing its entire $6.6 billion in surplus to it. That means that Citizens would have to spend $14.1 billion — including surplus, its Hurricane Catastrophe Fund coverage and private-market reinsurance this year before assessing policyholders.

"I can say that Citizens is in a strong financial position and has the financial resources to handle claims from Hurricanes Milton and Helene without the need for a surcharge or emergency assessment," Citizens spokesman Michael Peltier said Friday.

Fitch Ratings said in its report that Milton could push global industry insured losses for 2024 over $100 million for the fifth straight year and limit the potential that reinsurance rates would decline again as they did at the beginning of the current hurricane season.

Ultimate Milton losses and any additional catastrophes that await this year, the report said, could cause premiums to "harden" — which is insurance lingo meaning costs for policyholders could increase.

Locke Burt, CEO and chairman of Security First Insurance, says premiums will increase for policyholders next year no matter what. That's because inflation will continue to increase the price of building materials and labor costs required to repair damaged homes.

As for reinsurance rates, Burt says, "Nobody knows what's going to happen because nobody knows yet how much Milton's going to cost, or if there's going to be a Milton No. 2, or what's going to happen in the rest of the world with Japanese earthquakes, wildfires in California or floods in Germany.

"The price of reinsurance depends on global supply and demand, and right now there's a good amount of supply and a pretty good amount of demand."

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