The Florida Special Legislative Session on insurance reform has adjourned. While lawmakers and the governor may boast of the insurance reform they accomplished, an ALIRT research analyst rejects their bragging rights.

The May 19 webinar, Florida Property Insurance Market on Life Support, was live streamed between the Governor’s April 26 call for the special session and the five-day session held May 23-27. R Street’s Jerry Theodorou, director of the finance insurance and trade policy program, and David Paul, principal research analyst with ALIRT Insurance Research, discussed the factors that contributed to the current crisis mode of property insurers in Florida. Neither anticipated that Florida would look for free market solutions during the special session.

Even with no major hurricanes hitting the Florida coast since 2018, the property insurance industry in Florida is on the verge of collapse, said Theodorou. While one should expect the natural catastrophe prone state’s insurance market to have benefited from a few storm-free years, other factors have contributed heavily to the sizeable operating losses that have led to several domestic insurer insolvencies and major insurers exiting the market, said Paul.

“These market failures are not a new phenomenon,” said Paul in a white paper he published on May 13, “but rather represent an acceleration of trends in place for the last 30 years.” Paul looked back at every fix the legislature fashioned in the last 30 years and likened the public policies to building new ramps, pulleys, twists and turns in an elaborate Rube Goldberg machine. The simple solution, said Paul, would be to create a more free market environment. “We are dealing with political exigency clashing with market reality,” said Paul during the webinar, a statement somewhat predictive of the special legislative session.

Paul placed the failures in the market on what he termed “a manufactured artificial insurance market” created by state lawmakers in conjunction with the state’s insurance department. “An artificial insurance market is one that strays too far from the laws of supply and demand.”

This artificial market started in the aftermath of Hurricane Andrew 30 years ago when the legislature went into crisis mode, said Paul. Since then the legislature has crafted a variety of fixes that just send them to a new crisis and another needed fix. Over the last three decades, Florida has embraced state-run insurers or joint underwriting associations, a state-run reinsurer with subsidized rates, a surplus note program to help capitalize new entrants, bonus payments to insurers for depopulating Citizens Property Insurance Corporation, politically influenced rate regulation and a number of other legislative fixes. Every fix merely created another problem, Rube Goldberg machine-style, said Paul. “It has become increasingly clear that this whole artificial structure is untenable.”

Adding more turmoil to this untenable structure are current issues of aggressive public adjusting and litigation practices, surging material inflation, and high costs of reinsurance or outright resistance by reinsurers to cover Florida property insurers, said Paul.

Paul explained the simple economics of the situation: “When an insurance company loses money, unless it is backfilled by some net capital gains or outside capital support, the surplus in these companies is going to fall. When it falls to a critical low, you are going to start having some real problems. This is a trend we have seen in this market over the last two decades.”

Proof that this artificial insurance market does not work lies in the insolvencies and withdrawals of Florida insurers, said Theodorou. “Insolvencies of property casualty companies are rare,” he said. There are about 1,500 P&C companies in the U.S. In a typical year, there are five to six insolvencies, and Florida accounts for the bulk of those,” said Theodorou.

Paul said Florida has seen four domestic insolvencies in the past year and it looks like there may be a couple more coming. Lexington, an AIG company, announced it is leaving the market, and Progressive is dialing back its policy count by 55,000 to 56,000 policies.

This is a state that does not have the typical Top Ten insurers found in other states, said Theodorou. “You don’t see familiar players, USAA, GEICO, State Farm or Liberty Mutual,” he added. At least 65 percent of Florida homeowners depend on small domestic insurers for coverage.

Theodorou said that the combined ratio for just about all the Florida-only companies is above 100 percent, some as high as 117 percent.

Paul said he has seen combined ratios of 120 for some Florida insurers in the past couple years. “You can’t take these kinds of losses year after year and stay in business.”

While insuring only 11 percent of the homeowners today, Citizens Property Insurance Corporation, the state’s residual market insurer, has become the insurer of first resort for homeowners who are unable to obtain insurance elsewhere, said R Street in promoting its webinar. Paul said there has been a “hyperbolic rise in the number of policies in Citizens.”

Paul said that Citizens is required by law to recommend actuarially sound rates. But, the legislature then limited rate increases to 11 percent or 12 percent per year. Paul said he had trouble wrapping his mind around the conundrum: Basically, said Paul, “The lawmakers are saying, ‘We know what you need to do, but we’re not going to let you do it.’”

Paul expressed little confidence in the ability of the state-run reinsurer to offer any measure of comfort to Floridians. He said the state-run reinsurer provides reinsurance for private companies when reinsurers don’t want to. “If it (the state run reinsurer) takes on more risk because the (private) reinsurance market shies away, you are really just shifting the risk from the private insurers to the state-sponsored reinsurer. The citizens of Florida are going to end up paying (for the losses) anyway. So, that is not a real solution,” he said.

The recent difficulties of purchasing reinsurance are especially worrisome for small insurers, said Paul. They cede 50 to 54 percent to nonaffiliated reinsurers and now face a difficult, if not impossible, choice. Roll the dice and not buy reinsurance, or buy the right amount of high priced reinsurance and reduce their net premium to zero or less. “We’ve seen companies do it both ways,” said Paul. “They both go out of business.”

Paul found favor with Governor Ron DeSantis’s plan going into the special session to deal with frivolous lawsuits, even though he wasn’t optimistic about a favorable outcome. “Insurance litigation around property risks has proven to be a big business in Florida and a boon for the state’s trial bar, a constituency which has support in the state legislature,” said Paul.

Theodorou provided the data. Florida has about eight percent of the nation’s homeowner policies and about eight percent of the claims, a reasonable number given Florida’s population is about eight percent of the U.S. “The depressing thing” said Theodorou, “is that Florida has about 76 percent of the nation’s homeowner litigation. … That’s 10 times the rest of the country.” Theodorou blamed the multipliers and attorneys’ fees added by state law in 2017 as adding to the litigation incentives in Florida.

Paul said the current litigated roofing claims bonanza is not a new claims phenomenon. It surfaced in the 1990s with mold claims and after that with sink holes “This is the third iteration of what I have seen as the litigious environment of Florida. Those two issues put companies out of business as well.”

On the outcome of the special session, Paul told The Reporter, “By not addressing the principal driver of claims, which is fraud, or, if I want to be kind, aggressive adjusting and litigation practices, the Florida homeowners market remains stuck in the same ol’ rut.” He was not alone in his disappointment regarding the special session. Paul said that Joe Petrelli, the president of Demotech, anticipates further downgrades of domestic insurers below Demotech Level A, the lowest rating accepted by mortgage lenders. “This is a sort of death knell for impacted insurers,” said Paul.

Theodorou, who attended the Florida insurance reform legislative session, had a more positive view of the outcome. “I was encouraged by passage of the Florida insurance reform bills in the special session. I am optimistic we are on the right path. If we remember the mood in April, when we thought there was no need for a special session because nothing would get agreed, we must admit we were wrong. The reforms passed by a strong majority. It appears most members of the Florida legislature ‘got religion.’ And if we observe that one of the lone legislators voting against reform was a personal injury lawyer at Morgan & Morgan and Rubenstein Law, and that immediately after passage of (Senate Bill) 2D two Florida restoration and roofing groups filed lawsuits to block the bill, we have further confirmation we are moving in the right direction.”

Still, said Theodorou, some members of the legislature did not appreciate the gravity of the crisis. Theodorou commended Sen. Jim Boyd. R-Bradenton, for  “compellingly, respectfully and tirelessly arguing why the reforms must be implemented.”