Florida’s Citizens Property Insurance Corporation continues to see increasing policy counts as ongoing challenges in the private market drive policyholders back to the residual market, resulting in expanding exposure levels and putting depopulation, or takeouts, back in focus.
Florida Citizens is now on-course to see its policy count surpass 1 million in 2022, rising further by the end of the year, as the growth of its portfolio and as a result catastrophe exposure continues.
That’s a stunning number when you think that at the end of 2020 Citizens policy count stood around the 540,000 mark.
It’s even more stunning when you consider that Florida Citizens counted just 420,000 policies in May 2019, which suggests that the rate of assumption of exposure has been accelerating through 2021, as the challenges faced by Florida’s primary property insurance market continued.
One driver of an accelerating rate of policies to Citizens has been reinsurance costs, which have risen considerably for some Florida carriers.
Higher reinsurance costs, continuing frequency losses, exposure to social inflation and litigation and the resulting declines in surplus, have driven some Floridian primary carriers to shed business and as a result Florida Citizens steps in.
At a recent Board of Governors meeting, Citizens President, CEO and Executive Director Barry Gilway cautioned that the expansion of Citizens’ policy count and exposure means an elevated risk of assessments on Florida insurance consumers, if a major storm or series of storms hit the state.
Should Citizens exhaust its $6.4 billion surplus and utilise its reinsurance and catastrophe bond arrangements, insurance consumers would be forced to pay even higher premiums as a result.
This comes at a time that premiums have been rising anyway in Florida for property owners.
Florida may also face further reinsurance rate pressure in 2022, not least as the retro market could be a point of dislocation through the end of this year and insurance-linked securities (ILS) funds that provide reinsurance to Florida carriers have been hit by another year of losses in 2021.
Citizens is currently taking on around 5,000 new policies a week, as private insurers continue to shed policies after losses brought on by litigation, damage from hurricanes Irma and Michael, more expensive reinsurance protection and other factors.
“Citizens is considering all ideas to reduce exposure, and to continue to operate as efficiently as possible during this unprecedented growth period,” Gilway explained.
The new business assumption trend is largely on the residential side, where there’s been a 152% increase in homeowners policies over a recent four month period, while the dwellings category saw 123% growth and condos 121%.
Insolvencies and consent orders, allowing carriers to shed business, have driven a significant proportion of this and with surplus issues still apparent for some Florida carriers, it seems likely these trends will continue.
Since October 2019, Citizens policy count has soared from 420,000 to more than 700,000.
On this pace, Citizens expects its policy count could exceed 760,000 by the end of 2021, while initial estimates call for Citizens policy count to reach 1.1 million to 1.3 million by year end of 2022.
The previous high, of nearly 1.5 million policies was seen in 2011, which resulted in Florida Citizens carrying nearly $520 billion in exposure.
At that scale, a 1-in-100 year hurricane loss was estimated as likely to drive policyholder assessments of as much as $24 billion, which would have elevated Florida homeowners rates for years.
As of the end of August, exposure sat far lower at nearly $204 billion, but the fear is if policies continue to flow to Citizens at the rate they have been then exposure would be expected to jump more rapidly, particularly should more coastal account properties flow back.
Which means Florida Citizens should be expected to buy additional reinsurance protection in 2022, as its exposure is higher, which also raises the prospects of further catastrophe bonds being sponsored over the next year.
Of course, it also suggests potential opportunities for providers of insurance capacity or reinsurance capital that are able to raise money and have an appetite for portfolios of Florida focused property catastrophe exposed risks.
All of which has put depopulation back into focus, with takeout activity expected to ramp up again in time.
In order to make takouts more attractive again, as activity has tailed off significantly in recent years, rates on the property insurance business need to be deemed attractive to the carriers or capital providers backing depopulation efforts.
Florida Citizens has been undertaking a roadshow with existing participants in its depopulation program, to try and garner additional support for fresh takeouts.
Legislative changes are also being considered to make it harder for policyholders to stay at Citizens, if a suitable offer with a premium rate within 20% of Citizens is received.
Citizens is also trying to onboard new participants for its depopulation program as well, to increase the range of offers policyholders will receive and make the process of shedding risk faster.
Perhaps it’s also time to think laterally, about whether there is a way Citizens itself, or the state, could structure a mechansism through which alternative capital could back its policies, while their management and administration remains in the hands of Citizens, an MGA, an insurer, or other suitable entity.
It seems that capital markets funding could back-up the risk Citizens has been assuming, at the right price of course. But it’s how to do that sustainably, in a model where administration and claims continue to be managed by the most appropriate entities, while the most efficient reinsurance capital is used to support the exposure.
That’s really what the likes of Nephila Capital aimed to do when it was heavily involved in the depopulation process, via its MGA Velocity Risk.
Now, Nephila remains a significant reinsurance source of Citizens, having taken a $600 million line at the renewals this year.
Showing that there remains an attraction to the type of risk Citizens holds in Florida, but perhaps a more efficient way to structure this could encourage even more capital to come along and join in supporting the policies more directly, rather than just providing excess-of-loss reinsurance to Florida Citizens itself.
It certainly seems like the appetite is still there, in ILS and institutional markets (as long as the price is right). But now we also have more advanced technology that could help in providing analytics on pools of primary property risk, to deliver some transparency and better understanding around portfolios in-force and backed by reinsurance capital.
Combine that with capital markets structuring technology and surely its time for the industry and government to try and come up with more efficient ways to pool and collateralize these policy risks, while keeping the right administration and claims protocols in place, even allowing for certain risks (like the catastrophe exposure) to be covered by those most appropriate to do so?
Citizens President Gilway is perfectly aware of the possible reinsurance pricing pressures coming his organisations way next June, saying, “Many companies are implementing double digit increases in rates and we are hopeful that considering that reinsurers have been hit extremely hard this past several months by Hurricane Ida, Western Wildfires, European Floods and additional tropical storms, it does not significantly impact reinsurance pricing for the upcoming renewal cycle. The range of estimated total Insured losses from Ida alone have ranged from $30 Billion to $40 Billion. (RMS had a $44 Billion Insured estimate and AIR was
between $30 Billion and $40 Billion) Fortunately, only a very small number of Florida Insurers have exposure in Louisiana, Alabama and Mississippi making the direct impact on Florida Insurer Financials from Ida very limited. ”
Florida’s property insurance market continues to face significant challenges and while there has been some evidence of litigation rates dropping slightly in the summer months, which may be as a result of recent legislative change, it’s expected the growth of Citizens will continue.
Gilway stressed that, “Citizens is considering all ideas to reduce exposure…, and to operate as efficiently as possible during this unprecedented growth period.”