Best's Review



Market Correction

Florida reinsurers raise rates and return to underwriting differentiation in response to lingering issues.
  • Kate Smith
  • August 2019
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CLEANUP IN PROGRESS: A rainbow hovers over a Florida beach in recovery after being destroyed by Hurricane Irma in 2017.


Key Points

  • Lingering Losses: Claims development from Hurricane Irma was 26% higher than estimated, according to JLT Re, and claims are still rolling in.
  • Reevaluating Risk: Reinsurers took a close look at loss drivers in 2017 and 2018 and revamped their pricing models to reflect those. The result, for many, was a new view of risk.
  • Return to Roots: The June renewals saw a return to differentiated underwriting, with some insurers seeing their reinsurance rates rise by as much as 30%.


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Kevin O'Donnell minced no words. With losses from 2017's Hurricane Irma still mounting nearly two years after the fact, the CEO of RenaissanceRe questioned the long-term health of the Florida property catastrophe market ... and his company's involvement in it.

“Absent some large-scale changes to this market,” O'Donnell wrote in an April letter to shareholders, “I anticipate its role in our portfolio will continue to diminish.”

The Florida market has been rife with issues—assignment of benefits (AOB) fraud, one-way attorney fees, social inflation and a long statute of limitations among them. But after two bad hurricane seasons, it has added another problem to the list—loss creep.

By early 2019, claims development from Irma was 26% higher than estimated, according to JLT Re, and claims were continuing to roll in. As late as May, FedNat Holding Co., a Florida homeowners insurer, said it was still receiving 90 new hurricane-related claims per week, many of them driven by attorneys eager to outrun AOB reform.

For reinsurers, frustration was mounting. O'Donnell's remark was evidence of that.

“It was a shot over the bow,” Scott Mangan, associate director of P/C reinsurance at AM Best, said.

Leading up to renewals, reinsurers made clear that they were willing to withdraw capacity from the troubled market—or, more specifically, from troubled accounts—if pricing did not match the risk.

And they held the line.

“Reinsurers indicated the need for adequate pricing to reflect adjusted risk views throughout the renewal process and had management support to withdraw capacity where pricing did not meet their requirements,” said Lara Mowery, managing director and head of global property specialty for Guy Carpenter.

With losses increasing and retrocession capacity decreasing, reinsurers finally got some relief at the June renewals. Perhaps not as much as they wanted, but enough.

Scott Mangan, AM Best

I think of it in terms of: Are they getting enough rate? That market had been relatively cat free for a long time, so companies got more and more complacent, and it allowed the market to slide lower.

Scott Mangan
AM Best

“The market had higher expectations than what was achieved,” Josh Knapp, director of carrier relations for Willis Re, said. “But this stopped the bleeding.”

Experts say rate increases ranged from the mid-single digits up to 30% for loss-affected accounts. But the renewals were about more than just raising rates. They showed an underwriting correction, as well.

“The rate increases seen at the June and July renewals are an important pricing correction that was needed,” said Mike Quigley, head of property underwriting, reinsurance division, Munich Reinsurance America. “Perhaps more importantly, there was a return of underwriting differentiation by cedent as demonstrated by the range of market pricing across individual carrier renewals.”

Guy Carpenter said price differentiation was among the broadest it has seen.

“Reinsurers established a new view of risk that focused on the wide-ranging impacts of factors such as social inflation (assignment of benefits, public adjusters and litigation), variability of loss adjustment expense, development of 2017 and 2018 losses, experience and other account-specific factors when assessing appropriate pricing for June 2019 renewals,” George Carse, managing director at Guy Carpenter, said. “Differentiation between accounts was significant and produced one of the broadest ranges of price change that Guy Carpenter has tracked for a single region.”

Mangan said it was good to see a return to the cycle.

“We doubted the traditional underwriting cycle for a while there,” he said. “It has changed, but at least there are still cycles, rather than perpetual downward pressure.”

Downward Pressure

The downward pressure was driven by alternative capital. Between 2012 and 2018, alternative capital in the market increased 150%, according to Guy Carpenter. Rates, simultaneously, fell by more than 40%.

“As with any supply/demand scenario, when there is an overabundance of supply, in this case capital interested in supporting the reinsurance market, pricing tends to the level companies calculate as adequate for the risk,” Mowery said.

“As an example, the United States has been the largest consumer of catastrophe reinsurance worldwide, with Florida as a significant driver,” she said “Pricing was impacted by this as demand was historically on the edge of outstripping supply in many instances. With the significant influx of new capital, U.S. catastrophe reinsurance pricing moderated to a technical rate the market was willing to support.”

Because third-party capital providers have a lower cost of capital, their return hurdles are correspondingly lower. To remain competitive, traditional reinsurers lowered rates and took out more retrocession to balance out their exposure.

“Since 2011, we have seen the reinsurance pricing in the Florida property cat market drop significantly,” Quigley said. “This drop was driven by a couple of factors; namely, many years without land-falling hurricanes in Florida and new capital entering the market that drove rates down. These phenomena created a more commoditized reinsurance market with little price differentiation across Florida insurer portfolios.”

The commoditization of the reinsurance market was a nonissue during benign catastrophe years.

“I think of it in terms of: Are they getting enough rate?” Mangan said. “That market had been relatively cat-free for a long time, so companies got more and more complacent, and it allowed the market to slide lower.”

But after back-to-back seasons with major wind storms—coupled with large losses from California wildfires and Typhoon Jebi—reinsurers started to feel the squeeze.

“I think the hurricanes of the last couple of years and the development of the associated losses have been a wake-up call for some market participants and a reminder for others of the need to properly underwrite the wind risk and the individual insurance carrier portfolios being considered,” Quigley said.

Perfect Storm

The losses also amplified some of Florida's other troubles—most notably, its high levels of fraud and litigation and its long statute of limitations, which gives policyholders three years to file hurricane claims.

“The civil justice system in Florida promotes an abusive litigation environment that causes Florida to be listed, on a regular basis, as one of the 'U.S. judicial hellholes' by the American Tort Reform Foundation,” Quigley said. “Fraudulent actors, especially those related to assignment of benefits abuse, have helped drive up insurance costs in the state, making it exceedingly difficult for insurers to effectively compete in specific regions of the state such as South Florida.”

Florida's assignment of benefits provision allows a third party, such as a contractor, to stand in place of an insured party and seek direct payment from the insurance company.

“Assignment of benefits by itself is not necessarily an issue but the components of the practice that fostered an environment of inflated and litigious claims, which was damaging to all in the state, including policyholders who bore the brunt of increasing claim costs,” Guy Carpenter's Carse said.

According to the Insurance Information Institute, homeowner AOB lawsuits increased to 19,200 in 2018 from 2,800 in 2013.

Abuse of AOB has ticked up considerably in the last five years, Quigley said. It stems from the state's one-way attorney fee provision, which requires insurers pay the legal fees for successful claim award challenges. The plaintiff owes nothing if the insurer wins.

“The abusive practices of some unscrupulous service providers and plaintiff's attorneys originated in the tri-county region of Miami-Dade, Broward and Palm Beach counties but has been expanding to other parts of the state since,” Quigley explained.

“For those reinsurers that did not understand the dynamics of the Florida property market and the associated potential loss trends, they likely underpriced their products or were adversely selected against over the last several years,” he said.

“In addition, those reinsurers that did not differentiate their underwriting and pricing of property cat business in Florida to reflect operational and portfolio differences by insurer, most likely suffered some larger than anticipated losses from the recent hurricanes.”

Knapp said it got to the point where many reinsurers were pricing deals purely based on modeled expected loss. Traditional vendor models, however, do not explicitly include provisions for the Florida market's nuances.

“Generally speaking, there were no loads for loss adjustment expenses,” Knapp said. “There were no loads for AOB. There was very little differentiation going on in the market in terms of pricing one deal to the next.”

Josh Knapp, Willis Re

At the end of the day, what we saw at renewals was a rational market that dealt with having back-to-back loss years.

Josh Knapp
Willis Re


That changed this year. Carse said many reinsurers spent a lot of time reviewing the 2017 and 2018 loss drivers and altering their pricing models in response.

“Some of these analyses were at a very detailed level, contributing to the significant differentiation in renewal pricing between accounts,” he said. “Reinsurers were focused on achieving pricing reflective of their new view of risk.”

The same scrutiny was applied at the retrocession level, where rates also increased. The retro market also saw a decrease in capacity, in part because one of the largest providers, Markel's CATCo, went into runoff.

“Many reinsurers that depend on third-party capital for retrocession protection found that their cost of capital increased as the retro market supply decreased and pricing increased,” Quigley said. “This reduction in retro capacity was partly driven by the collateral trapped in prior-year structures due to buffer loss reserve requirements and perhaps also by a changed view of risk on the part of ILS investors.”

The increase in retro rates helped propel the increase in June reinsurance rates.

“If the retro rates are going up, then the reinsurers that are buying the retro will generally try to keep up with that,” AM Best's Mangan said. “That's where holding the line starts—in the retro pricing. We saw earlier in the year that retro pricing was up, which was a good sign. I think it was 10 to 20 percent, at least.”

The other good sign in the market came from AOB reform. In response to mounting pressure, Florida Gov. Ron DeSantis signed into law an AOB reform bill that took effect July 1. The bill specifically targeted the one-way attorney fee provision and established a payment scale to determine who is responsible for what fees. It also gave insurers the ability to offer policies, at a reduced rate, that restrict the use of AOBs in whole or in part.

Whether AOB reform proves a game-changer, though, remains to be seen.

“There's a fair amount of excitement,” Chris Draghi, senior financial analyst at AM Best, said. “Whether it dynamically changes the market remains to be seen. Do fraudsters get more clever? Do they try to find new holes? While signs point toward effective change, I think some people are cautiously optimistic.”

For direct writers, the reinsurance rate increases could negate any benefits from AOB.

“An issue to watch in Florida is the potential political pressure on insurers to drop rates in the short term in reaction to the assignment of benefits reform,” Quigley said. “Given rising reinsurance costs and other factors driving up noncatastrophe losses, insurers need to make sure they are collecting sufficient premiums for the risks assumed. If the political pressure results in too great a rate drop, some Florida carriers may find it impossible to operate.”

Overall, however, experts say the Florida market, particularly the reinsurance market, has gotten stronger as a result of the renewals.

Willis Re's Knapp is often asked how today's market compares to the markets of 2004-05, the last major hurricane seasons.

“It's much more healthy today from a cost of capital perspective than it was then,” he said. “When we dealt with those two wind seasons, we had a situation where reinsurers were primarily writing business based on their balance sheet and their capital. Third-party capital was not available back then, so the cost of capital was a lot higher than it is today.

“Big-picture-wise, we have a healthy market. At the end of the day, what we saw at renewals was a rational market that dealt with having back-to-back loss years.”

Kate Smith is managing editor of Best’s Review. She can be reached at

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