Fears mount that many insurers might not be financially prepared for hurricane season, despite reforms [South Florida Sun-Sentinel]
While most Floridians kick off summer by enjoying a long
Depending on how many fall short, tens of thousands of policyholders could be left without coverage after hurricane season begins on
One major
Numerous other companies will be doing the same thing by
Reforms enacted during the just-completed special session, including litigation reforms that will reduce payouts to plaintiffs attorneys and creation of a
Companies that fail to complete their reinsurance buys risk losing their financial stability rating from ratings firm Demotech. If too many companies lose their stability ratings, it could trigger a cascade of failures that would affect not only the failing companies but millions of policyholders, the mortgage loan business, the real estate market, and by extension, large swaths of the state’s economy.
Reinsurance deals hard to make
In the past, the loss of an insurance company’s Demotech stability rating has prompted the state
The state steps in because federal mortgage guarantors
“This could be an unmitigated disaster,” Petrelli said Friday of the possibility of multiple companies failing to complete their reinsurance buys. “Companies cannot be rated if their reinsurance obligations are not fulfilled in a timely manner.”
Separately, other industry experts said they were aware of companies scrambling to complete their reinsurance buys and fear some will fall short.
“We have known for months that many financially struggling
Friedlander noted that “several lawmakers” during the session “seemed resigned to the fact that a few more residential insurers could fail soon because of the reinsurance issue but there were no amendments to the bills to address this imminent crisis.”
Reinsurance negotiations by many insurers had been put on hold in late April after
New RAP fund falls short
Insurers were hoping the Legislature would open
The RAP program fails to cover gaps in insurers’ reinsurance obligations because it only provides coverage for named hurricanes, leaving companies on the hook for covering any other severe weather event — including tornadoes, hail storms, lightning strikes and tropical storms — out of their own coffers before they can be reimbursed from the RAP fund or if damage is costly enough, the
As a result, “you’re going to have people in insurance companies rooting for tropical storms to become named hurricanes,” Petrelli said.
In a typical year, Demotech-rated insurers will report during the third week in May that they are nearly finished buying their reinsurance coverage, Petrelli said. Over the past week, he said, “people are saying they’re 50% or 60% done. None are 100% done.” And some, he said, “will find out at the last minute that they can’t fulfill theirs.”
Deals might require cancelling policies
For companies that do get enough reinsurance and keep their ratings, the trade-off could be a requirement to reduce their exposure to levels their reinsurers are willing to cover, said
“Some companies might have to non-renew or cancel policies because they won’t otherwise be able to get enough reinsurance to cover their books,” Ulrich said.
That could be why Southern Fidelity decided to stop writing new policies and to not renew policies expiring during the suspension period, Ulrich said.
Two other companies also announced plans to suspend writing new business.
In a letter to agents,
The letter attributed the decision to “extreme marketplace challenges” on “multiple fronts: ongoing weather-related events, the rising cost of reinsurance, and a difficult litigation climate.” It added, " All Florida carriers are feeling the impacts.”
Beyond Southern Fidelity, People’s Trust and Progressive, seven other companies have stopped writing new business in
It’s like insurance, but more
Reinsurance is a complicated purchase for insurers that could involve transactions with as many as 10 to 12 separate companies filling various layers of companies’ financial needs, Petrelli said.
But basically it works for insurers similar to how buying property insurance works for homeowners.
A homeowner buys the amount of coverage they need to repair any damage caused by a covered peril. They also agree to pay the initial portion — say between 1% and 5% — out of their own pocket. This is the deductible.
With reinsurance, the deductible is called a retention. Following any severe weather event, insurers must pay the earliest batch of claims out of their own surplus funds. After a certain percentage of that surplus is paid out, then insurers are reimbursed by their private reinsurance coverage. If a series of disasters are so numerous or so severe that insurers deplete their private reinsurance coverage, then they can seek reimbursement from the state-funded
Just as all homeowners buy different amounts of insurance to cover homes of varying value, so too do insurers buy varying amounts of reinsurance depending on the value of the properties they insure.
Demotech closely monitors companies’ financial statements and reinsurance purchases to ensure they can cover the properties they insure. The criteria is not adjustable, Petrelli said. Companies are either financially stable according to Demotech’s standards or they are not.
Reinsurers have been signaling for months that they were not excited to sell coverage to
Reforms no game changer
Another is the Legislature’s failure to quell the number of lawsuits that insurers blame on five straight years of underwriting losses in the state, including more than
According to estimates by the
The special legislative session took some steps to address the disparity. Third-party assignees of policyholders will no longer be able to collect legal fees from insurers when negotiating litigated claims settlements. That should reduce incentives for contractors and their attorneys to file multiple lawsuits over single claims, said
And attorneys will only be able to seek 1.5 to 3 times their legal fees — or a “contingency fee multiplier” — in rare and exceptional circumstances.
Still, the Legislature failed to enact measures that would reduce Florida’s share of insurance-related litigation down to its share of claims, Petrelli said.
That failure, combined with the shortcomings of the RAP fund, prevented reinsurers from seeing the reform bill as first step toward returning Florida’s insurance market to profitability, he said.
If too many insurers fail to complete their reinsurance contracts and lose their financial stability ratings, bolder action from the Legislature might be required, Petrelli said. And that could require what no one wants to see — another special session.
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