Florida Relief Not Immediate: AM Best

Insurance reforms passed in Florida’s most-recent legislative special session will lead to much-needed relief to the state’s homeowners market, but the impact won’t be immediate, AM Best analysts said in a report published Tuesday.

The rating agency commentary report, “Florida Insurance Reforms: Long-Term Relief on Horizon; Near-Term Headwinds Remain,” recounted reform measures that will be credit positive for insurers in the state, but at the same time analysts stressed that capacity likely will remain limited in the near term and reinsurance costs will be stay high.

Before a special legislative session in Florida earlier this month that ultimately resulted in the credit-positive provisions signed into law last week—the elimination of assignment of benefits and the one-way attorneys’ fees rule for property claims, as well as a reduction in the amount of the time allowed for a supplemental claim (18 months)—AM Best analysts had predicted more insolvencies on the near-term horizon if such reforms hadn’t been implemented.

In Wednesday’s report, AM Best raised the prospect of insolvencies again, noting that while the changes in the new law “will bring about much needed relief,” the forthcoming relief “is unlikely to be immediate. “There will likely be judicial challenges to the new law. Until the courts rule, national writers may still be wary of the environment in Florida.”

“The five largest national homeowners insurers account for over 50 percent of the U.S. market outside of Florida, but just 15 percent of the market in Florida, demonstrating just how dire the situation is,” said Sridhar Manyem, senior director, industry research and analytics. “The legal environment and reinsurance market are two significant issues addressed by the special session that may ultimately make the market more attractive, but the effectiveness of reform will require time.”

The report also noted that local carriers remain heavily dependent on reinsurers. If losses exceeds reinsurance coverage, there could be more insolvencies, the commentary says.

In addition, reinsurance cost increases will likely fuel hikes in primary market premiums charged to policyholders.

“Legislators have taken aim at elements influencing rising reinsurance costs, but how material the potential savings for insurers will be under the new legislation will depend on whether the private reinsurance market interprets the most recent actions as viable mitigations since the risk of catastrophe losses remain,” said Chris Draghi, associate director, AM Best, in a statement about the new report.

Unchanged by law, of course, is the inherent risk profile of property in Florida property, which will continue to impact pricing and the balance of policies issued by the private market and Citizens Property Insurance Corporation. New restrictions on insureds obtaining coverage from Citizens, however, should help move the market toward actuarially sound pricing, AM Best notes.

The report also describes the workings of the Florida Optional Reinsurance Assistance (FORA) plan put in place under the new law, and an earlier notice from Fannie Mae and Freddie Mac to mortgage servicers directing them to accept property insurance from insurers that fall short of financial strength rating requirements but participate in a backstop arrangement (Temporary Market Stabilization Arrangement).