With Less Reinsurance for Reinsurers, Prices Set to Rise Again for Florida Carriers

It has been three weeks since Hurricane Ian struck Florida on Sept. 28, 2022. The storm took not less than 119 lives and brought on estimated insured losses ranging from $31 billion to $74 billion, with most estimates within the $60 billion neighborhood. These damages exceed these brought on by every other U.S. pure disaster, aside from Hurricane Katrina.

Above and past the tragic ongoing private and financial hardship wrought, Ian will go away a troubling legacy in Florida’s insurance coverage and actual property markets. Prior to Ian, owners insurance coverage premium for Floridians was already three occasions the nationwide common. The state’s property insurance coverage market was already faltering and below excessive stress, with half a dozen insurance coverage carriers within the state declaring insolvency in 2022 alone.

And that is only the start. The storm’s aftermath will trigger insurance coverage charges to enhance, rendering insurance coverage protection so out of attain that Florida dwelling values will drop for need of consumers.

At the core of those rising insurance coverage charges is the shrinking availability and affordability of reinsurance.

Reinsurance is insurance coverage purchased by insurance coverage firms

Reinsurance acts as a shock absorber within the insurance coverage trade by assuming threat above and past what insurance coverage firms are prepared to bear.

Insurance firms purchase one kind of reinsurance—extra of loss reinsurance—to set a cap on essentially the most they’re prepared to pay out in claims from a significant loss occasion. When losses burn via this most, insurers pay losses up to its most restrict (the retention), and the remainder is ceded to reinsurers. Without reinsurance, insurers’ face existential threats from catastrophes comparable to Ian, so that they switch a portion of their threat to the reinsurance trade to defend their capital base. Insurance, at its coronary heart, is the administration and evaluation of threat, and reinsurance permits insurers to measure and account for extra of it.

In places the place there’s a vital threat of pure disaster loss, comparable to in Florida, insurers purchase extra reinsurance safety. The Florida insurance coverage market is exclusive in that a lot of its insurers are small-to-medium-sized insurers primarily based within the state that plug the hole left by nationwide insurers who restrict their Florida enterprise due to the state’s outsized threat. These Florida-only or Florida-mainly insurers are known as “take-out companies” as a result of they have been established to take enterprise away from the state-run insurer, Citizens Property Insurance Corporation (Citizens), which is the insurer of final resort. This implies that if a person can not get insurance coverage from every other Florida insurers, Citizens is their remaining choice.

The common Florida take-out insurer cedes shut to two-thirds of its premium and threat to reinsurers. This implies that Florida insurers are very closely depending on availability of reinsurance. If the provision of reinsurance shrinks, or costs enhance, insurers have to account for that market change, typically which means that owners should pay extra for property insurance coverage.

Additionally, reinsurers are cautious not to bear an excessive amount of Florida threat. Individual reinsurers will solely tackle a small portion of an insurer’s threat, requiring insurers to cede threat to a number of reinsurers. For instance, the Florida take-out insurer American Integrity, which writes lower than a half billion {dollars} of premium, cedes enterprise to 41 reinsurers.

Reinsurers develop skittish

In the aftermath of Hurricane Ian, Swiss Re, one of many world’s largest reinsurers, is cutting again on its Florida publicity, elevating charges and paying much less fee to its insurer companions. Because the reinsurance market is essentially pushed by provide and demand, a drop within the provide of reinsurance capability on the similar time that demand for reinsurance grows is a system for inexorably larger charges, handed on to insurers—and handed on in flip to insurance coverage consumers or owners seeing premium will increase.

Another reinsurance improvement contributing to scarcer and costlier insurance coverage premiums is the injury Ian brought on to the Florida Hurricane Catastrophe Fund (FHCF). The FHCF was created in November 1993 throughout a particular legislative session a yr after Hurricane Andrew. Its objective is to function a further supply of reinsurance capability for Florida insurers. The FHCF is among the largest reinsurance companions for Florida insurers. At yr finish 2021, the FHCF had a fund balance of roughly $11.3 billion. If Ian’s losses show enough sufficient to wipe out the FHCF’s limits—which they might be in accordance to a latest insurance coverage trade analyst‘s report—Florida insurers shall be onerous put subsequent yr to discover the reinsurance capability they so desperately want. This implies that when the following disaster hits the state, additional disaster within the insurance coverage market will comply with, rising charges, collapsing insurers and worse.

When reinsurers purchase reinsurance

Even reinsurers want reinsurance safety to keep away from an excessive amount of threat accumulation at anybody location. Reinsurance for reinsurance firms is known as retrocessional reinsurance. One of the most important suppliers of retrocessional reinsurance is Berkshire Hathaway’s National Indemnity Group. The Berkshire firm is chopping again renewing its retrocessional enterprise with its reinsurance shoppers. If reinsurers can not substitute this misplaced capability elsewhere, the decline in retrocessional capability provide from one of many largest suppliers will imply reinsurers could bear extra threat, and lift their charges—with the rise mirrored in larger house owner insurance coverage premiums.

Some good news

The bleak panorama of the Florida insurance coverage market, with rising prices for shoppers, potential insolvencies at some take-out firms and evaporating reinsurance capability, additionally options some vibrant spots. First, the trade is sufficiently capitalized to take in a $60 billion loss. What is extra, two authorities insurance coverage suppliers, state-run Citizens and the federal National Flood Insurance Program (NFIP), have prudently bought enough reinsurance to defend their steadiness sheets. Citizens is anticipated to pay out roughly $2.5 billion in Ian claims. It has over $7 billion in capital, so its steadiness sheet can maintain the loss funds. After first dipping its toe within the reinsurance markets a number of years in the past, the NFIP now secures vital reinsurance capability from the normal reinsurance market in addition to from the insurance coverage linked safety (cat bond) market.

Litigation, not insurance coverage, drives Florida’s insurance coverage woes

There is a technique to offset the inevitable rise in Florida house owner’s insurance coverage charges brought on by larger reinsurance prices. The reply is a head-on assault on the root reason for Florida’s insurance coverage woes – extreme litigation. Florida’s insurance coverage woes stem from a man-made disaster rooted in extreme, unjustified litigation. Florida’s damaged insurance coverage market is brought on by a legal responsibility disaster. Uniquely within the United States, Florida is dwelling to extreme volumes of house owner insurance coverage litigation, a lot in order that though Florida has 9 p.c of the nation’s house owner insurance coverage claims, it has 79 percent of the nation’s house owner insurance coverage litigation. Insurance threat modeling agency Karen Clark & Company estimates that over 1 / 4 or extra of Ian losses shall be litigation-related.

Florida should tackle this disaster as soon as and for all to strip out the pointless load from unjustified litigation. To do that, it should implement the reforms enacted on this spring’s special legislative session and put an finish to contractors and attorneys partaking in unscrupulous practices and unjustified litigation. With reinsurance market forces driving larger charges, the one manner to restore inexpensive premiums is to finish the state’s out-of-control litigation. Reinsurance provide and demand elements shall be a headwind for insurance coverage charges. But if the legal responsibility epidemic is addressed as soon as and for all, it may be a tailwind to counter the affect of costlier reinsurance.

Jerry Theodorou is director of the Finance, Insurance and Trade Policy Program at R Street Institute, a suppose tank. He develops free-market public coverage options to complicated points the place federal and state governments have intervened. Prior to R Street, he was a director in insurance coverage analysis at Conning in Hartford, Connecticut.

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