Florida’s Property Insurance Market Is
‘Spiraling Towards Collapse’ Due to Litigation |
Article Courtesy of The Insurance Journal
By Amy O'Connor
Published
September 16, 2022
Florida’s property insurance market is “spiraling
towards collapse” and requires immediate attention if there is any
chance of protecting the market, consumers, and ultimately, the state’s
economy, according to an analysis about to be presented to the Florida
Legislature.
The report points a finger at the state’s “litigation economy” as the
main contributor to insurance market woes— seeing it as more of a direct
cause than the many weather events Florida has suffered.
Among its findings:
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Litigation frequency and severity represents an
additional expense load of 17% (and rising) on all earned premiums
for insurers in Florida compared with other catastrophe-prone
states.
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The fees paid to attorneys by Florida carriers
far exceed the damages paid to the insureds.
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In 2019 alone, Florida insurers paid almost $3
billion in lawsuit costs that translated into higher premiums for
insureds.
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Although the volume of claims after storms is a
factor in costs, claims unrelated to catastrophes account for
approximately 60% of all litigation.
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Florida consumers are paying a “hidden tax” to
fund the litigation that averaged about $680 per family in 2020.
The report, “Florida’s P&C Insurance Market:
Spiraling Towards Collapse,” was authored by Guy Fraker of Cre8tfutures
Innovation System & Consultancy. Fraker has worked with the insurance
industry for 30 years, including on auto insurance and autonomous
vehicles, and with primary carriers, reinsurers and related sectors.
In tracing how the market got to this crisis point, the report
identifies four Florida laws passed between 2011 and 2019 as fostering
the litigation crisis. They are statutes governing assignment
agreements, mandatory replacement cost coverage for residential roofs,
multi-year statute of limitations to file a first notice of loss and the
one-way attorney fee.
Also, two state Supreme Court rulings have exacerbated matters.
This litigation environment has carriers steadily hemorrhaging capital
and surplus. Fraker’s report says the roughly 6% of homeowners insurance
claims being litigated are equal to the cost of a “good solid Cat 3
hurricane” every 12 months.
“This market is at a critical inflection point. The longer and broader
these trends continue, the more likely the state will face a recovery
measured in generational time horizons,” the report warns. “The time for
hoping some theoretical break point doesn’t materialize is over.”
Fraker was commissioned last year to do the Florida market analysis by
insurers, lawsuit reform groups, and others. Florida State Senator Jeff
Brandes, a member of the Senate Banking and Insurance Committee who has
been sounding alarms about the Florida property insurance market, helped
spearhead the effort.
Fraker’s study argues that the state’s residential P/C insurance
marketplace “faces a convergence of existential threats in the form of
increasingly unpredictable claims litigation, from rising costs of risk
capital and from its persistently high exposure to natural catastrophe
risks.”
The report argues that “targeted legislative reforms are needed in order
to preserve the insurance industry’s viability while serving property
owning Floridians and Florida’s economy,” while adding that “without
intervening public policy solutions, the residential property insurance
marketplace will experience failure.”
Fraker said in an interview with Insurance Journal that he agreed to do
the report on “behalf of Florida’s economy and Florida’s consumers, not
the industry [or] any other stakeholder groups.”
In compiling the report, Fraker said he interviewed insurance executives
from companies, regulators, lobbyists/advocates, plaintiff counsel
firms, defense counsel firms, building and roofing contractors, consumer
advocates, reinsurers, ratings agencies, as well as investors and a
climate scientist. He also analyzed litigation records and reviewed
thousands of documents from regulators.
While Florida has faced three consecutive years of major hurricanes from
2017 to 2019, insurers have insisted that the insurance problems are
tied to an exponential increase in litigation.
Florida domestic carrier results showed a continuous drop in surplus
over the last five years that culminated in a single year underwriting
loss of more than $1 billion through the third quarter of 2020.
Florida Insurance Commissioner David Altmaier told the Senate Banking
and Insurance Committee on Jan. 12 that carriers were on pace to nearly
double their losses in 2020 compared with 2019, as their surpluses fell
from $6.7 billion to $6.1 billion in just the first three quarters of
the year. The combined ratio for Florida domestics was over 100% in the
third quarter of 2020 and has been “trending upward for several years.”
Carriers writing property risks in the state have been responding by
pulling back capacity in certain areas including south Florida and more
recently central Florida, along with filing for rate increases. Altmaier
said insurers submitted 105 rate filings in 2020 for increases of 10% or
more and 55 of those filings were approved; in 2016 only six rate
increases were approved.
Florida’s insurer of last resort, Citizens Property Insurance Corp., has
received a flood of new policyholders over the last year as consumers
struggle to find coverage in the private market.
The problems are also starting to impact Florida insurers’ ability to
get reinsurance capital in the catastrophe prone state.
“These losses are having a direct impact on the surplus position of our
industry,” Altmaier said. “As capital and surplus deteriorates,
companies lose the flexibility to be able to write additional business …
that has consequences for the consumer.”
Litigation Explosion
Fraker blames a convergence of several events that have “moved the
market from stabilizing towards total collapse.”
Fraker said four individual Florida statutes governing assignment
agreements, mandatory replacement cost coverage for residential roofs,
multi-year statute of limitations to file a first notice of loss and the
one-way attorney fee statute were passed between 2011 and 2019
“individually and in an isolated form without real consideration for how
they might someday form a relationship.”
Additionally, two Florida Supreme Court decisions – Joyce vs. FedNat
(2017) that found a contingency fee multiplier does not need to be
reserved for rare and exceptional circumstances; and Sebo vs. American
Home Assurance (2016) where the court shifted to using the Concurrent
Causation Doctrine that permits a covered cause of loss (such as wind)
to combine with damage caused by non-covered cause of loss – helped
propel the market towards crisis.
“The combination of these policies and court decisions represents an
ideal combination for significant financial exploitation,” the report
states. “The volume of claims following each major storm became the fuel
and the architecture for an economic engine distinct to Florida
generally referred to as ‘Litigation.'”
Insurers have racked up more than 200,000 lawsuits since 2013, many of
them stemming from non-catastrophe water damage and roofing claims, and
many of them with assignment of benefits agreements attached. After
reforms were passed in 2019, there was a dip in AOB lawsuits,
particularly for Citizens, Fraker notes. However, by the third quarter
of 2020 plaintiff attorneys had established a work around to AOB with a
“Demand to Pay,” instead filing first party suits against carriers.
According to Fraker, the cost of this litigation cannot be understated.
He found that while there has been an obvious influence of catastrophic
storms on claim frequency, non-catastrophe claims have accounted for
approximately 60% of all litigation filed against Florida’s domestic
companies while 40% of the litigation is associated with cat losses.
In analyzing more than 3,000 insurance cases, Fraker found that
litigation costs are 17% higher for Florida insurers than in other
catastrophe-prone states. The fees paid to attorneys by Florida carriers
for this litigation are on average more than 750% of the damages paid to
the plaintiffs/insureds. In one case Fraker examined, the plaintiff
attorney was awarded 21,041% of the damages in fees.
Insurers have paid out more than $12 billion in fees to attorneys since
2013 and were engaged in more than 221,000 suits between 2014 and 2020,
according to the report.
The costs of all this litigation equals approximately $3 billion in
expenses “being forced upon Florida property owners,” the report states.
In 2019 alone, Florida insureds paid between $2 billion and $2.7 billion
in costs allocated to suits in the form of increased premiums.
Fraker said just 8% of damages are paid to insureds while plaintiff
attorneys receive about 71% of the insurance litigation cash flow
“because they are allowed to, not because plaintiff attorneys are
motivated to do harm.”
Insurer defense costs range from 237% to 307% of damages, or 21% of
total litigation.
“Florida’s P&C litigation economy may be rooted in hurricane recovery.
However, like every emergent economy, the state’s litigation economy
required nurturing and protections in order to become established,” the
report says. “Yet, unlike an economic system balanced by governance
relevant to all stakeholders, Florida’s litigation economy operates
almost entirely at the expense of insurers, then ultimately the State’s
economy and resident consumers. As a result, the value of corporations,
the value of jobs, and spendable consumer income is either destroyed or
greatly degraded.”
Forecasting Litigation
It isn’t just Florida insurers paying the price of the litigation.
Reinsurers and investors are paying close attention to the Florida
market because it is no longer profitable, and they are now seeing a
negative return on their investments.
Fraker quoted one executive he spoke with for the report as saying, “I’d
rather invest in time shares on the West Bank than to invest in the
Florida insurance industry.”
“Understand this proxy for an additional tax generates zero community,
county, or state benefits because these billions are diverted away from
Florida’s economy,” the report notes.
There isn’t likely to be relief from rate increases for consumers
either, as reinsurance rates increase for carriers and uncertainty about
future litigation costs make it difficult for the industry to reliably
model for litigation, the report notes.
Florida carriers already pay 30% to 35% more on reinsurance premiums
than other hurricane prone states and soaring litigation costs creates
more concern. Fraker said insurers have underestimated preliminary
damage assessments immediately following a hurricane by an average of
300% because of unforeseen litigation costs and that is also influencing
reinsurance rates.
For reinsurers as well as domestic carriers reflecting upon 212,000
litigated cases since 2015, the inability to reliably model litigation
“is the final push off the cliff for Florida’s P&C market.”
Fraker said because “there’s no way to reliably forecast the dollars and
cents of this litigation storm,” he created a new financial construct
called the litigation probable maximum loss (LPML). It is similar to the
probable maximum loss (PML) model companies use in modeling catastrophic
storm damage, but the LPML forecasts the range of litigation frequency
and severity from thousands of insurance litigation data points
extracted between 2016 to 2020.
“Output from forecasting litigation costs through this construct is an
assessment of litigation frequency and severity uncertainty, which is
significantly influencing reinsurance rates in Florida which then
becomes a cost burden affecting Florida’s domestic carriers, and
ultimately for Florida consumers,” the study notes.
Florida consumers are the ultimate victims of what is happening Fraker
says, as they are essentially paying a “hidden tax” to fund the
litigation. This hidden tax averaged $487 per family in 2019, and is
growing annually by 25.6%, totaling about $680 per family in 2020. That
“tax” is being paid to less than 2,500 attorneys and contractors in the
state.
Meanwhile, the narrative by plaintiffs’ attorneys that insurance
companies created this crisis because of poor claims’ handling practices
is a “catastrophic PR failure” on the part of the industry, Fraker said.
“The reality is whether it’s a catastrophe claim or not, 92.5% of all
claims are closed within a year; 80% of the claims that require more
than one year involve representation by a third party,” he said. The
carriers in the marketplace have between a 95.2% and a 98.3%
policyholder retention rate, he noted.
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