Opinion: The net tightens in Florida
The latest data on Floridian insurers’ 2020 performance highlights the unique challenges primary carriers in the state will face in the run-up to this year’s mid-year reinsurance renewals, with rising loss costs leading to deteriorating combined ratios and declining solvency levels.
Data compiled by Willis Re on the Floridian market gives fresh confirmation that the property market in the state is severely challenged.
Combined ratios worsened significantly in 2020 – and in the case of specialist Florida carriers, combined ratios were already above 100%, highlighting the long-term nature of the challenges faced by the market.
Alongside continuing significant annual losses, the data shows that unfavourable prior-year loss development continues to be a major factor, demonstrating that difficulty continues for both insurers and their reinsurers in accurately predicting losses.
These latest data points come ahead of perhaps the toughest 1 June renewals in a generation, in which several successive damaging hurricane seasons conflate with factors including worldwide (re)insurance price increases following Covid-19 and intense ratings agency scrutiny.
With cedants’ ability to raise primary pricing restricted, and weaker solvency levels forcing a reliance on increasingly expensive reinsurance, the net is tightening in Florida – and reinsurers are walking a fine line between generating much needed returns and supporting the financial needs of their cedants.
Rocketing combined ratios
According to Willis Re’s data, across the Florida property insurance sector – bringing together state specialists and nationwide players – the 2020 combined ratio hit 120.6%, a deterioration of 13.3 points year-on-year. (See graph above.)
Floridian specialists are by far the worst performers, but the national carriers –by which Willis Re means the Floridian subsidiaries of Allstate, Nationwide, Travelers and State Farm – are also now comfortably running at an underwriting loss.
Partly, this worsening of performance is due to 2020 being another active cat year in Florida. As highlighted by sister title Trading Risk, FedNat, Universal, UPC and Heritage all reported painful Q4 figures this year after an active hurricane season.
However, as the data shows, adverse prior-year reserve development remains a significant factor – particularly in the case of the national carriers, where reserve charges accounted for 13% of 2020 net earned premium.
For both groups, 2019 one-year loss development was a significant factor, illustrating the particular way in which past-year losses can inflate dramatically in Florida.
This is due to the highly litigious nature of the state. In December 2020, for instance, data from insurance litigation technology firm CaseGlide shows that the number of new lawsuits launched against the 17 largest Floridian insurers increased by 17% month-on-month and by 61% year-on-year.
And here, estimates for Hurricane Irma are perhaps the most relevant example. In April 2020, Universal Insurance Holdings revealed it had added $50mn of losses to its reserves for the 2017 storm, exhausting its private insurance cover for the event and bringing total booked Irma claims to $1.45bn. This was up from a late 2017 estimate of between $350mn and $450mn.
But while Universal’s losses here have been used as a benchmark, the creep on Hurricane Irma has been a market-wide problem.
Capital levels fall
At the same time, the capitalisation of some market participants also suffered over 2020. Across the Florida property segment, median authorised control level risk-based capital (RBC) deteriorated, shifting from 469% to 412% over 2020.
This deterioration was driven by the Florida specialist carriers, among which solvency dropped by 33 points to 407%, just over double the NAIC’s RBC company action level of 200%.
Willis Re also noted that for many carriers, the situation would have been far worse if they had not received capital injections to shore up their balance sheets.
The increasing challenges around profitability and solvency come as part of a slew of issues that have led reinsurers to become increasingly wary of Floridian business in recent years.
Pressure from financial stability ratings agency Demotech is one such factor. The firm is an active quasi-regulator that has threatened to downgrade swathes of the Floridian market on a number of occasions.
In 2020, the watchdog threatened that it could downgrade up to 18 of the 46 carriers it covers, although ultimately it only downgraded one: Anchor P&C.
This year, however, Demotech has continued to apply pressure around poor performance and weak capitalisation, listing in March the carriers that must make significant improvements to sustain their current ratings.
The instability of some carriers in the Florida market and the risk of insolvency is another issue at the forefront of reinsurers’ minds.
Cedants that collapse midway through a policy period present a credit risk to reinsurers – the threat that carriers will not receive premiums for a full year, while potentially being left with claims. Secondly, if a cedant collapses, reinsurers also face the prospect of receiving no payback in the form of rate increases in subsequent years.
Reinsurers have also faced difficulty historically in securing adequate rate from primary carriers in Florida because of cedants’ inability to pay. Private insurers are competing alongside a sizeable state-backed insurer which effectively acts as a subsidy to help lower rates.
However, over the past year, an increasing number of insurers have obtained permission from the state insurance commissioner to raise primary rates. According to Florida Insurance Commissioner David Altmaier, Florida insurers requested 105 rate increases during the first 10 months of 2020, and more than half of the increases that regulators approved were greater than 10%.
The movement on primary rates, however, comes after several years of pricing inadequacy in Florida, which in turn has been supported by reinsurers willing to accept suboptimal pricing during the soft market. This means that price increases now on the primary side, and even the 20%-30% achieved in reinsurance last year, may be too little too late.
The combination of all these factors represents an existential threat to Floridian insurers. With their own primary pricing still to an extent artificially constrained and low levels of capital forcing a reliance on increasingly expensive reinsurance, primary carriers operating in Florida are caught in a bind.
Meanwhile, reinsurers face a difficult task in balancing the needs of their own investors and cedants. While price adequacy for many is still a long way off, further price increases in a market so beset by challenges could contribute to pushing some cedants under.