All of the changes enacted at the latest Florida Special Session will have a positive impact on the region’s property market, but the benefits will need to be proved before reinsurers and insurance-linked securities (ILS) markets really jump back in, according to experts from across the space.
The third panel of Artemis’ recently held annual ILS conference in New York, which had more than 380 attendees, focused on the challenges that must be overcome to ensure that the Florida property marketplace is sustainable.
The panel was moderated by Judith Klugman, Global Head of ILS Distribution, Swiss Re Capital Markets, and featured Jennifer Montero, Chief Financial Officer, Citizens Property Insurance Corporation; Michael Stahel, Partner/Portfolio Manager, LGT ILS Partners; and Adam Schwebach, EVP, Tampa Branch Manager, Gallagher Re.
Back in December, the Special Session of Legislature in Florida approved a wide-ranging bill designed to reform the state’s property insurance marketplace. While the bill is no panacea for all of the issues in the region, it has the potential to have a relatively significant impact.
Commenting on the reforms, Montero of Citizens Property Insurance Corporation, Florida’s insurer of last resort – which as a result of the issues in Florida has seen its exposure grow substantially – highlighted some of the main benefits of the changes.
“So, the biggest one for us, for everybody, I think, is the one way attorney fees, so that goes away, which means if you sue somebody, you’re paying your own legal fees,” said Montero. “The one way fee of the assignment of benefit, that is gone. That was effective January 1st for property, not for anything else specific about that. So that’s no longer a problem.”
Another important change concerns the length of time that a claim can be filed post-event, which has come down from two years to one year, having previously been as long as five years.
“Unfortunately, that’s at new business or renewal… but it’s going to one. So that’s great. That gets rid of a lot of fraud, and people just get it in, get it taken care of, get it paid. I think that will help out on the LAE costs and the indemnity costs, on both of those. So those are good,” added Montero.
Expanding on this, Schwebach of reinsurance broker Gallagher Re, stressed that all of the changes noted by Montero are good news for the sector, and extremely beneficial for both reinsurers and risk takers.
“If you talk about pulling one way attorney fees and AOB out of the claims process, ultimately, in a hurricane those charges and those losses are being passed on to risk capital that sits behind these carriers. And I think that’s a huge point to make. What the industry experienced with Hurricane Irma, I think, was kind of the groundswell wake up call for the market to say; we thought we trusted models, one year out we thought we had a good loss, and then two years out, we thought we had a good loss, and then three years. Irma just kept developing, and all these additional litigation losses were being passed on to reinsurers. And I think that was a huge separation from the reinsurance market saying this is something I can underwrite, versus saying, I don’t even know how I can price for this anymore,” said Schwebach.
“The one year reporting period is huge, especially for those in this room, right. I mean, you talk about trapped collateral, you’re going to get to a point much sooner in the claims process where you know what your ultimate loss is going to be for both the carrier and the reinsurer, and you can then redeploy that risk,” continued Schwebach.
Adding, “I think if you’re talking to the traditional reinsurers and ILS markets, there’s going to need to be a period of proving the benefit of that before people really jump back in.”
As a reminder of just how significant the fraud issue is in the Florida property insurance market, the state accounts for just 7% of losses on a national level, but around 87% of the litigation.
“So, ultimately, the question is can you price this risk? Do you feel comfortable? With these changes that have been discussed, do you feel that you can rely on the risk probabilities to price something? Because if you don’t know how much risk you’re taking, you can’t price it. Do you feel that this sort of ring fences your risk a bit more and that you can price this? Are you optimistic?” questioned moderator Klugman.
“We are very optimistic, I have to say,” responded Stahel. “And certainly, as for all of these measures, we take a close watch on all these improvements.”
“In the past, what we’ve simply done, in order to underwrite Florida business, we have added a factor for the uncertainty. And that factor, hopefully, we can reduce that over time. Because all we have to do is we have to factor in an additional loss cost for the Florida challenges. And as these challenges are getting smaller, of course, it’s hard to prove it, I’m not saying it takes another hurricane because no one wants another hurricane, but over time we will see how that really plays out,” continued Stahel.
He went on to stress that his firm has great hopes that all of these measures are making the market more stable, noting how undesirable adverse loss development on Irma was for investors in the ILS space.
“How can you explain to an investor that you’re following the reserves of the original counterparty and then two years later, you still increase the reserve level for that loss that happened two years ago. And that’s a true game changer. I think there, you can really use those words, game changer, is the 12 months cap. That’s extremely helpful, because okay, I’m not saying that we have to find a number after 12 months, but at least we know the count, and you can have a better handle on the actual loss level,” said Stahel.