BEST’S COMMENTARY

Our Insight, Your Advantage™

June 3, 2022
Despite New Reform Law, Florida
Property Insurers to Face Continued
Financial Pressures
Principal Takeaways
With the
• The CS/SB 2-D and 4-D bills signed by Florida Governor Ron DeSantis on May 26, 2022, are
current unlikely to alleviate immediate financial pressures on insurers.
hurricane • A $2 billion reinsurance layer below the Florida Hurricane Catastrophe Fund attachment
may provide relief but at a cost.
season under • The new law provides limited immediate impact; however, if changes are applied as intended,
way, market potential long-term positives are possible for roof claims, litigation, and attorneys’ fees.
• Current direct premiums written (DPW) leverage metrics are a significant issue for carriers,
participants as reinsurers will continue to manage their exposures to Florida in the face of mounting
will continue issues.
• Reinsurance capacity remains selective, with some primary carriers facing challenges
to face finding full program placement.
pressure—
The Florida property insurance market has been under immense pressure and faces multiple
especially challenges entering the 2022 hurricane season. The deterioration in performance has been a by-
those that product of the greater frequency of secondary perils (severe thunderstorms, wind, hail), rising
reinsurance costs, escalating levels of litigation, and building codes that have been exploited
are highly by parties looking to profit. Insurers have thus been grappling with inadequate rates despite
significant rate hikes. Risk-based pricing became a moving target due to continued loss cost
dependent on
escalation from litigation, roof replacements, contingent fee multipliers, and higher reinsurance
reinsurance costs. For many property insurers in Florida, reinsurance is an integral part of their risk
management strategy. However, the reinsurance market has become more selective in taking on
Florida exposures due to local market forces and higher levels of exposure, which has created an
existential challenge for many of the primary carriers who depend on reinsurance.

Analytical Contacts:
Chris Draghi, Oldwick
+1 (908) 439-2200 Ext. 5043
Chris.Draghi@ambest.com
Christopher Graham, Oldwick
+1 (908) 439-2200 Ext. 5743
Christopher.Graham@
ambest.com
Contributors:
Richard Attanasio, Oldwick
Sridhar Manyem, Oldwick
2022-086
With an active hurricane season on the horizon, AM Best believes that the current
legislation—although a step in the right direction—does not provide significant immediate
relief. Pressures remain for market participants, particularly for those struggling to fully place
their reinsurance programs ahead of what is predicted to be another active hurricane season.
Legislative Response
In response to the crisis, Governor DeSantis convened a special legislative session on May
23. On May 26, he signed into law a number of provisions designed to make homes safer
by providing home hardening grants of $150 million to inspect and mitigate single family
residences valued less than $500,000, as well as changes regarding roof claims/exposures.
Changes regarding litigation may provide some benefit over the longer term. In addition, in
the wake of the Surfside condo collapse in June 2021, the new law also requires structural
integrity studies and enhanced inspection requirements, as well as reserve funding for
condominium associations.

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Commentary Florida Property Market

However, some of Exhibit 1

the provisions of Share of Homeowners' Premium vs. Share of DCC Expenses by State (Top
the bill do not go far 10)
enough to address 35
the immediate crisis
in Florida’s property 30

insurance market. 25
The law mandates
the establishment 20

of a $2 billion fund, (%)

15
the “Reinsurance to
Assist Policyholders” 10

(RAP) program, 5
which will
provide $2 billion 0
FL TX CA NY IL GA PA OH NC CO
of reinsurance Share of US Market (%) Share of DCC (%)
coverage to insurers
Note: DCC stands for defense and cost containment expense. Examples include court fees, fees for lawyers, fees
at no up-front cost, for expert witnesses, preparing for trial, etc.
in exchange for
lower premiums to
policyholders. The reinsurance program sits below the Florida Hurricane Catastrophe Fund and is
available in case of a hurricane, but, importantly, the coverage does not apply to secondary perils or
less severe storms, which have been problematic in Florida. Participating companies are required to
take RAP protection either this year or next, depending on where they are in their placements. The
rate reduction requirement may provide some rate relief for consumers, but it does not address rate
inadequacy issues driven by loss costs aside from reinsurance pricing.

The legislation also attempts to curb the impact of litigation, given that reform initiatives in
2019 and 2021 have yet to have a profound impact. Defense cost and containment (DCC)
expenses as a percentage of incurred losses in Florida are the highest of all the states and more
than double that of California, the second-largest state
(Exhibits 1 and 2). To mitigate these costs, the new bill
eliminated one-way attorneys’ fees for claims using the Exhibit 2
assignment of benefits feature. The legislation established Ratio of DCC to Direct Incurred
a presumption that a lodestar fee will be sufficient and Losses for Homeowners
reasonable in awarding attorneys’ fees except in “rare Insurance (Top 15)
and exceptional” circumstances, which is somewhat State DCC to DIL Ratio
ambiguous. The presumption is aimed at diminishing the FL 12.6
use of contingency fee multipliers, which can dramatically CA 6.0
HI 4.9
increase the amount of attorneys’ fees awarded. These
MA 3.6
efforts indirectly address what many consider the driving
NY 3.2
force behind the litigation crisis in Florida—the one-way PA 3.1
attorney’s fee rule. This rule has been a material incentive NJ 3.0
for claims to be disputed and remains an incentive WV 2.9
for interested parties to develop creative ways around NV 2.9
regulations. The ultimate effectiveness of these reforms RI 2.9
will be contingent on the response from those who have SC 2.7
CT 2.6
previously taken advantage of the system.
WA 2.5
MS 2.3
Legislators also addressed roofing claims that have plagued OH 2.2
Florida insurers. It allows insurers to offer a separate roof

–2–
Commentary Florida Property Market

deductible; consumers who opt for the roofing deductible can receive a discount or a premium
credit. Limits have been set as to what roofs insurers are allowed to non-renew or cancel based
specifically on age and remaining life. Furthermore, the building code threshold for roof replacement
was somewhat relaxed as it pertains to the percent damage and total replacement requirements. The
impact of these changes will likely depend on the tradeoff between roof deductibles and premium
discounts, as well as the real-time application of the adjusted building code, which could diminish
the severity of roof losses.

Reinsurance Capacity Remains Pressured

Although the RAP program indicates a meaningful commitment of financial support from the legislature, it
does not fully address reinsurance capacity pressures. Because of the significant losses in Florida in recent
years, reinsurers have been evaluating their own aggregate exposures and capital allocation targets. As a
result, primary insurers whose leverage ratios are already high will find their financial strength in jeopardy
if they are unable to place the reinsurance on which they rely. Whether many of these carriers, especially
those not rated by AM Best, have sufficiently filled out their catastrophe programs, is difficult to ascertain.
As an indicator of riskiness, Florida personal property insurers rated by AM Best have a DPW to capital and
surplus ratio of 2.8, compared to an estimated 4.7 for those not rated by AM Best. (The premium to surplus
ratio measures the capital available to support risks.)

Rising Home Prices Dampening Affordability and Raising Cost of Insurance & Repairs
According to the Freddie Mac Housing Price Index (FMHPI), housing prices in Florida increased by
over 26% year over year in 2021. Higher prices were driven by low inventory, low interest rates,
rising housing demand (particularly from millennial buyers), and a strong labor market. Florida also
saw an influx of new residents during the pandemic. According to US Census estimates, Florida was
second to only Texas as the state with the most population growth from July 2020 to July 2021.

In 2022, home affordability will remain a challenge. The median listing price of a Florida
home has increased from $335,000 in January 2020 to $425,000 in January 2022—an increase
of approximately 27%. (In 2020, the median household income in Florida was approximately
$58,000.) The rise in mortgage rates will also affect mortgage affordability (Exhibit 3). Since the
start of the year, the 30-year
fixed mortgage rate has
Exhibit 3
increased by more than 200 Freddie Mac Housing Price Index – Florida, Seasonally
basis points, with the rate Adjusted
currently at 5.25%. Although 340
the strong labor market has
320
helped propel wages higher,
wage growth has not kept 300
up with the rise in inflation. 280
Index

With rising home values

260
and affordability issues, an
increase in insurance prices 240
will add to consumers’ 220
woes. Concurrently, higher
200
home values increase the
value at risk for insurers,
which face supply chain and
Source: FreddieMac.com
inflation issues that are only
adding to aggregate loss costs.

–3–
Commentary Florida Property Market
Best’s Commentary
Published by AM Best
BEST’S COMMENTARY
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