It’s no surprise that Florida carriers are raising homeowners insurance rates given several years of catastrophes and losses from litigation related to assignment of benefits and water damage claims.

What may be surprising for insureds, however, is how substantial the increases to their premiums may be, particularly if current filings being evaluated by the Florida Office of Insurance Regulation are approved without modification.

In rate hearings before OIR over the last two months, several Florida carriers explained their filings for rate increases ranging from more than 20 percent to nearly 40 percent. Since December, Edison Insurance Co., Capitol Preferred Insurance Co. and Velocity Risk Underwriters (on behalf of National Specialty Insurance Co.) have told regulators that these rate increases are needed for their companies to remain healthy.

“Unfortunately, times come that you have to do certain things to increase your rates and make sure your company stays viable and functional and healthy,” said Capitol Preferred President and CEO Jimmy Graganella at the company’s Feb. 7 rate hearing. His company is seeking a 36.5 percent rate increase on one of its 14 insurance programs covering about 28,000 consumers in Florida.

Capitol Preferred is one of many insurers responding to deteriorating conditions in the Florida homeowners insurance market from a combination of AOB, water damage loss claims and several years of major hurricanes, as well as what insurers call “loss creep” from those claims in recent months.

According to a June 2019 AM Best report, several carriers, including the top five publicly traded Florida insurers (United Insurance, FedNat, Heritage, Universal and Homeowners Choice), have reported adverse development related to Hurricane Irma, “considerably increasing ultimate loss estimates since impact,” Best said.

The report also noted claims from Hurricane Michael appear to be taking a “similar, though less severe, trajectory,” with several carriers increasing ultimate loss estimates as time passes.

These factors are being blamed for the need for higher insurance rates and a tightening of coverage in several regions of the state, particularly in South Florida.

AOB reforms (House Bill 7065 ) passed last year are expected to help the issue, but insurers say many of these claims could still take years to resolve and will have an impact on insurer losses in the short term, thus contributing to the need for rate increases.

Insurers are required by state law to participate in rate hearings before the Florida OIR for any rate increase filings of more than 15 percent.

Florida’s Edison Insurance Co. was the first to go through an OIR rate hearing back in December for a 21.9 percent rate increase. Representatives with the company told regulators the frequency of water damage losses was largely to blame and that without the recent enactment of AOB reforms, the insurer would have needed a 38 percent rate increase.

Ryan Purdy, Merlino & Associates principal and consulting actuary assigned to the Edison filing, told regulators while the AOB reforms have helped, the frequency of the insurer’s water damage losses without an AOB increased 56 percent over a three-year period, and severity of those claims that were represented by an attorney increased by about “four-fold.” The company currently receives about a thousand first-party lawsuits a year.

“While there’s great optimism about how House Bill 7065 will improve the claims environment of the state, it cannot be said with great certainty at this point in time what specific value these savings might be given these uncertainties,” Purdy said.

OIR approved Edison’s 21.9 percent insurance rate filing last month with an effective date of Feb. 15, 2020, for new policies and March 24, 2020, for renewal policies statewide.

At the Capitol Preferred Insurance Hearing on Feb. 7, Graganella noted three factors that have brought the company to the point of needing a 36.5 percent rate increase: reinsurance costs, AOB abuse and, more important, first-party lawsuits. According to Graganella, 36 percent of his company’s claims are now called in represented by an attorney. It used to be 4 percent. “That’s a massive number,” he said.

He told regulators the new AOB reforms haven’t affected the number of AOB lawsuits the company has received, so far, but it has seen a decrease in the severity of AOB claims.

“We are seeing the AOB bill having minimum effect,” he said. “It’s really too early to tell what the true longevity effect’s going to be.”

Non-AOB water damage claims are driving much of the insurer’s current litigation and costs, Graganella said, noting the average cost of represented claims is twice the cost of non-represented claims at $24,000. He said the company pays out $1.77 on water losses for every dollar it takes in and has experienced a 727 percent increase in lawsuits since 2016.

“That’s substantial. That’s lawsuits; that’s not cases that are represented files that we are able to negotiate prior to the lawsuit – that’s actually lawsuits,” he said.

He said while the number of represented claims and lawsuits has been increasing, the company has “taken care” of its consumers in Florida. The carrier has paid out more than $416 million in claims for 30,000 insureds over the last three years and has a closing ratio of 98 percent for Hurricane Michael, he told regulators.

Barry Gilway, president and CEO of the state-backed insurer of last resort, Citizens Property Insurance Corp., also highlighted the Florida insurance market issues during a December board of governors meeting. He cited third-quarter underwriting losses of $378 million for Florida insurers and said these losses could have an impact on any efforts to further reduce Citizens’ policyholder count, which the insurer plans to try to do this year.

“The market impact [of losses] is a continuation of increased rates – rates [increases] are being filed consistently on a monthly basis ranging from 3 percent to the 14.9 percent allowed for automatic approval by OIR,” he said. “These rates are absolutely necessary to overall stability to the marketplace.”

Update: According to OIR, there is no automatic approval threshold for personal residential rate filings.

“OIR carefully reviews all proposed rate filings, regardless of the amount requested, to ensure they comply with all applicable laws and are not excessive, inadequate or unfairly discriminatory. OIR holds public rate hearings in compliance with section 627.0629(6), Florida Statutes when a rate filing exceeds 15 percent, and if it is based in whole or in part on data from a computer model,” a spokesperson from OIR said.

Ratings agency Demotech, which provides financial stability ratings (FSRs) to more than 40 Florida domestic insurers and warned recently that many are facing downgrades, said the 15 percent rate threshold has led to carriers taking less than needed increases despite a significant accumulation of losses. As a result, rates are below where they should be, Demotech President Joe Petrelli said in a letter to Florida’s insurance regulator and Citizens Property Insurance Corp. in December.

“The cumulative impact of carrier acceptance of rate revisions at a percentage change that eliminates the time, effort and expense for a hearing and decision—i.e., less than 15 percent—has had a cumulative impact over the past several years,” he wrote.

Demotech said carriers must take several steps to improve their financial stability, including securing actuarially sound rates at the earliest possible date.

Rising Reinsurance Costs

Increasing reinsurance costs are also hitting Florida insurers, as they rely heavily on reinsurance to maintain their surplus and claims paying ability. According to a recent report by AM Best, reinsurance rates are going up after several years of losses and rates are likely to increase by 15 percent to 20 percent for the June renewal period. Carriers that depend highly on reinsurance may be most affected, according to the ratings firm.

“Companies with high reinsurance dependence face difficult choices. Higher reinsurance rates may pressure earnings if insurers decide to continue writing business at existing levels. Those opting to retain more business may see declines in capitalization in the event of catastrophic storms; these companies may be forced to write less business to maintain existing capital,” Best said.

Velocity Risk Underwriters, the managing general agency underwriting risk on behalf of National Specialty Insurance Co., said at its Feb. 14 rate hearing that its requested 28.1 percent rate increase is due to its wind loss ratio and increasing reinsurance costs. The filing is for HO-3 policies for more than 35,000 Florida policyholders.

The company began writing in Florida in 2016 and has grown to a policy count of 41,753 as of Dec. 31, 2019. Its policies are backed by reinsurance and insurance-linked security capital.

Representatives of Velocity Risk said reinsurance costs account for 25 percent of the needed rate increase.

“The reinsurers and the capital base we have would like our competitive position to be better than it is,” said Velocity Risk CEO Phil Bowie. “They take all of the risk, including the non-hurricane risk as well, so they definitely would like to get some increases and achieve some stability in the other perils of this program.”

AM Best noted in its report that from mid-2016 through early 2018, Florida OIR approved more rate increases than it denied, after which it denied more increases than it approved. Through August 2019, it resumed approving more rate hikes that should help offset the rise in reinsurance costs slightly, Best said.

Legislative Help

Industry representatives are hoping the Florida Legislature will pass reforms they say will stem the excessive litigation losses and help the state’s private market.

Graganella told regulators he is working with Florida lawmakers on bills that he thinks “can impact the state of Florida in a positive fashion.”

Several bills have been introduced this session that would target first-party litigation abuses and insurer bad faith cases, but a couple of the bills were temporarily postponed in mid-February by the bills’ sponsor, State Senator Jeff Brandes. In an interview with the Florida Chamber of Commerce, Brandes said property insurers cannot sustain the huge increase in litigation that is occurring.

“The insurance industry, frankly, isn’t designed for that level of legal engagement,” Brandes said. “We have got to begin to put some parameters on this issue.”

Graganella said parts of central Florida are now becoming as hard for insurers to offer coverage in as areas of south Florida due to lawsuit abuse. He pointed to laws that were passed targeting the abuse of sinkhole claims as an example of how issues can be addressed.

“We had legislation that got the fraud out of the statutes and all of a sudden we have sinkholes get healed,” he said. “Central Florida’s going to be the next [Miami] Dade County in rates if something is not done.”

*This story ran previously in our sister publication Insurance Journal.