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OIR Hosts Property Insurance Symposium

OIR Hosts Property Insurance Symposium

At the end of the recent NAIC conference in Orlando, the Office of Insurance Regulation held a symposium on the state of Florida’s property insurance market.  The session recapped many of the known concerns about the current market, including the role of sinkholes, re-opened hurricane claims, and public adjusters in driving up insurers losses and expenses.

 The opening panel started the symposium with some general observations about the market.  Although the property and casualty insurance industry reportedly has performed well as a whole, this generalization cannot be extended to certain markets or segments of markets, and in particular to the Florida residential property insurance market.  The Florida market has been characterized by high loss ratios and significant volatility.  In addition, external capital in the Florida market has been replaced by internal (i.e., assessments) as private carriers have reduced writings.

 A reinsurance intermediary pointed out that 55 domestic insurers have posted a net combined ratio of 125.8% in 2010.  The intermediary attributed the results to competition from Citizens Property Insurance Corporation, rate freezes and rollbacks, and the mitigation discounts (both in their implementation and as a result of fraudulent application).  Non-hurricane losses are increasing, with a 27% increase in frequency and a 33% increase in severity.  Insurers’ costs likewise are increasing.  Although the cost of private reinsurance has declined since 2006, the FHCF’s TICL layer has been reduced and its price increased while the FHCF also has reinstituted the rapid cash buildup factor.  The reinsurance portion of the discussion also focused on the substantially greater 100-year PML in Florida than any other state.  This ultimately means that Florida will always have a high demand for both public and private reinsurance options (and any shortfall is left to assessments).

 Other financial products such as catastrophe bonds are playing an increasing role in providing capacity in markets like Florida.  However, all panelists agreed that alternative risk transfer mechanisms will only supplement traditional reinsurance and cannot serve as a substitute for it.  Even so, as those markets become more sophisticated and gain efficiency, they will be able to engage in transactions of both larger and smaller dollar amounts than are currently seen in most deals.  Panelists commented, however, that the alternative markets prefer transactions in the 100-year to 250-year event range and are unlikely to expand their transactions below the 100-year level, meaning traditional reinsurance will continue to prevail at those levels.

 From the agents’ perspective, consumers currently are shifting their attention from price to claims-paying ability.   An agent representative also expressed concern that availability in the private market will be adversely affected by sinkhole claims expanding into areas not traditionally associated with sinkholes.

 One speaker commented that to restore the Florida property insurance market, the state should anticipate a five-year horizon over which insurers gradually restore capacity.  This time period is necessary for the industry to see consistency in the state’s message and to reduce the political risk that has been prevalent in recent years.  In addition, the state will require time to restore not only the financial capital that is needed, but also the intellectual capital–  the state needs to develop and retain skilled insurance professionals.  Finally, even upon embarking on this course, the state must acknowledge there is an inherent limit on the amount of Florida property insurance exposure specific members of the industry will take on.

 Mitigation also plays a role in restoring the state’s property insurance market.  All parties agree that reducing the magnitude of potential losses is the only way to limit the cost of insurance in the long run–  coastal exposures continue to increase, and costs go up over time.  However, an effective mitigation program must include rate differentials that are validated, consist of information that is verifiable, and have widespread participation.  In addition, effective mitigation must be pursued strategically, focusing on areas where benefits are greatest in relation to costs.

 Panelists briefly mentioned the possibility of a sinkhole facility to address Florida’s exploding sinkhole problem.  Potential benefits include eliminating the bad faith exposure that currently drives up the cost of settlements and making the true costs of sinkholes known to consumers.  However, there are concerns regarding how a facility would be operated and whether the approach will solve the problem.

 Perhaps the most consistent them of the afternoon was the need for timely and adequate rate relief.  The state recently has been emerging from a difficult rate environment, with many insurers having been able to adjust rates over the last 12-18 months.  Most panelists commented that the ability to adjust rates in response to changing market conditions and cost drivers is critical to a healthy market.