Firm suggests shock to home insurance to jolt lawmakers

Essay says causing chaos is ‘only sure way’ to spur action

A national insurance industry research analysis firm is calling for the global reinsurance industry to shock Florida lawmakers into enacting meaningful property insurance reform.

But the strategy the firm proposes would not only shock lawmakers, it would interrupt coverage for untold numbers of Florida homeowners and transfer billions of dollars of risk to state-owned Citizens Property Insurance Corp.

An essay posted Monday by Assured Research Inc., a Madison, New Jerseybased consulting firm run by two longtime insurance analysts, recommends that global reinsurers stop short of providing coverage that insurers in Florida will need to enter the upcoming hurricane season with sufficient claims-paying ability.

Reinsurance is coverage that nearly all insurers doing business in Florida must purchase to maintain their claims-paying abilities at a level necessary to earn an A — “Acceptable” — financial strength rating from ratings agency Demotech.

The essay, which is unsigned, acknowledges the chaos that would result from reinsurers purposely withholding capacity from the Florida market just weeks before the June 1 start of hurricane season.

But as the authors see it, that chaos would be the only way to force lawmakers to enact real reforms that don’t amount to “tweaks” that haven’t slowed the claims abuses and litigation that brought about the current availability and affordability crisis.

“The only sure way to ensure progress, as we see it, is for reinsurers to exercise their rights to pull capacity from the state,” the essay said.

Such a destabilizing tactic, the authors said, is necessary to combat solvency risks that drove Gov. Ron DeSantis to call a special session on the state’s property insurance crisis. That special session is scheduled to begin on May 23, which, the essay contends, may be too late to allay concerns of reinsurers “who might be wondering if Florida homeowner risks are insurable — at any price.”

Founded in 2011, Assured Research is managed by its president William Wilt, whose 30-year insurance career included stints as equity and credit analyst, executive positions and actuarial consulting, and managing director Alan Zimmerman, a long-time insurance analyst and former head of property casualty research at Macquarie Group, a global financial services company.

“Our purpose in penning this note is to

share: 1.) The depth of this market disarray is among the worst we’ve seen covering this industry,” the essay said. “2) We suspect a real estate and political crisis in the state of Florida commensurate with the aftermath of Hurricanes Andrew in 1992 and the active 2004-2005 hurricane seasons is at the doorstep of all Florida homeowner stakeholders.”

Why reinsurance is vital

In Florida, availability of reinsurance is vital to the survival of the private insurance market.

If a company’s surplus and reinsurance is insufficient to cover likely claims after a 1-in-130-year event and a second 1-in-70-year event, Demotech will downgrade or withdraw their rating.

If downgraded to an S — “Substantial” — the company won’t be acceptable to federal mortgage guarantors Fannie Mae and Freddie Mac, but it could still be considered financially stable.

But if Demotech withdraws its rating altogether, state insurance regulators have no choice but to order the company into receivership and transfer its obligations to the Florida Insurance Guaranty Association. That’s already happened to four Florida-based insurers since April 2021 and several more are teetering on the brink, experts say.

Policyholders stranded by the dissolutions are left with little choice but to hope another private-market insurer will cover them — which is increasingly unlikely as more and more companies are losing money — or seek an inferior policy from stateowned Citizens Property Insurance Corp.

Citizens is on track to becoming the insurer of last resort for 1.1 million homeowners this year, officials there said. Lawmakers worry that Citizens will grow so large that it will be unable to pay its claims from its $6 billion surplus and the reinsurance it buys from the Florida Hurricane Catastrophe Fund.

If that happens, Citizens wouldn’t go broke. It would levy special assessments to make up the shortfall. First, it would send bills to current Citizens customers and next to virtually all insurance consumers in the state.

The Assured Research essay acknowledges the chaos that would follow a decision by reinsurers to withdraw capacity. But

that might be the only way to get lawmakers to stifle the excessive litigation triggering insurers’ heavy losses that they must make up by raising rates charged to policyholders, the essay said.

“The capacity shortfall, ratings downgrades, and flood of business into Citizens that would follow could not be ignored or papered over with tweaks to the current

property insurance statutes fueling the runaway litigation,” it said.

Instead, the essay said, lawmakers must focus on what’s driving the losses — “contractors and lawyers promising to force [policyholders’] insurer to pay for a new roof ’ irrespective of whether the old one was legitimately damaged in a ‘sudden and accidental’ way.”

Experts say reinsurers won’t play ‘politics games’

Insurance experts who read the essay said there’s little chance that reinsurers would follow its recommendation to withhold capacity.

Most companies are already deep into negotiating prices of reinsurance policies ahead of the June 1 deadlines, said Paul Handerhan, president of the Federal Association for Insurance Reform, a consumer-oriented watchdog group that makes policy recommendations to legislators.

Besides, reinsurance providers, which are global in scale, wouldn’t make business decisions to influence legislation, he said. They simply analyze market conditions and set prices accordingly. If the market dictates that prices increase, as has been happening in Florida since Hurricane Irma struck in 2017, insurers

will either have to pay the higher prices or go out of business, he said.

“I don’t think reinsurers are playing games with their capacity just to influence the Legislature,” he said. “And if you’re an insurance company, you are putting together your reinsurance program regardless of what happens in the Legislature. All of the companies are trying to complete their reinsurance treaties now.”

The big question for consumers, he said, is whether all of the companies will be able to afford enough reinsurance to stay afloat for another hurricane season.

Bob Ritchie, president and CEO of Tampa-based American

Integrity Insurance Group, said reinsurance buys for the upcoming hurricane season are on hold as everyone awaits what happens during the special session.

The special session

DeSantis’ proclamation ordering a special session to begin on May 23 cites six areas of consideration: “property insurance, reinsurance, changes to the Florida building code to improve the affordability of property insurance, the Office of Insurance Regulation, civil remedies, and appropriations.”

Out of the six areas, lawmakers know that the most critical and immediate need will be to ensure that all active insurers can secure enough reinsurance prior to June 1, Handerhan said. If they fail at that task and companies go broke after the session ends, voters will be asking, “What did you do up there?” he said.

Discussion among lawmakers is focusing on a couple of alternatives — making $4 billion worth of coverage available through the Florida Hurricane Catastrophe Fund or making the same $4 billion available outside of the CAT fund, backed by Florida’s general revenue, he said.

Coverage through the CAT fund is less expensive than coverage purchased through the private market and companies would likely opt for it over what they’ve negotiated with private reinsurers, Ritchie said.

As a result, some reinsurers are holding back on quoting renewal rates, which will cause “complete delay and upheaval” as June 1 approaches, he said. “We are in completely uncharted waters right now due to the very late timing of the special session,” he said.

Ritchie said he doesn’t believe that reinsurers would follow Assured Research’s advice.

“Capacity should not be withheld in order to make a political statement,” he said. “And this will not happen, as reinsurers need Florida business to make their business plans. We are the world epicenter for property catastrophe reinsurance and have the highest rates. Don’t let anyone tell you any differently. Reinsurers need Florida and we need them.”