Hi Jason - I operate a customer-owned insurance exchange in Florida. There is some merit to the notion of reducing the deductible for the FHCF. The FHCF was relatively flush, starting the year with >$10B of surplus, and it would reduce expenses for insurance companies which could then be required to be passed on to consumers. The lower layers of the reinsurance programs - the ones with the smallest deductibles that are most likely to get hit - were very very expensive this year. The state did something along those lines with the RAP layer, which made additional reinsurance limit available below the deductible of the FHCF. The RAP program, however, is very small relative to the overall FHCF.
One big issue with extending coverage below the current FHCF limits is that it exposes the state to a lot more risk. Even now, the FHCF will have a big loss, if Irma hit again this year the FHCF estimates it would have cost it $7.8M. Ian is significantly larger than Irma, so it's entirely possible that, even without the change that you are advocating for, the FHCF will exhaust its' surplus this year because of Hurricane Ian. If they had lowered the retention by another $3.5B that would almost certainly move FHCF surplus to zero.
The FHCF is a pretty key component of the reinsurance strategy for most companies writing in Florida, and without it, rates will be much higher, especially now that interest rates are high and raising more money is difficult for insurance and reinsurance companies. If it's insolvent or it's credit is impaired, it will have a big impact the solvency of all the insurance companies that buy reinsurance from it (every company in Florida).
In retrospect the lawmakers in Florida look wise for not following the course set in this article.
A real fix is to eliminate one way attorneys fees, which are inflating premiums in Florida by about 2x. Florida is about 8% of homeowners claims in a given year and about 80% of homeowners insurance lawsuits. Other states that have significant hurricane exposure - Texas, Louisiana, South Carolina, etc. have lower rates, largely because they have avoided the massive litigation abuse where customers sue insurance companies to get new roofs when they are simply worn out, not when they were impacted by a catastrophic storm. Very little of the money that gets paid by insurance companies into those scams ends up with the consumer, it mostly gets captured by the attorneys, public adjusters and roofer who are initiating that fraud.
I may be misunderstanding one of your points, but the Cat Fund wouldn't go insolvent. If it runs out of money, it borrows money and levies a tax on *most* private insurance policies to pay them off. This tax would obviously be no fun, but there are ways you can ameliorate it. For instance, you can broaden the tax base by eliminating exemptions for workers' comp and medical malpractice policies. You could also use general revenue to replenish some of the fund -- especially since the state of Florida is currently sitting on more than $20 billion in reserves. Not to suggest these are great options, but there aren't really any great options when you get hit with a storm like Hurricane Ian in a state where the insurance market was already dysfunctional.
On the one-way attorney's fees, didn't Florida already largely eliminate one-way attorney's fees in third-party (AOB) cases between the reforms of 2019, 2021 and 2022? Are you suggesting that Florida eliminate one-way attorney fees in first-party cases, too? My concern with something like that is that, suddenly, insurance companies would have lots more incentive to dispute and deny legitimate claims. The whole point of one-way attorneys fees is to try to level the playing field between individual policyholders and their insurance companies. Is there something short of simply eliminating first-party one-way fees entirely that you'd like to see the Legislature do?
Obviously, the Legislature could clamp down on lawsuits to the point where they're pretty much impossible to pursue. That's basically what they've done in workers' comp. But you really risk sacrificing a lot of homeowners with legitimate claims if you do that. And so if you do it, you'd better be certain that there are going to be significant savings passed on to consumers.
Curious what you think about one other idea: Unshackle Citizens. Really let it compete with the private sector. Right now, you can only buy a policy from Citizens if the private quotes you find are all at least 20 percent higher. What about eliminating that 20 percent threshold? Obviously that would likely grow Citizens' rolls substantially, which increases the state's direct exposure to storm losses just like with the Cat Fund. But you'd also start to build a bit more diversity into Citizens and let it spread its risk more.
In that scenario the cat fund would go insolvent unless it recapitalized. You are correct that it would have an easy time recapitalizing since the state can borrow at a low cost of capital and they can always tax people to service the debt.
The point I was trying to make is that having the FHCF ( or Citizens ) play a larger role in the insurance market does cost something. It's easy to trick ourselves into thinking that cost is less than reality during the years when there is not a big catastrophe event like Ian (which is a 1/10 to 1/15 year event, so not all that infrequent). FHCF and Citizens both provide coverage at below-market rates, so ultimately the cost of that subsidy ends up getting borne by taxpayers.
I don't think it was a crazy idea to extend FHCF lower, but in retrospect the taxpayers of Florida are pretty lucky that the state didn't do that this year. The reinsurers who ultimately took that risk lost a lot of money from taking that risk, even though they were charging a much higher rate than FHCF would have.
I think in these situations it's usually a reasonable assumption that the private market is pretty good at pricing risk. The reinsurance market is sophisticated, competitive and deep and it charges a higher rate to take that risk than the FHCF, so it's safe to assume that providing FHCF costs taxpayers money, at least on a probability-weighted basis.
There just isn't a free lunch in this case - it would be shifting costs from one year to another and from one set of taxpayers (folks living nearer the ocean) to another (inland).
Fixing the litigation abuse absolutely would help the situation. I am not arguing that the intent of the one way attorneys fees statute was honorable. Of course we want to protect consumers against claims friction. In addition to that law, there is a significant regulatory apparatus designed to protect consumers. State insurance departments are generally quite aggressive about intervening and fining companies to ensure claims are being paid. However, the details of the law have resulted in a system that generates 10x the number of lawsuits relative to other states and much greater increases in premiums than you see in other states with similar levels of weather risk.
There have been some reforms around the edges, but none have resulted in a meaningful reduction in the amount of AOBs or the amount of lawsuits.
I am not sure what exactly the right remedy is for fixing that situation, but I know that the prevalence of litigation is unique relative to other states, is a big reason why more of the national carriers don't write in Florida, is a massive concern for the reinsurers who ultimately assume much of the risk in Florida, has been driving many of Florida-focused insurance companies into insolvency (even in years that were not impacted by major weather events) and is necessitating big rate increases from the insurers that remain.
Your Citizens idea is interesting. Generally I am in favor of solutions that enhance competition in the market. I think in this case, however, what you are proposing is basically the status quo, as Citizens is now significantly cheaper than the private market and has gained market share significantly in the past year. Citizens is capped in the amount it can raise rates each year, which has led it to have a pretty far below-market rate. It also doesn't have to buy reinsurance to maintain a credit rating like the private carriers do - for example this year it just skipped buying a lot of the reinsurance it usually buys, which has left it a lot more exposed to a big event like Ian. I think your idea could be beneficial if it also removed the glide path limit on rate increases and required Citizens to buy adequate reinsurance.
Absent those changes you would drive even more private capacity out of the state, which is already lacking private capacity, and effectively socialize homeowners insurance in Florida. There may be some advantages to that, but two of the disadvantages are lack of choice and competition and Florida retaining a lot more hurricane risk than it does currently.
Interesting article, but written by someone with very little knowledge about how the insurance and reinsurance works particularly as it relates to the very unique Florida market place. I have been in the reinsurance industry for over 45 years ( specializing in Florida for 30+ years). The Florida insurance market is unique in a number ways, there are solutions, but there are no experts employed by the state in reinsurance that can put them on the right track…..and asking a reinsurer or reinsurance broker who have vested interests in certain outcomes is not the answer
The purpose of the write up seems to give a broader view on the subject. It's up to you, me and others that read this article to contact your state representative to let them know there is a real solution for everyone. Lowering rates, have full coverage and low deductible is what people need. Do you think raising rates and offering a higher deductible or Actual Cash Value policy's are affordable? Would you want to pay 5k, 10k or even 15k to have your home repaired by a storm? The cat fund sounds like something that will release 99% of all Florida's insurance companies from a bad market to great market. Crist sounds like he's on to something with the Faith act. We have to make sure the Florida Chamber of Commerce does not get decided by 1 or 2 of these big insurance companies. Having an insurance company drive the government is outrageous and should not be allowed.
YOU SHOULD WANT TO SHARE THIS ARTICLE OR YOUR THOUGHTS TO EVERY FLORIDA HOUSE AND SENATE MEMBER. SEND AN EMAIL AND EVEN CALL!
Hi Jason - I operate a customer-owned insurance exchange in Florida. There is some merit to the notion of reducing the deductible for the FHCF. The FHCF was relatively flush, starting the year with >$10B of surplus, and it would reduce expenses for insurance companies which could then be required to be passed on to consumers. The lower layers of the reinsurance programs - the ones with the smallest deductibles that are most likely to get hit - were very very expensive this year. The state did something along those lines with the RAP layer, which made additional reinsurance limit available below the deductible of the FHCF. The RAP program, however, is very small relative to the overall FHCF.
One big issue with extending coverage below the current FHCF limits is that it exposes the state to a lot more risk. Even now, the FHCF will have a big loss, if Irma hit again this year the FHCF estimates it would have cost it $7.8M. Ian is significantly larger than Irma, so it's entirely possible that, even without the change that you are advocating for, the FHCF will exhaust its' surplus this year because of Hurricane Ian. If they had lowered the retention by another $3.5B that would almost certainly move FHCF surplus to zero.
The FHCF is a pretty key component of the reinsurance strategy for most companies writing in Florida, and without it, rates will be much higher, especially now that interest rates are high and raising more money is difficult for insurance and reinsurance companies. If it's insolvent or it's credit is impaired, it will have a big impact the solvency of all the insurance companies that buy reinsurance from it (every company in Florida).
In retrospect the lawmakers in Florida look wise for not following the course set in this article.
A real fix is to eliminate one way attorneys fees, which are inflating premiums in Florida by about 2x. Florida is about 8% of homeowners claims in a given year and about 80% of homeowners insurance lawsuits. Other states that have significant hurricane exposure - Texas, Louisiana, South Carolina, etc. have lower rates, largely because they have avoided the massive litigation abuse where customers sue insurance companies to get new roofs when they are simply worn out, not when they were impacted by a catastrophic storm. Very little of the money that gets paid by insurance companies into those scams ends up with the consumer, it mostly gets captured by the attorneys, public adjusters and roofer who are initiating that fraud.
Hey there. Thanks for this thoughtful response.
I may be misunderstanding one of your points, but the Cat Fund wouldn't go insolvent. If it runs out of money, it borrows money and levies a tax on *most* private insurance policies to pay them off. This tax would obviously be no fun, but there are ways you can ameliorate it. For instance, you can broaden the tax base by eliminating exemptions for workers' comp and medical malpractice policies. You could also use general revenue to replenish some of the fund -- especially since the state of Florida is currently sitting on more than $20 billion in reserves. Not to suggest these are great options, but there aren't really any great options when you get hit with a storm like Hurricane Ian in a state where the insurance market was already dysfunctional.
On the one-way attorney's fees, didn't Florida already largely eliminate one-way attorney's fees in third-party (AOB) cases between the reforms of 2019, 2021 and 2022? Are you suggesting that Florida eliminate one-way attorney fees in first-party cases, too? My concern with something like that is that, suddenly, insurance companies would have lots more incentive to dispute and deny legitimate claims. The whole point of one-way attorneys fees is to try to level the playing field between individual policyholders and their insurance companies. Is there something short of simply eliminating first-party one-way fees entirely that you'd like to see the Legislature do?
Obviously, the Legislature could clamp down on lawsuits to the point where they're pretty much impossible to pursue. That's basically what they've done in workers' comp. But you really risk sacrificing a lot of homeowners with legitimate claims if you do that. And so if you do it, you'd better be certain that there are going to be significant savings passed on to consumers.
Curious what you think about one other idea: Unshackle Citizens. Really let it compete with the private sector. Right now, you can only buy a policy from Citizens if the private quotes you find are all at least 20 percent higher. What about eliminating that 20 percent threshold? Obviously that would likely grow Citizens' rolls substantially, which increases the state's direct exposure to storm losses just like with the Cat Fund. But you'd also start to build a bit more diversity into Citizens and let it spread its risk more.
In that scenario the cat fund would go insolvent unless it recapitalized. You are correct that it would have an easy time recapitalizing since the state can borrow at a low cost of capital and they can always tax people to service the debt.
The point I was trying to make is that having the FHCF ( or Citizens ) play a larger role in the insurance market does cost something. It's easy to trick ourselves into thinking that cost is less than reality during the years when there is not a big catastrophe event like Ian (which is a 1/10 to 1/15 year event, so not all that infrequent). FHCF and Citizens both provide coverage at below-market rates, so ultimately the cost of that subsidy ends up getting borne by taxpayers.
I don't think it was a crazy idea to extend FHCF lower, but in retrospect the taxpayers of Florida are pretty lucky that the state didn't do that this year. The reinsurers who ultimately took that risk lost a lot of money from taking that risk, even though they were charging a much higher rate than FHCF would have.
I think in these situations it's usually a reasonable assumption that the private market is pretty good at pricing risk. The reinsurance market is sophisticated, competitive and deep and it charges a higher rate to take that risk than the FHCF, so it's safe to assume that providing FHCF costs taxpayers money, at least on a probability-weighted basis.
There just isn't a free lunch in this case - it would be shifting costs from one year to another and from one set of taxpayers (folks living nearer the ocean) to another (inland).
Fixing the litigation abuse absolutely would help the situation. I am not arguing that the intent of the one way attorneys fees statute was honorable. Of course we want to protect consumers against claims friction. In addition to that law, there is a significant regulatory apparatus designed to protect consumers. State insurance departments are generally quite aggressive about intervening and fining companies to ensure claims are being paid. However, the details of the law have resulted in a system that generates 10x the number of lawsuits relative to other states and much greater increases in premiums than you see in other states with similar levels of weather risk.
There have been some reforms around the edges, but none have resulted in a meaningful reduction in the amount of AOBs or the amount of lawsuits.
https://www.artemis.bm/news/newly-litigated-florida-claims-aob-percentage-of-them-rises-caseglide/
I am not sure what exactly the right remedy is for fixing that situation, but I know that the prevalence of litigation is unique relative to other states, is a big reason why more of the national carriers don't write in Florida, is a massive concern for the reinsurers who ultimately assume much of the risk in Florida, has been driving many of Florida-focused insurance companies into insolvency (even in years that were not impacted by major weather events) and is necessitating big rate increases from the insurers that remain.
Your Citizens idea is interesting. Generally I am in favor of solutions that enhance competition in the market. I think in this case, however, what you are proposing is basically the status quo, as Citizens is now significantly cheaper than the private market and has gained market share significantly in the past year. Citizens is capped in the amount it can raise rates each year, which has led it to have a pretty far below-market rate. It also doesn't have to buy reinsurance to maintain a credit rating like the private carriers do - for example this year it just skipped buying a lot of the reinsurance it usually buys, which has left it a lot more exposed to a big event like Ian. I think your idea could be beneficial if it also removed the glide path limit on rate increases and required Citizens to buy adequate reinsurance.
Absent those changes you would drive even more private capacity out of the state, which is already lacking private capacity, and effectively socialize homeowners insurance in Florida. There may be some advantages to that, but two of the disadvantages are lack of choice and competition and Florida retaining a lot more hurricane risk than it does currently.
Interesting article, but written by someone with very little knowledge about how the insurance and reinsurance works particularly as it relates to the very unique Florida market place. I have been in the reinsurance industry for over 45 years ( specializing in Florida for 30+ years). The Florida insurance market is unique in a number ways, there are solutions, but there are no experts employed by the state in reinsurance that can put them on the right track…..and asking a reinsurer or reinsurance broker who have vested interests in certain outcomes is not the answer
The purpose of the write up seems to give a broader view on the subject. It's up to you, me and others that read this article to contact your state representative to let them know there is a real solution for everyone. Lowering rates, have full coverage and low deductible is what people need. Do you think raising rates and offering a higher deductible or Actual Cash Value policy's are affordable? Would you want to pay 5k, 10k or even 15k to have your home repaired by a storm? The cat fund sounds like something that will release 99% of all Florida's insurance companies from a bad market to great market. Crist sounds like he's on to something with the Faith act. We have to make sure the Florida Chamber of Commerce does not get decided by 1 or 2 of these big insurance companies. Having an insurance company drive the government is outrageous and should not be allowed.
YOU SHOULD WANT TO SHARE THIS ARTICLE OR YOUR THOUGHTS TO EVERY FLORIDA HOUSE AND SENATE MEMBER. SEND AN EMAIL AND EVEN CALL!
There's no ask here... What's the purpose of the write up???