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With the June 1 reinsurance renewals a week away, the outlook for Florida-based property insurers may not be quite as dire as many had predicted earlier this year, at least according to a top official with one of the world’s largest reinsurance brokers.

“So far, what we’re seeing is a much more orderly renewal process than what we saw in 2022,” Rhandahl Fuller, managing director and Florida practice lead for Guy Carpenter & Co. He spoke this week at an online Florida market briefing hosted by the AM Best financial rating firm.

While some in the industry have warned that reinsurance renewal costs could rise another 40% next month, along with tightened availability, Fuller suggested the feeling now is more of “cautious optimism.”

“We saw a bit more overall appetite as some of the reinsurers that had stepped back last year either reentered or they increased their participations this year,” he said.

And one big reason for the measured sanguinity is that recent Florida legislative reforms, which have limited assignments of benefits and one-way attorney fees, already appear to be having an impact on many carriers’ long-suffering bottom lines.

Claims litigation and defense containment costs in Florida rose steadily from 2014 to 2018, dipped a bit in 2019, then rose again, explained Chris Draghi, AM Best’s associate director, who also spoke at the webinar. Since 2013, defense costs have increased more than six-fold and since 2018, Florida insurers have spent $2.6 billion in that category for homeowners, allied lines and fire insurance claims. Draghi called that “a material amount.”

Looked at another way, the direct defense and cost-containment expenses for Florida carriers were about 8% of direct premiums earned in 2022, compared to 2% for most other states. The next-closest state was Louisiana, with about a 4% cost number.

But since late 2022, those defense costs have started to drop in the Sunshine State, after May and December legislative changes, the AM Best-compiled data show.

“We really started to see the impact pretty quickly,” Fuller said. “We’re already starting to see companies observing pretty significant decreases in reported claims and frequency of AOB, and frequency of litigation. So a lot of that stuff is kind of happening behind the scenes and not all of it’s going to be reflected in operating results right away.”

Combined ratio for Florida carriers, excluding major national companies and Citizens Property Insurance Corp., also has dropped since 2020, after rising steadily for six years, Draghi pointed out. In 2014, those carriers enjoyed a luxurious combined ratio in the high 70s. But by 2020, that had almost doubled before sliding back slightly. For many insurers, though, the bellwether measure of profit is still well above 100, he noted.

Direct-loss ratios also are improving, Fuller said. For the first quarter of this year, the Florida domestic industry saw the ratio drop 5 points from the same time in 2022. The average ratio is now 15 points lower than the five-year average for Q1 – “pretty meaningful movement there,” Fuller said.

“We saw that more than 75% of the companies were reporting improvements year-on-year on that direct-loss ratio,” he noted. “So that’s really, really encouraging.”

But the Florida market is not out of the woods yet, Fuller and Draghi said. Capital contributions since 2018 for those Florida carriers, excluding Citizens and major nationals, have increased significantly, totaling $1.8 billion. But in that time, surplus amounts have risen just $158 million, or about 7.6%, Draghi’s data show.

“So what this indicates is that there has been a substantial amount of capital that has been flowed into these primary insurance carriers that is almost needed in order to keep them afloat,” he said. “And you have to wonder how long that can continue, if there’s any concerns in that kind of dynamic.”

Just as the plaintiffs’ law firm of Morgan & Morgan warned, the number of Florida lawsuits filed across the state has shattered previous records, topping 280,122 in April, the Florida Bar reported.

That’s more than double the previous record set in May 2021 and is largely due to anticipation of the Legislature’s passage of a far-reaching tort reform bill that Gov. Ron DeSantis signed into law March 24, the Bar noted.

As it became clear that House Bill 837 was about to pass in March, limiting one-way attorney fees and multipliers in almost all insurance and injury litigation, and slashing damages if the plaintiff is found to be 50% at fault, Morgan & Morgan and other claimants’ firms told insurance defense attorneys that they were getting ready to file tens of thousands of lawsuits in the days before the law took effect upon the governor’s signature.

The firms were not exaggerating. And insurers and county clerks of court are now dealing with the impact.

“Our primary concern is having adequate resources to process the high volume of cases and appropriately serve all parties and the judiciary,” Martin County Clerk of Courts Carolyn Timman told the Bar.

Sarasota County Clerk Karen Rushing said the flood of new cases began around March 17, Rushing told the Bar’s news site.

The total number of documents in the case filings was almost 3.6 million in March, a third more than the previous month. About 44% of the new cases were filed in Miami-Dade County and in Hillsborough County, home to Tampa.

Some clerks have said they already are facing budget shortfalls, spiraling costs and understaffed offices – even before the tort wave hit, the Bar noted.

The Florida Department of Financial Services, which must be included on notices of intent to litigate against insurers, also reported a spike in planned litigation. The agency in March recorded 8,637 notices of intent to initiate litigation, up from 7,634 in February. That’s double the number of notices filed in March 2022, the DFS web page shows.In previous eras, many of the insurance claims behind the lawsuits would have been dropped or settled without litigation, Florida Justice Association Secretary Todd Michaels told the Tallahassee Democrat news site. But with the law taking effect immediately in late March, firms felt compelled to file the suits to avoid the law’s fee limitations and protect their clients, Michaels said.

“At this moment we are doing what all lawyers should be doing – protecting the interests of our clients,” John Morgan, head of the Orlando-based plaintiffs firm, said in a statement in March.

The tort-reform law clamped the attorney fee and other restrictions on suits filed after March 24. It does not apply retroactively in most cases, although some insurer lawyers have indicated they may challenge that in some circumstances.

Even after lawmakers pulled the plug on litigation incentives that Florida property insurers have long blamed for rising homeowner rates, there’s more insurance sticker shock ahead, experts say.

We can thank the increased frequency of catastrophic hurricanes and other costly weather events over the past few years, along with concerns that climate change will continue to send disasters our way, according to a recently released report.

The report was prepared by ALIRT Insurance Research, a Connecticut-based firm that analyzes the financial strength of insurers on behalf of insurance distributors, insurers, institutional buyers and analysts. Released on May 2, the report paints a dire picture of Florida’s insurance market and warns of a “no-win situation” for Florida-focused homeowner insurers monitored by the firm.

Reinsurance costs — which is coverage that insurers must buy to ensure they can cover claims after hurricanes and other catastrophes — could increase by up to 50% for Florida-based insurers before the June 1 start of hurricane season, the report said.

Such a steep increase could force insurers to pay more for reinsurance than they collect in premiums, which is “an unsustainable business model over the long haul,” the report said. Meanwhile, companies that cannot secure or afford desired levels of reinsurance could be left vulnerable to storm claims that could drive them into insolvency, according to the firm.

The pressures are evident in the shrinking pool of small domestic insurance companies that have formed to serve homeowners in the state since 1992’s Hurricane Andrew. A pool of companies monitored by ALIRT has shrunk from 42 companies in 2021 to 33 currently. Eight Florida-based companies have gone insolvent since 2021, the report notes.

The 33 surviving companies exclude subsidiaries of large companies like Allstate, Farmers, Progressive, State Farm, Travelers and USAA that were created to insulate the parent companies by focusing solely on Florida risks.

Thirty of the 33 surviving Florida-focused companies have financial strength scores well below the national average of companies that ALIRT reviews and are “problematic,” the report says.

Nearly half of Florida-based homeowner insurers are on a “watch list” developed by the Florida Office of Insurance Regulation, said Mark Friedlander, communications director for the industry-funded Insurance Information Institute (III).

“There is growing concern that several Florida residential insurers will be unable to complete their reinsurance programs for the 2023 hurricane season,” Friedlander said. “This could result in numerous financial rating downgrades and potential insolvencies.”

The ALIRT report observed that by offering insurers less coverage at higher rates, “it appears that reinsurers, worn down by years of substandard earnings, have also finally cried, ‘Uncle.'”

What’s to blame for rising costs?

Of course, rising reinsurance costs will be passed directly to consumers. Friedlander says some companies could be forced to pay 70% more for their reinsurance this year.

ALIRT’s report stated that the looming reinsurance cost spikes are only partly attributable to litigation abuses that were addressed by the Legislature last year and earlier this spring, after being blamed for five years of rising premiums and collective industry losses.

While reducing lawsuits is “certainly a formidable step in the right direction, it occurs at a time when the Florida property insurance market faces another, perhaps equally existential challenge: obtaining the reinsurance protection so critical to the relatively small homeowners insurers that comprise the majority of this market,” it said.

A bigger reason for the upcoming price hikes is that reinsurers are waking up to Florida’s vulnerability to natural catastrophe after several years of costly hurricanes and other weather events “that many now attribute to climate change,” the report said.

Hurricane Ian, which caused an estimated $40 billion to $50 billion in damage after striking Southwest Florida last last September, is seen by the global reinsurance industry as the straw that broke the camel’s back after six years of global catastrophe losses, the report said.

The reinsurance industry, backed by global financiers looking for safe investments, has been reeling lately, averaging about $100 billion a year in from global catastrophes, according to financial analysis firm Moody’s.

Friedlander said III agrees that reinsurance rates for Florida-focused insurers are headed sharply higher but disagrees with ALIRT’s contention that litigation is a secondary factor this year. “Reinsurance renewals in other hurricane-prone states are expected to run much lower on average than Florida because those states don’t see the litigation abuse experienced here,” he said by email.

Despite restrictions enacted last year largely preventing third-party claims assignments and supplemental collection of legal fees in claims disputes, those enticements remain in place for policies active when the law took effect on Jan. 1. That means lawsuits over claims made before the reforms took effect can still be filed for years to come, delaying the reforms’ anticipated cost savings for insurers and any rate stabilization promised to homeowners.

Yet, Locke Burt, president and CEO of Security First Insurance Co., says the reforms have reduced the number of lawsuits filed against his company by 57% over the first four months of this year. He said, though, that the upcoming reinsurance cost increases will wipe out those savings.

For every $1 of insurance premiums that homeowners pay, about 20 cents goes to litigation claims, Burt said. “We think that’s going to be cut in half” in the near future, he said. Forty cents of the $1 goes to reinsurance and those costs are expected to increase for his company 30% to 40%, he said.

Reinsurance cost hikes passed to customers

According to ALIRT, Florida-focused companies paid reinsurers an average of 49 cents for every dollar of premium collected in 2022.

What does that mean for policyholders? Policyholders will generally see premium increases of roughly half of the percentage increases that insurers will see for reinsurance, says Paul Handerhan, president of Federal Association for Insurance Reform, a consumer watchdog organization based in Fort Lauderdale.

That means that if an insurer must pay 50% more for reinsurance this year, premium increases for policyholders will run about 25% on average, he said.

Handerhan expects all but a couple insurance companies will secure their needed reinsurance coverage for the upcoming hurricane season, but the increases will prove costly for policyholders.

He concurs that reinsurers are awakening to the increased costs of damaging storms. “There’s no doubt that climate change, including sea level rise, hurricanes and storms like the one that flooded much of Fort Lauderdale last month, are increasing in frequency and severity,” he said.

Were we paying too little?

ALIRT also suggests that Florida homeowners have been enjoying artificially low insurance rates — or in insurance-speak, “suppression of actuarily sound” rates — for the past three decades. The combination of suppressed rates and increasingly costly storms, the report said, “has proven a recipe for chronic (re)insurance losses.”

That’s because insurers rely on reinsurance coverage to pay claims after they spend a prescribed percentage of their surplus. Many companies, particularly startups, charged low premiums to compete for customers in the 10 hurricane-free years between 2006 and 2015, Handerhan said. As a result, many accumulated less surplus and are now weaker financially than if they had charged rates reflecting their actual cost of risk, Handerhan said.

If reinsurance costs rise year after year for a company that has seen its surplus erode for six or seven years, eventually that surplus is eroded to the point that the company can never catch up, he said.

Handerhan expects reinsurance rates to stabilize within two to three years, as last year’s legal reforms gradually reduce litigation costs, and as insurers are forced to cut costs by improving claims handling practices and shedding risky policies.

That means state-owned Citizens Property Insurance Corp. will still have to be the insurer of last resort for owners of older homes most vulnerable to damage from severe weather, he said. But eventually, premiums should stabilize for homeowners fortunate enough to be able to buy private-market insurance, he said.

ALIRT’s report warns that much depends on the weather.

About the only way out of trouble for Florida’s property insurance industry as it waits for the legal reforms to reduce losses is to “keep their fingers crossed on the catastrophe front,” the report said, adding that’s “never a great strategy.”

By the end of March 2023, National Flood Insurance Program (NFIP) claims paid after Hurricane Ian had surpassed $3.4 billion, with more than 46,000 NFIP flood insurance claims received.

As we wrote previously, by mid-January 2023, the NFIP had paid $2.2 billion in claims for Hurricane Ian, the powerful Category 5 Atlantic hurricane which battered Florida in September 2022, becoming one of the costliest re/insured loss events in history at an estimated $55 billion.

The January 17th figure reported by the US Federal Emergency Management Agency (FEMA) represented an almost 28% increase from the January 9th figure.

In early March, the total had risen by more than 45% to $3.2 billion, rising by a further 6% to the more $3.4 billion figure as of the end of that month.

By now, it’s likely that the total has risen even higher, but given that it’s now been seven months since the hurricane it’s likely that the pace of claims would have slowed somewhat.

Of course, FEMA had reinsurance protection in place for the NFIP in 2022 – securing $1.064 billion of flood protection for a total premium of $171.9 million at the January 1st, 2022, reinsurance renewals.

The 2022 program covered portions of NFIP losses above $4 billion arising from a single flood event, structured to cover 4.163% of losses between $4 billion and $6 billion; 26.565% of losses between $6 billion and $8 billion; and 22.453% of losses between $8 billion and $10 billion.

So, with NFIP claims paid now at more than $3.4 billion, the attachment point is approaching, although it’s still someway off and, as noted above, the pace of claims will have slowed given the time that has passed since Hurricane Ian’s impacts.

Back in December, FEMA’s updated estimate for NFIP claims arising from Hurricane Ian stood at between $3.7 billion and $5.2 billion.

FEMA also secures reinsurance protection for the NFIP from the capital markets in the form of catastrophe bonds via its FloodSmart Re program. Of these, the lowest down that are potentially exposed to Ian would only attach at $5.2 billion of losses, so at this stage it appears as though the cat bonds are reasonably safe from loss, barring a late and significant surge in claims, which seems unlikely now

The fact trial lawyers have dumped tens of thousands of lawsuits into the Florida courts in March, just before the state’s tort reform legislative overhaul kicked in, adds another threat to the already challenged Florida insurance market, the Insurance Information Institute (Triple-I) has said.

While this isn’t strictly property insurance related, for Florida’s legal system the fact trial lawyers have filed a record 280,122 lawsuits between March 1st and March 23rd, in order to beat the state’s tort overhaul, has the potential to be a concern.

That deluge of cases was 126.9% higher than the previous record in May of 2021, the Florida Bar said.

Triple-I explains, “These lawyers see the writing on the wall. The days of outsized legal fees from filing frivolous claims against insurance providers are over.”

But adds, “This last-ditch effort by trial lawyers will likely further delay consumers from benefiting from the new reforms as the load of cases slowly makes its way through Florida’s court system.”

In fact, the Triple-I predicts that this deluge of Florida lawsuits could “create a historic backlog” and as a result this could ensure that “insurers shell out billions of dollars in legal fees for the foreseeable future.”

This would “further threaten Florida’s weakened insurance market,” the Triple-I believes, a market that currently still sees as many as 24 insurers facing the risk of insolvency.

“This will make it even harder for Florida’s insurance market to stabilize, which was the intent of the reforms in the first place,” the organisation explains.

A destabilised Florida insurance market can pressure already-weakened insurers, drive additional costs through the system, while also resulting in further reinsurance pressures as the perception of the health of Florida’s primary insurers may take longer to improve.

It’s expected that many of these legal cases would normally have been denied, or settled pre lawsuit, but given the tort reform deadline lawyers have sought to file cases to protect their clients.

One of the Senate sponsor of the tort reform law, Palm Coast Republican Travis Hutson, commented, “I think it proves to us that the system is kind of broken and we need to reform it. You’re seeing all these lawsuits being filed now and it’s going to shock the system for a little bit, but eventually it will work itself out and we’ll be able to move forward under the new provisions.”

There’s no visibility of how many cases were filed that are relevant to Florida’s property insurance marketplace. But we’re told that the industry should expect that cases related to property carriers will be among them and there may have been a flurry of lawsuits filed in relation to last year’s hurricane Ian as well.

Time will tell how those work through the system and whether this legal backlog creates any challenges through the rest of 2023.