A drop in catastrophe reinsurance costs for insurers has not translated into reduced property insurance rates for Florida consumers, and state Chief Financial Officer Jeff Atwater wants to know why.
Atwater began his quest to find out in an Aug. 7 letter to Florida Insurance Commissioner Kevin McCarty. "For more than a decade, insurance companies have argued that their property insurance rate increases have been due in large part to rising reinsurance costs," Atwater wrote. "But if this is their justification for years of rising rates, can you please explain why a significant drop in reinsurance costs worldwide has not yet corresponded with a significant drop in property insurance rates for Floridians?"
The Florida Office of Insurance Regulation, which has oversight of insurance rates, issued a statement saying a response is forthcoming. "Commissioner McCarty has received the letter from CFO Atwater and appreciates his inquiry for information on this issue," the statement said. "We are in the process of working on a response letter to address his questions and concerns."
There is at least an indication as to what the response might be. Atwater's letter is regarded as similar to one sent to McCarty in June by Rep. Ray Rodrigues, R-Fort Myers. Rodrigues said market sources were reporting a massive influx of global market private capital into reinsurance. Bradley Kading, president and executive director of the Bermuda Insurers and Reinsurers mentioned in a mid-June opinion-editorial that the price of private reinsurance in Florida had fallen 15% on average statewide, Rodrigues said. Rodrigues called for a drop in private insurance policyholder premiums during 2014.
McCarty's July 2 response to Rodrigues indicated that some insurers intend to reduce rates in certain territories based on 2013 reinsurance costs. But others may opt to buy more reinsurance instead of reducing rates and some companies are required by their rating agency to buy more reinsurance than they had planned. "This is likely to keep rates up and move additional premium and exposure to reinsurers," McCarty wrote.
McCarty wrote that reinsurance demand is based on the amount of insurance a company writes, its exposure to hurricane loss and the availability of policyholder surplus to pay for hurricane losses. "We would anticipate the filing to reduce rates if the only thing that changed from last year is that their reinsurance costs are lower," he wrote. "This is not likely to be the case across the board but may be true for some insurance companies who are actively competing for market share in many parts of the state."
Atwater cited reports from the reinsurance community that indicated that Florida's property insurers have seen catastrophic reinsurance prices fall dramatically. "Industry reports show that the influx of capital from pension funds and other markets have created the right conditions for relief," he wrote.
Atwater - believed to be a possible gubernatorial candidate - said insurance companies should be able to lower their premiums in these conditions. "Floridians not only deserve an explanation for why they have not seen any savings to date, they also deserve to quickly begin seeing property insurance savings in their bills," he said.
Atwater's letter said the CFO and OIR should provide economic relief for consumers and maintain a secure insurance system for property owners when possible. "But this goal means ensuring fairness for both insurers and consumers, and right now there is no evidence that Florida families are benefiting as they should from the drop in reinsurance costs," Atwater wrote.
Catastrophe bond prices, which are typically more expensive than traditional reinsurance, have dropped 35% since last year, putting them at roughly the same level or below that of traditional reinsurance, according to Swiss Re. This drop in pricing, as well as increased use of collateralized insurance such as industry loss warranties is putting pressure on the traditional market.
Florida currently has 21 eligible reinsurance companies, some of them coming to the state from Europe and Bermuda after Florida lawmakers passed legislation in 2007 that loosened their eligibility requirements.
The top five writers of homeowners' multi-peril insurance in Florida during 2012 are Citizens Property Insurance Corporation, with a 19.53% market share; State Farm Group, with 8.68%; Universal Insurance Holdings Group, with 8.42%; Tower Hill Group, with 6.62%; and USAA Group, with 4.78%, according to BestLink.