Severe Weather in Coastal States Presents Big Challenges in Hardening Homeowners Market
While much attention is focused on Florida, storms have wreaked havoc on the property markets in other coastal states, particularly Louisiana, Texas and South Carolina.
- Anthony Bellano
- November 2022
- The Challenges: Louisiana and Texas have high combined ratios after two years of natural disasters, while the insolvencies of several Louisiana and Florida companies are having impacts in states across the region.
- Proposed Solutions: AM Best Associate Director David Blades says Louisiana and Texas can look to Florida, which has found ways to adapt to the continuing risks associated with severe weather, as an example of how to help lower their combined ratios.
- Diversification: There is talk of a decreased appetite among reinsurers in the catastrophe market, and analysts say diversification will help alleviate some of the pressure felt in the aftermath of severe storms.
For the U.S. homeowners insurance market, it was a perfect storm of catastrophic events.
In Louisiana, it began with Tropical Storm Cristobal in June 2020, the first of seven named storms that slammed the state in a two-year span and cost insurers more than $10 billion in losses. Next door, in Texas,a winter storm unofficially known as Uri and the deep freeze of 2021 brought a wide array of significant perils that the state hadn't seen, perhaps, ever. “That was extraordinary in terms of the length of time it lasted, and the impact that it had on the power grid, the impact that it had from the standpoint of property losses,” AM Best Associate Director David Blades said. “The length of time those lower temperatures persisted caused significant water damage loss from busted pipes and issues.”
Recently in September, Hurricane Ian not only caused more than $50 billion in insured losses in Florida but also left roof and structural damage in South Carolina from the wind and downed trees and tree branches, according to the South Carolina Property and Casualty Insurance Guaranty Association. Catastrophe modeler Karen Clark & Co. said it estimates less than $1 billion of insured losses in the Palmetto State as of early October.
Last year, insurers faced more than $5 billion in flood losses related to Hurricane Ida after the storm's remnants dumped six to nine inches of rain over three hours in New York, New Jersey and surrounding states.
Those weather patterns damaged vast coastal areas of the United States, but they also illustrated how the homeowners insurance market in those and other coastal states are facing bigger challenges every year amid an uptick in the frequency and severity of storms, new non-weather risks and a rash of insolvencies.
Indeed, after the severe storm pattern that began in 2020, the direct combined ratio for Louisiana's combined homeowners market rose to 461.86 in 2021, up from 76.98 just two years earlier, according to BestLink. All of the state's top 49 insurers reported direct combined ratios greater than 100. In 2019, only six companies were in that category.
Texas' overall combined ratio rose to 136.46 in 2021, up from 86.50 one year earlier, according to BestLink. Thirty-nine of the state's top 49 insurers all had direct combined ratios greater than 100, and only four have combined ratios below 95. In 2020, the majority of the top insurers had direct combined ratios below 100.
“The apparent increase in the frequency and severity of the losses there doesn't make anything easier about the market. Insurers are still ready to play a role. They're still taking on many risks, but the challenges do seem to be increasing rather than decreasing,” said Jon Schnautz, assistant vice president of state and policy affairs, National Association of Mutual Insurance Companies.
Blades, for instance, said all coastal states should brace for tornadoes, which he noted have been shifting south from the Midwest recently. “Before, tornadoes were consistently occurring more often in Nebraska, Oklahoma, Kansas, South Dakota. Now you're seeing some more of that activity happening in Tennessee, Georgia, Mississippi, Arkansas,” Blades said. “It's all part of some of the things that we're seeing that are changing.”
Blades suggests that insurers in Louisiana, Texas and other coastal states specifically look to an unlikely source for help: Florida, which reported a collective direct combined ratio of 90.65 in 2021. The Sunshine State has been dealing with new trouble since Hurricane Ian left a path of devastation in September. But in recent years, as Florida has dealt with a wide range of storm patterns, the state has found ways to adapt—particularly through the use of technology—to the continuing risks associated with severe weather.
“Insurers are still ready to play a role. They’re still taking on many risks, but the challenges do seem to be increasing rather than decreasing.”
National Association of Mutual Insurance Companies
The Louisiana homeowners market has seen seven insurers go insolvent in the state over the last two years: Gulfstream Property & Casualty Insurance Co.; State National Fire Insurance Co.; Access Home Insurance Co.; Americas Insurance Co.; Lighthouse Insurance; Southern Fidelity Insurance Co.; and Weston Property & Casualty Insurance Co.
Although those carriers all wrote business in Louisiana, they were not all based in the state, Deputy Commissioner of Public Affairs at the Louisiana Department of Insurance John Ford pointed out. Schnautz noted they were small, regional companies, but ones that “enjoyed some years of relative stability and then, with two really bad years back-to-back, simply didn't make it.” Twelve companies have withdrawn from the homeowners market but continue to write business in the state.
As of Sept. 29, more than 120,000 policies were covered by Louisiana Citizens Property Insurance, the state's insurer of last resort. This is up from nearly 39,000 last year and 35,700 in 2020, according to Ford. The most recent number would have been higher, had two insurance companies not agreed to take policies from insolvent companies. Centauri Specialty Insurance assumed the policies from Gulfstream, and Safepoint Insurance Co. assumed the policies for Access Home, State National Fire, and Americas. Those homeowners did not lose coverage and didn't have to find coverage with Louisiana Citizens or elsewhere, Ford said.
In Texas, Weston, Lighthouse, Access Home, Gulfstream and American Capital Assurance Corp. have all become insolvent over the last two years, according to the Texas Department of Insurance. Ten other companies stopped writing homeowners insurance but continue to write other lines in the state.
As of the end of the second quarter in 2022, the Texas Windstorm Insurance Association, Texas' insurer of last resort that provides windstorm and hail coverage to those who are unable to obtain insurance from the voluntary insurance market, oversaw more than 197,000 policies, up from 184,890 in 2020.
Florida's homeowners insurers struggle with issues of fraud and insolvency. Schnautz points out that Louisiana and Texas insurers should be cautious of the rampant fraud associated with assignment of benefits in the Sunshine State. “When you have a real disaster occur, those are the conditions in which you would see the potential for abuse of assignment of benefits arise because you have a large pool of valid claims that can be inflated,” Schnautz said.
In the last two years, 11 insurers that wrote policies in Florida went insolvent, according to the Florida Insurance Guaranty Association. This included five in 2021, two of which were the result of the current litigation crisis surrounding roofing claims. As of mid-October there were six insolvencies in 2022.
As of Sept. 30, Citizens Property Insurance of Florida, the state's insurer of last resort, reported 1,075,850 policies in force. Before Hurricane Ian, Citizens was growing at a rate of approximately 10,000 policies a week, according to spokesman Michael Peltier.
Some—such as United Property & Casualty Insurance Co.—have not gone insolvent but have entered into run-off. United P&C made the decision to leave the market in Louisiana, Florida, Texas and New York.
Insolvencies in states such as Florida and Louisiana impact markets in nearby states. South Carolina has seen six insolvencies in the last two years, all involving companies based in Florida and Louisiana, according to the South Carolina Guaranty Association. Of the 13 insolvencies reported by Georgia regulators, only one carrier was domiciled in that state.
Lasting impacts on the South Carolina market from Hurricane Ian will likely stem from Florida insurers that do business in both states, industry experts said.
“The industry is well-positioned to handle losses in S.C.,” South Carolina Insurance Association State Allied Member Russ Dubisky said. “However, if losses in Florida impair carriers that also do business in South Carolina, there could be some impact on the market.”
“It should be noted that those insurers there that are geographically concentrated, particularly along the coast, will need to demonstrate effective risk management in handling this event,” AM Best Senior Director Richard Attanasio said. “And those companies that have exposure to Hurricane Ian in both Florida and South Carolina will need to consider the aggregation of losses.”
Blades said Louisiana's governor has focused on things related to improving the homeowners market. In that regard, Louisiana has already begun to follow Florida's lead, according to Ford. Two bills passed in the recent legislative session were modeled after Florida laws.
Act 69 raises the minimum capital and surplus requirement for property/casualty insurance companies operating in Louisiana from the current $3 million to $5 million by 2026, and to $10 million by 2031 for existing companies. Act 434 requires insurers to cover additional living expenses related to all actions of a civil authority, regardless of whether an emergency declaration was declared. Previously, the emergency declaration was required to provide coverage.
Munich Re has developed its “own view of risk and modeling to account for the observed shifts in severe convective storm losses.”
Munich Re U.S.
Reinsurers Shifting Focus
At the annual Rendez-Vous de Septembre conference held recently in Monte Carlo, many reinsurers spoke about moving away from catastrophe risk and into other markets. Carsten Prussog of Munich Re told AM Best TV, “We have experienced this in the midyear renewals already that some of the competitors have pulled back.”
“At Munich Re, we have materially reduced our proportional property reinsurance footprint over the last 24 months with clients whose portfolios are concentrated in the South, especially in the Gulf states, including Florida, Louisiana and Texas,” said Michael Quigley, executive vice president and head of property underwriting & multiline risk quantification for Munich Re U.S. “With that said, Munich Re still takes on significant risk in these states but has been more strategic in the clients and reinsurance structures it supports given the current economic environment and our view of natural catastrophe risk.”
Schnautz didn't speak to the specific reinsurance market, but he did say that insurers and reinsurers alike need to put more emphasis on a diversified portfolio. “One of the challenges in all these states with coastal risks is insurers have to be careful about their concentration of exposure to that risk,” Schnautz said. “If the wrong storm hits at the wrong place and you're not sufficiently diversified across different areas, you can face obvious problems.”
Louisiana Insurance Commissioner Jim Donelon recently told Louisiana lawmakers he wants $20 million that normally flows through his department to the state General Fund to stay in his budget to use in a property insurer incentive program. He told Best's Review he's confident that the plan will help incentivize companies to write more in Louisiana or to do business there. The companies would be required to take out some policies from Louisiana Citizens, and Donelon expects that will happen before the end of the year.
Michael Wise, acting director of the South Carolina Department of Insurance, indicated the state has seen some tightening of the reinsurance market, but said he believes it is equipped to handle the continuing fallout from Ian.
“While we have observed some tightening in the reinsurance market, it continues to offer adequate capacity for carriers writing property coverage in South Carolina,” Wise said.
Better Tools and Maps
Blades said Florida has been adapting to storm risk since at least 1992, when the market was transformed by Hurricane Andrew. In 2004, Florida experienced four hurricanes in six weeks. Because it has dealt with that continuing risk, many Sunshine State insurers have focused on better mapping and use of technological tools, Blades said.
“The successful Florida insurers have put much more into updated maps, aerial tools and things of that nature,” Blades said. “What's happened the last couple of years in Louisiana and Texas has been related to specific incidents. Hopefully it's now going to get insurers to look at some of the things they might need to do to protect themselves going forward.”
The technological tools insurers in the Sunshine State have been using have made a difference “not just from an underwriting standpoint, but also from a claims service perspective,” Blades said.
“Better use of technology can also help from an expense perspective. Being able to attack underwriting results from both sides, from a loss perspective with better risk selection and also from the underwriting expense perspective,” Blades said.
Quigley said Munich Re has developed its “own view of risk and modeling to account for the observed shifts in severe convective storm losses, especially those seen over the last decade as exposures have grown in the South due to population migration patterns.”
“We would support insurers being able to use a wide range of predictive modeling on the front end,” Schnautz said. “States are going to restrict that in different ways in terms of what they'll allow, but the intention here on the industry's part is to try to understand risk better using the best technology possible. In general terms, we absolutely support that.”