Florida and Reinsurance – Pulling Back the Covers


The Florida Legislature will conduct a particular session through the week of December 12 specializing in fixes for a failing, flailing insurance coverage market within the state that has reached disaster ranges. Signs of the disaster embody the monetary collapse of a number of insurance coverage firms working in Florida thus far this yr, and insurance coverage premiums for householders ballooning to painfully excessive ranges. Florida Home Speaker Paul Renner announced lawmakers will look at a “kitchen sink of choices” within the particular session in an try to stabilize the market and broaden non-public choices. Renner recommended options might contain extra spending on reinsurance.

The basis explanation for the damaged Florida property insurance coverage market just isn’t, opposite to fashionable perception, the truth that Florida is peculiarly uncovered to hurricanes. Different states and areas, reminiscent of North and South Carolina and the Texas Gulf coast, are additionally in hurt’s means. Florida’s insurance coverage disaster is man-made, somewhat than pure catastrophe-driven. Florida is house to off-the-charts lawsuit abuse, a lot in order that 79 p.c of the home-owner insurance-related lawsuits in your complete nation happen in Florida.

A significant thrust of the particular session shall be dedicated to options to place an finish to out-of-control litigation. One other focus shall be reinsurance, or insurance coverage for insurance coverage firms, which is the shock absorber of the insurance coverage trade. Florida’s insurance coverage trade is closely depending on reinsurance as a result of a lot of its insurers function solely in Florida, and thereby lack the unfold of danger.

Options mentioned on the particular session will possible contain two Florida entities which have a big position within the state’s insurance coverage market—the Florida Hurricane Disaster Fund (FHCF) and Citizen’s Property Insurance coverage Company (Citizens). As a result of these two our bodies play an outsized half on the Florida insurance coverage stage, it is very important know the way they function when it comes to reinsurance.

Florida Hurricane Disaster Fund

The FHCF is a reinsurer of Florida insurance coverage firms. It operates like a personal market reinsurer, apart from the value of its product. Its mission is:

to offer a secure and ongoing supply of well timed reimbursement to residential property insurers for a portion of their catastrophic hurricane losses for the aim of defending and advancing the state’s curiosity in sustaining insurance coverage capability by the environment friendly and efficient administration of the fund.

The Florida Legislature created the FHCF in 1993, after Hurricane Andrew struck the state within the prior yr. All Florida residential property insurers must purchase reinsurance from the FHCF. The obligatory safety supplied by the FHCF is much like non-public market reinsurance apart from the truth that it comes at decrease value. The FHCF requires that its clients retain $8.5 billion in protection. If a loss occasion causes greater than $8.5 billion in loss, losses attain the FHCF, which may present as much as $17 billion in restrict.

There are two prima facie issues with the FHCF. First, providing protection at below-market charges is a recipe for hassle. Any enterprise promoting its services or products beneath the market worth has the potential for failure. Second, the FHCF’s monetary situation is weak. In its newest fiscal yr, ending June 30, 2022, it took in premiums of $1.2 billion and paid out $1.1 billion in hurricane losses, largely stemming from persevering with funds related with 2017 Hurricane Irma. If the FHCF successfully broke even in a hurricane-free interval reminiscent of 2021, 4 years after Irma, the wrath of Hurricanes Ian and Nicole in 2022 will definitely rattle its cage.

What’s extra, the FHCF carried out poorly on the key ingredient of insurer success—funding earnings. In its most up-to-date fiscal yr, the FHCF had a loss of $412 million on its funding portfolio, following a meager $34 million acquire within the prior yr. Insurance coverage firms ordinarily generate funding income on the order of 10 p.c of their premium, which within the FHCF’s case could be over $100 million.

Residents is a state-run insurer, and the insurer of final resort for Floridians and their brokers who can not entry reinsurance within the non-public firm markets. In distinction to the FHCF, Residents’ financials are in much healthier shape. For instance:

  • Residents has $9 billion in property, and took in $1.8 billion million in premiums in 2021. Such extraordinarily low leverage is conservative and wholesome.
  • Residents’ funding portfolio generated $164 million in funding earnings, down from $254 million within the prior yr. This was not a terrific return, however a nine-figure funding earnings is
  • Residents protects its stability sheet with vital reinsurance purchases. In 2021, it paid $322 million for FHCF reinsurance, up from $126 million within the prior yr, and it paid $400 million for personal market reinsurance, up from $210 million within the prior yr.
  • Residents’ expense ratio (bills divided by premium) is 14.7 p.c, about 10 share factors decrease than most insurers.

What’s subsequent?

There shall be quite a few concepts and options proposed on the particular legislative session—a few of them good and a few not. As we’ve got seen, Residents just isn’t the issue, so one mustn’t throw out the newborn with the bathwater. The identical can’t be mentioned for the FHCF, whose place shall be weakened because it pays losses out to the lengthy roster of Florida insurers, all of which purchased reinsurance from the fund. Backside line: depart Residents alone for now and repair the FHCF by some means.


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