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Florida’s P&C Insurance Market: Spiraling Toward Collapse

Guy Fraker, Principal IE Advisory, Cre8tFutures, Adjunct Scholar James Madison Institute (JMI)

Stakeholders & Objectivity
The beginning is an ideal time to reinforce a very important point that the primary challenge in adequately describing the scope, scale, and momentum of Florida’s financial sector downward spiral is being objective without placing blame.

Upon understanding just how far off the rails Florida’s property and casualty (P&C) insurance market has traveled, an understandable reaction is to look for villains in need of cuffs and a perp walk. To be explicitly clear, Florida’s P&C market did not come about at the hands of any such villains. Moving forward through the 2021, and 2022, legislative sessions will provide ample opportunity for transparency as influencers and decision makers could emerge in polar opposition to consumer’s best interest, and Florida’s economic growth. However, additional commentary in this regard is out of scope, and detrimentally presumptuous. With regard to the key stakeholder groups within Florida’s P&C insurance economy:

  • Insureds: Florida’s population of 6.5M property owning consumers.
  • Primary and Reinsurance Insurance Entities: Florida relies heavily on “Florida based” or “FloridaDomestic” insurers experienced at successfully navigating historic disasters. A review of 4 recent hurricanes reveals carriers closing 89% to 92% of all storm related (Cat) claims within 1 year and operate with a policyholder loyalty measure above 90%. Reinsurers provide consumers with an additional layer of protection by insuring the insurance companies.
  • Plaintiff Attorneys and Service Providers (building trades): These are professionals, highly competent in their craft, and successful as entrepreneurs. These stakeholders have been placed together due to their relatively high degree of collaboration. Both also share exceptional skills at leveraging governing rules to their advantage.
  • Legislators: Over a period measured in decades, Florida legislators have enacted unrelated statutes, with the best of intentions. Subsequent unintended consequences include significantly negative impacts upon the state’s P&C consumers, insurers, investors, and reinsurers. Legislators will determine how the future impacts their property- owning constituent’s.
  • Ratings Agencies and Regulators: These stakeholders face the most difficult balancing act. Collectively, they are responsible for market conduct, complete financial examinations, and act as advisors. In Florida’s market, these activities have to be balanced against the top priority of maintaining adequate and affordable insurance capacity in the market.
  • State Chartered Insurance Entities: Consumers in Florida have experienced a loss of availability to property insurance in the past. In order to make sure insurance is available to consumers Florida legislators chartered a residual market carrier, Citizens Property Insurance Company (CPIC). The term “residual” simply means when no other insurance company is available, the “insurer of last resort” will be available. All catastrophe prone states have similar organizations. Additionally, Florida has a state-chartered reinsurance entity, the Florida Hurricane Cat Fund (FHCF).Before going further, a brief review of key insurance terms and financial metrics will help deepen understanding of the balance of the report. Primer on Basic Insurance Carrier Financials
    • Combined Ratio: Measures the money flowing out of an insurance company. The combined ratio is usually expressed as a percentage. A ratio below 100% indicates that the company is making an underwriting profit, while a ratio above 100% means that it is paying out more money in claims that it is receiving from premiums.
    • Loss damage payments: Payments to insureds.
    • Loss Adjustment Expenses (LAE) / Direct Defense Costs (DDC): Expenses associated with paying those damages known as. Insurance litigation, including plaintiff attorney fees, are split between LAE



and DCC.

  • Underwriting Gain/Loss: This is a measure of premium against claims without consideration of expenses. In short, if positive, then the premium charges paid by customers are appropriate. If this figure is negative, then rates are inadequate.
  • Net Income: A company’s total earnings calculated by subtracting total expenses from total revenues. If the number is a positive, there is profit. If the number is a negative, there is a loss.
  • Surplus: Cutting through all the jargon, this metric is essentially an insurer’s net worth.

View the complete report here:

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