Florida property and casualty insurers will continue to face a myriad of challenges despite the sudden creation of a temporary reinsurance program to aid a host of troubled carriers in the Sunshine State.
A plan, currently on hold, by rating agency Demotech to downgrade approximately 17 Florida-focused P&C insurers generated intense pushback from both the industry and regulators. It also spurred the Florida Office of Insurance Regulation to action.
The reinsurance program, backed by Citizens Property Insurance Corp., helps property insurers meet an exception provided by the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corp., or Freddie Mac, that lets a policyholder retain coverage even if the insurer receives a financial strength downgrade.
Insurers rated by Demotech account for $5.92 billion, or 47.7%, of the $12.4 billion in direct premiums written by Florida carriers, according to an S&P Global Market Intelligence analysis.
While the reinsurance program addresses one potential pitfall for insurers, a host of other issues are not going away any time soon. The claims environment in the state has continued to worsen as claims frequency and the severity of catastrophic and non-catastrophic weather events climbs, said Paul Handerhan, president of the Federal Association for Insurance Reform.
"It's made the Florida market really challenging," Handerhan said in an interview.
Handerhan also pointed to the erosion of the financial landscape for Florida P&C insurers over the last five years. Before 2017, insurers were more secure financially and the reinsurance market was soft, so they diversified their books of business and expanded operations to states such as Mississippi, Louisiana and Texas.
Then in 2017, Hurricane Irma hit Florida's Gulf Coast and Hurricane Harvey smashed Texas and Louisiana, while Hurricane Michael struck the Florida Panhandle as a Category 5 storm the following year.
"Most insurance companies are prepared for one or two catastrophes," Handerhan said. "But when you get hit by four or five within a two-year period, that really erodes your policyholder surplus."
Handerhan said the way insurers responded to their financial challenges, by injecting new risk capital, is also an issue rating agencies like Demotech consider. Insurers are required to have a certain amount of risk-based capital on hand in order to comply with state regulator and rating agency rules.
"Downstreaming cash into ... [an] insurance company year after year is not a long-term strategy that's viable," Handerhan said. "[Demotech] wants to see these companies figure out a way to start turning an underwriting profit."
Demotech President Joseph Petrelli had warned on July 21 that the agency was ready to downgrade at least 15 carriers, but this was delay the downgrades after pushback from the state regulator and insurers.
Handerhan said the quick action by the regulator's office and Jimmy Patronis, the state's CFO, indicated that they knew the downgrades would cause a problem as they were set to hit in the middle of the Atlantic hurricane season.
"We're coming into the months where the risk of hurricane exposure is at its most severe," Handerhan said, adding that the lack of notice frustrated the industry and regulators alike.
The first test of the temporary reinsurance program came after Demotech downgraded three Florida carriers on Aug. 2, according to a report by the Insurance Journal.
United Property & Casualty Insurance Co. was downgraded to "M," moderate, from "A," exceptional, while the ratings for Weston Property & Casualty Insurance Co. and FedNat Holding Co. were withdrawn.
The state regulator a day later ordered the initiation of delinquency proceedings against Weston Property & Casualty, saying the insurer is "insolvent or about to become insolvent," the fifth property insurer in Florida to be dissolved in 2022.
Weston Property & Casualty, a subsidiary of Weston Insurance Holdings Corp., was created Jan. 5 by a merger between Weston Specialty Insurance Co. and Weston Insurance Co., which had its rating withdrawn by Demotech the previous day.