There hasn’t been much good insurance news to report for Florida property owners over the past several years.
Premiums for most South Florida policyholders have increased significantly over the past three years — a result of claims abuses and sharp upticks in costly litigation for major insurance carriers.
And those factors are expected to trigger rate hikes for most area property owners again this year.
But here’s a bright spot, such as it is: Your 2018 policy cost won’t increase as much as insurance executives had expected following $140 billion in catastrophe losses last year from events that included hurricanes Irma, Harvey and Maria, and wildfires in California.
That’s because rates for reinsurance — which is the insurance that insurance companies pay to help them pay claims after a catastrophe — only increased an average 1.2 percent for the 2018 Florida hurricane season that began June 1, according to a report released late last week by JLT Re, a unit of Jardine Lloyd Thompson Group PLC, a London-based provider of insurance advice and brokerage services.
he increase is a turnaround from the previous six years of reinsurance rate decreases. But a 1.2 percent increase is considerably lower than what most insurers were expected to pay, JLT Re’s report said.
Paresh Patel, president of Tampa-based Homeowners Choice Insurance, said investors expected the heavy losses from 2017 to trigger rate increases ranging from 10 percent to 20 percent, which would have sent individual property owners’ premiums up by similar percentages.
But “because everyone thought that, all this money came pouring into the marketplace [from investors] wanting a piece of the action,” he said.
And because so much money was available to sell to insurance companies, reinsurers had to keep rates low just to compete, Patel said.
“Suddenly, you ended up with too much [capital] chasing the business. So the rate increases didn’t happen.”
And while that might not have made the investors happy, it’s a windfall for policyholders, he said.
“Once in a while, Florida gets lucky,” Patel said.
Reinsurance rates as a whole are 40 percent lower than they were in 2012, JLT Re said.
One of the biggest reasons is investors have found they can realize higher yields in the reinsurance market than they can by parking their money in bonds and other traditional investments, said Jay Neal, president and CEO of the Florida Association for Insurance Reform (FAIR), a Fort Lauderdale-based nonprofit insurance watchdog group.
That has enticed “alternative capital” such as “insurance-linked securities markets” to enter the reinsurance game, leading to situations like this year’s “negligible rate rises despite Florida having recently suffered its first landfalling hurricane since 2005,” JLT Re’s report said.
“This is a significant contrast to previous large-loss years which were all followed by significant — often double-digit — rate increases,” the report said.
Another reason reinsurance rates remain low in Florida is that hurricane risk isn’t as concentrated along Florida’s coast as it was in the 1960s and ’70s, Neal said. “Reinsurance costs continue to improve for Florida because other areas of the world are building up coastal real estate,” he said.
The sustainability of insurance markets, and the cost of insurance, correlates with how wide risk is spread — both geographically and what risks are covered, Neal said. For instance, an insurer with policies spread equally across 50 states is far less likely to be put out of business by a Florida hurricane than a company with all of its policies in Florida.
Spreading risk is why FAIR would like the federal government to require homeowners with federally backed mortgages in California, Washington and Oregon to carry earthquake insurance, he said.
Currently, there’s no such requirement for residents of those states, even though Floridians with federally backed mortgages must buy hurricane insurance.
“That’s the real way to get Florida property insurance rates lower — make residents of West Coast states buy earthquake insurance,” Neal said.
As for whether the cheap reinsurance trend continues for Florida, Patel said investors will have their eyes on a few key indicators, including how much unresolved Irma claims winding their way through the courts will increase total insured losses from the storm beyond the current tally of $8.6 billion, as well as insurers’ ongoing battle against third-party claims assignments driving up losses and lawsuits.
And if Florida and the United States overall gets hit by another round of hurricanes like in 2017, “I don’t think [reinsurers] are going to be that thrilled about it,” Patel said.
Still, Neal cautioned against rooting against reinsurers making money. Insurance regulators require Florida’s private market insurers to have enough surplus and reinsurance capital on hand to pay maximum losses following a storm with a probability of occurring once every 100 years.
Florida has about 120 private-market insurers, and it’s vital that reinsurance remain available and affordable to them, he said. Otherwise, options could dwindle like they did after the storms of 2004-05, leaving state-run Citizens as the only option for 1.6 million.
“The reality is the fact that [reinsurers] have capital deployed the way they do makes Florida’s private insurance industry possible,” he said.