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 Memorial Day weekend, executives of financially shaky insurance companies will be scrambling to make sure their customers remain protected into the upcoming hurricane season.

Depending on how many fall short, tens of thousands of policyholders could be left without coverage after hurricane season begins on June 1.

One major Florida-based insurer, Southern Fidelity Insurance Co., which insures about 75,000 homes in the state, announced Thursday that it was suspending writing new business or renewing existing policies until it completes purchase of its required levels of reinsurance — which is insurance that insurers must buy to guarantee they can pay all claims after destructive events.

Numerous other companies will be doing the same thing by June 1, and fears are mounting that many might not succeed, industry sources told the South Florida Sun Sentinel.

Reforms enacted during the just-completed special session, including litigation reforms that will reduce payouts to plaintiffs attorneys and creation of a $2 billion state-funded reinsurance program, were not enough to overcome reinsurers’ reluctance to finance risks in Florida for the upcoming hurricane season, those sources say.

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.

Joe Petrelli, president of the Columbus, Ohio-based Demotech, says it’s possible that none of the 40 Florida-domiciled insurers that Demotech rates will have enough claims-paying capacity after June 1 to retain its financial stability rating.

Reinsurance deals hard to make

In the past, the loss of an insurance company’s Demotech stability rating has prompted the state Office of Insurance Regulation to order that company into receivership and liquidation. Policies held by liquidating companies are cancelled or, less frequently, absorbed by financially healthy companies. Thousands of policyholders are forced to find new companies. Those that can’t find coverage in the private market sign up with from state-owned Citizens Property Insurance Corp., the so-called insurer of last resort.

The state steps in because federal mortgage guarantors Fannie Mae and Freddie Mac won’t buy mortgage loans unless the buyer has secured full replacement coverage with an insurance company with an A (acceptable) rating from Demotech. Finance companies and banks that do not sell to Fannie and Freddie also rely on Demotech ratings.

“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 Florida insurers were facing the possibility of not obtaining reinsurance coverage for hurricane season,” said Mark Friedlander, director of corporate communications for the industry funded Insurance Information Institute.

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 Gov. DeSantis called the special session to address the insurance crisis, Petrelli said. But the special session wasn’t scheduled to begin until a month later, May 23. In the interim, insurers and Bermuda-based reinsurers stopped negotiating and waited to find out whether the Legislature would make enough reinsurance capacity available to bring down prices in the private market.

New RAP fund falls short

Insurers were hoping the Legislature would open $4.5 billion worth of reinsurance held by the Florida Hurricane Catastrophe Fund. Instead, it created what it called a RAP fund — short for Reinsurance to Assist Policyholders — that made just $2 billion in reinsurance available.

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 Florida Hurricane Catastrophe Fund, Petrelli said.

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 Kyle Ulrich, president and CEO of the Florida Association of Insurance Agents.

“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. Deerfield Beach-based People’s Trust Insurance on May 19 informed state insurance regulators that it was expanding the number of counties ineligible for new homeowner policies from eight — Broward, Miami-Dade, Palm Beach, Lake, Monroe, Orange, Osceola and Seminole — to all 67 counties in Florida.

Tom Gallagher, People’s Trust chief operating officer, said the company has “completed our reinsurance purchase and [we] are working on our new rate filing to account for additional reinsurance costs so that we can open up to new business.” Existing policies that meet the company’s “underwriting criteria” will be renewed, he said.

In a letter to agents, Progressive Insurance announced “the difficult decision” to temporarily suspend writing new homeowner policies and dwelling/fire policies in Broward, Palm Beach, Miami-Dade, Lee, Collier and Brevard counties effective June 1. Progressive owns several insurance companies operating in Florida, including American Strategic, ASI Preferred, ASI Assurance, Progressive Property Insurance, and ASI Home Insurance.

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 Florida since January. Five Florida-based insurers have gone out of business over the past year.

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 Florida Hurricane Catastrophe Fund. If the CAT fund is wiped out, it pays claims by issuing bonds backed with special assessments on all property insurance customers in the state.

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 Florida. One reason is that the state, along with much of the southeastern United States, has been hit by a record number of severe weather events over the past five years, driving up losses for insurers and reinsurers.

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 $1 billion in net losses reported by Florida-based companies in 2021.

According to estimates by the National Association of Insurance Commissioners, Florida was responsible for 79% of the nation’s insurance litigation in 2021 while filing only 9% of the nation’s claims.

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 Paul Handerhan, president of the consumer-focused Federal Association for Insurance Reform.

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.

Ron Hurtibise covers business and consumer issues for the South Florida Sun Sentinel. He can be reached by phone at 954-356-4071, on Twitter @ronhurtibise or by email at [email protected].