This is the third article in a series about Florida’s rapidly evolving property insurance landscape. Here are links to read part 1: Why Florida’s property insurance market is a dumpster fire; and part 2: Property insurance reserves vs. Chris Sprowls’ patience.
Reinsurance costs are rising, and struggling property insurers are begging lawmakers to throw them a lifeline during a May 23rd Special Session. But industry experts say that lowering reinsurance costs by making it easier for insurers on the brink of insolvency to access Florida’s Hurricane Catastrophe Fund would only be a temporary fix that rewards bad management. We unpack the issue here.
Reinsurance: insurance for insurers
Reinsurance, in simple terms, is insurance for insurance companies that protects against catastrophic losses from major events like a hurricane – events that deal substantial damage to a large number of the properties underwritten by an insurer. Reinsurance companies examine an insurer’s portfolio and then price reinsurance coverage based on the risk level.
Reinsurance coverage is renewed on an annual basis, and in Florida the renewal deadline for many companies is June 1st. Most solvent insurance companies have already secured reinsurance well ahead of that point, but a number of less-well capitalized companies are currently struggling to find reinsurance coverage they can afford.
The lack of adequate reinsurance protection could cause an insurer to be declared insolvent, leaving homeowners unprotected. For example, FedNat, an insurer headquartered in Sunrise, Florida, was given a deadline of July 1st to demonstrate to the Florida Office of Insurance Regulation that it has secured adequate reinsurance to protect its 152,000 Florida policyholders.
Rising reinsurance costs are squeezing insurance companies
Florida property insurers are being squeezed on multiple fronts including excessive litigation and rampant fraud. But rising reinsurance costs are also a factor. This past year, a number of catastrophic insurance losses around the world – such as windstorms, wildfires, floods and earthquakes – have combined to eat through a substantial portion of reinsurance reserves. Those events, combined with rising interest rates in the financial sector, means there are safer places for investors to make money than placing it at risk as collateral in the reinsurance market.
Taken together, the catastrophic losses and rising interest rates mean there is less capital available to be used as an emergency reinsurance backstop for property insurers, driving up the prices that reinsurers can charge for their coverage. Those rising reinsurance costs factor prominently on the balance sheet of property insurance companies, like FedNat, that are already struggling to make ends meet. Reinsurance costs eat up a substantial chunk of every premium collected from a homeowner, leaving insurers with little left to pay out claims or make a profit.
The hope of a Cat Fund “lifeline”
For many property insurance companies, the upcoming May 23rd Special Legislative Session in Tallahassee is viewed with the hope that lawmakers will take a range of actions that will both lower their overall long-term risk while also helping to cut their costs immediately.
Among the fixes being floated among Florida lawmakers is the potential adjustment of the retention point (basically lowering the deductible level) of the Florida Hurricane Catastrophe Fund (Cat Fund), a trust fund that pays out after certain insurance loss thresholds are met. By lowering the retention point and making it easier for companies to trigger payouts from the Cat Fund, insurers say it will lower their costs by reducing the amount of reinsurance they need to purchase.
Fix Florida’s property insurance market to fix reinsurance
But many industry experts say that any legislative fixes to the reinsurance market may be too little, too late. The session comes only a week before the reinsurance renewal deadline, and any companies still struggling to secure reinsurance are already in dire straights to begin with.
Larger, solvent insurers with adequately diversified risk portfolios will have long before secured reinsurance coverage. In fact, one of the largest reinsurers, RenaissanceRe, says that lowering the retention rate will have little to no impact on their analysis of the situation in Florida.
“That doesn’t change, from RenRe’s perspective,” said RenaissanceRe CEO Kevin O’Donnell in a recent earnings call, “…in what we do or how we’re looking at the market.”
As other experts point out, a drop in the retention point for the Florida Hurricane Catastrophe Fund (FHCF) might help a few companies in the short term, but the real problem remains the excessive litigation and fraudulent claims crisis that has created uncertainty for reinsurers and reduced the appetite to offer adequate reinsurance protection.
In short, fix the property insurance market, and the reinsurance market will fix itself.