The property insurance market in Florida has been a topic of intense discussion in recent years, marked by a mix of challenges and fleeting relief. As we move through 2024, it’s crucial to reflect on the issues that have shaped the market, understand the factors behind last year’s unexpected profitability, and assess whether these trends are sustainable.
Challenges in Recent Years
Increase in Hurricanes: Florida’s property insurance market has long been vulnerable to hurricanes, but recent years have seen an uptick in both frequency and severity. Hurricanes like Irma in 2017, Michael in 2018, and more recently, Ian in 2022, have caused widespread devastation, leading to significant claims and financial strain on insurers, ultimately highlighting the ongoing threat that these powerful storms pose. This trend of increasing hurricane activity has made it difficult for insurance carriers to maintain profitability as they grapple with the unpredictable nature of these catastrophic events.
Social Inflation: In Florida the rising costs of insurance claims due to claim misrepresentation, higher jury awards, and a more litigious environment, has been exacerbated by issues like assignment of benefits (AOB) abuse and one-way litigation fees. Couple those factors with the emergence of "nuclear awards," where juries grant exceptionally high verdicts that far exceed the actual economic damages, and we have an environment where insurers face unpredictable and often exorbitant financial liabilities, ultimately contributing to the overall instability of the market and higher premiums for policyholders.
Exits and Insolvencies: Adding to the turmoil, approximately 30 insurance companies have stopped providing coverage, withdrawn from the state, or declared insolvency in recent years. Since 2017, 15 companies have declared insolvency, a trend that reflects the ongoing volatility and financial challenges in the market. The running joke in the industry is that the fastest-growing insurance company is the self-insured, as more policyholders are finding it increasingly difficult to secure comprehensive coverage at an affordable premium.
Mediation and Appraisal Challenges: Alternative dispute resolution methods traditionally used to handle disagreements between insurers and policyholders are becoming less and less effective. Mediation in Florida often proves to be a fruitless endeavor, with many cases failing to achieve satisfactory outcomes for either party, and the appraisal process has become increasingly bogged down by the "old-boys-network" and a "split-the-baby" mentality, where mutual professional success often takes precedence over fair resolution.
2023: A Turning Point for Florida's Insurance Market?
Last year marked the first time in many years that insurance carriers in Florida managed to turn a profit. Let’s look at the key factors as I don't think it is yet sustainable:
No Major Hurricane Impact in a Major Metropolitan Area: Unlike previous years, 2023 saw no major hurricanes making landfall in Florida’s densely populated metropolitan areas. This respite from catastrophic storms allowed insurers to avoid the massive payouts that typically accompany such events.
Legislative Reforms: In response to mounting challenges, Florida’s legislature enacted several reforms aimed at stabilizing the property insurance market. These included measures to curb AOB abuse, limit frivolous litigation, and streamline the claims process, providing some relief to insurers by reducing the overall cost of claims and improving the predictability of losses.
Shrinkflation: Insurers effectively managed their risk exposure by offering policies with reduced coverage and/or higher deductibles, which helped them limit their financial liabilities in the event of a claim. While this approach of shrinkflation bolstered short-term profitability, it raises questions over long-term sustainability.
Where to go from here?
While 2023’s profitability was a welcome change and already appears to be having an impact on premiums, the underlying issues in Florida’s property insurance market suggest that this trend may not be sustainable in the long run, and let’s be realistic, we can’t bank on a year without a hurricane.
Shrinkflation is Not the Answer: Shrinkflation, while effective in the short term, is not a sustainable strategy. It’s already leading to consumer dissatisfaction as policyholders realize they are getting less coverage for their premiums. The fact is that this approach doesn’t address the root causes of financial instability in the market.
A More Organic Approach is Needed: To achieve long-term stability, Florida’s property insurance market needs to adopt a more organic approach that links underwriting and claims handling under a comprehensive risk management umbrella. Carriers are investing in more sophisticated risk modeling and catastrophe forecasting tools, but they’re missing the mark on prioritizing better physical inspections and personal interactions. Understanding the actual risk they are insuring requires more than just data and models; it demands a hands-on, detailed assessment of properties to ensure that the risks are well understood and often most importantly, well managed. "Simply stated, uncertainty is priced into premiums." -JK
Mandatory Arbitration: With the challenges facing mediation and the appraisal process, the introduction of mandatory arbitration forms into the Florida insurance market offers a potential solution. These forms may help create a more streamlined and equitable resolution process, though in their stage of infancy, yet to prove effective. If successful, mandatory arbitration could offer a sustainable answer to the dispute resolution challenges that increasingly plague the market.
Conclusion
While 2023 provided a glimpse of what’s possible when the stars align, the challenges that have plagued it for years are far from resolved. The road ahead will require careful management, innovation, and a commitment to addressing the systemic issues that threaten the market’s long-term viability. The Florida market must focus on sustainable practices and embrace a more holistic approach to risk management if we hope to build a more resilient future.
-DB
