The industry’s financial storm clouds have prompted fears of collapsing companies and the massive growth of state-owned Citizens Property Insurance Corp., the insurer of last resort:
Last week, Gov. Ron DeSantis said he’d “welcome” a special session to enact insurance reforms, but indicated he would not call one on his own. Instead, he left the proposal up to leaders of the state Senate and House.
So far, there’s been no indication that Senate President Wilton Simpson and House Speaker Chris Sprowls plans to call a special session, said Sen. Jeff Brandes, a Tampa-area Republican who has repeatedly warned that the state faces an insurance crisis that could undermine Florida’s booming real estate market.
The Senate passed a bill in the recently completed regular session aimed at curbing the number of “free roof” claims and related lawsuits that insurers say are driving up costs for all of their customers. But the House refused to consider any major insurance reforms.
The foreboding letter
In Demotech’s March 23 letter to DeSantis, Simpson and Sprowls, five Demotech executives, including its president and co-founder Joesph Petrelli, warned that failure to enact reforms before the June 1 start of hurricane season would lead to grave consequences.
“The conditions of the property insurance marketplace in Florida are unsustainable,” the letter said, “and without the necessary corrective action, many Florida insurers will struggle to maintain adequate surplus, efficient capital sources will avoid the market, private reinsurance costs will become prohibitively expensive, and consumers will ultimately bear the cost.”
Longtime leaders in the insurance industry believe that some companies won’t have enough cash, financing, or investment capital to purchase reinsurance, which is required so insurance companies have the ability to cover claims likely to roll in after a 1-in-100-year storm event, such as a major hurricane.
Insurers that fail to maintain an adequate surplus of claims-paying capital could be declared insolvent by state insurance regulators, and their policyholders would likely be forced into Citizens.
Citizens’ growth always prompts worries: If it grows too much and cannot pay all claims after a major hurricane, assessments could be levied against nearly all insurance policies in the state to make up the shortfall.
Citizens, which was down to 419,000 policies in 2019, has been quickly swelling with new customers who can’t get covered in the private market. As of March 25, Citizens was up to 807,910 policies.
Four Florida-based insurers have been declared insolvent since April 2021. Many others have stopped writing policies in high-claims areas of the state, such as South Florida, and declined to renew policies covering older homes or homes with roofs older than 10 years.
Insolvencies could also result from Demotech withdrawing companies’ financial strength ratings or downgrading companies’ ratings from A for “acceptable” to S for “satisfactory.”
A downgrade effectively puts a company out of business, either by prompting state insurance regulators to declare the company insolvent and transfer it to a receiver, or, in the case of any rating lower than A, disqualifying the insurer from covering any property backed by a federal mortgage guarantor, such as Fannie Mae and Freddie Mac.
Demotech’s letter warned lawmakers to expect ratings downgrades if no special session is called. “If current market conditions remain in place, we anticipate that we will downgrade Financial Strength Ratings of a number of companies in the coming weeks,” the letter said.
Simpson has called the idea of a special session to address insurance “a possibility,” according to a March 11 statement relayed by a spokeswoman. Sprowls’ office on Monday did not respond to questions about a special session.
More companies might have to fail before the Senate and House leaders call a special session, Brandes said.
“Sometimes you have to force a crisis to get the legislature to act,” he said.
Replacement policies hard to find with open claims
A former Avatar policyholder says she’s already facing a crisis.
Mimi Bright, a homeowner in Parkland, has been trying to find coverage since learning her Avatar policy would expire in mid-April.
But she has an open damage claim with Avatar, and her agent told her that no insurer, including Citizens, will cover her until the claim is resolved.
That could take several months. Under terms of Avatar’s liquidation, the company’s open claims will be resolved by the Florida Insurance Guaranty Association, which is working its way through about 2,000 open Avatar claims.
She doesn’t understand why state law does not require Citizens to offer coverage to policyholders left in limbo when their insurers are declared insolvent. “The state should be doing something to protect consumers,” she said.
Despite what its underwriting guidelines say, Citizens is willing to cover Bright and other Avatar customers with open claims if they provide documentation that the claim has been submitted and repairs are in progress, says Citizens spokesman Michael Peltier and Kyle Ulrich, president and CEO of the Florida Association of Insurance Agents.
“Obviously, [the Avatar dissolution] happened quickly, and we will be as flexible as we can be,” Peltier said. Homeowners will have to provide proof, such as a repair contract showing that repairs have been scheduled or proof that the repair process is underway, he said.
Agents have to be tenacious and offer to provide the documentation, which could also include price estimates from contractors, Ulrich said.
Citizens, Ulrich says, understands that “It’s in no one’s interest to have homeowners go without coverage for a period of time.”
Corey Neal, executive director of the Florida Insurance Guaranty Association, said FIGA is willing to work with agents to provide information needed to help displaced homeowners secure replacement coverage.
Some private-market companies, and not just Citizens, will cover a stranded homeowner when FIGA or a policyholder’s agent reaches out, Neal said.
“If the underwriter wants more information about a loss, we’ll absolutely help them. One of our first priorities is to help find replacement coverage. Hardship claims go to the top of the list.”
The key, he said, is for agents not to accept “no” for an answer from a company’s underwriting staff and to appeal to a higher level, such as an underwriting department manager. Agents needing help can reach out to FIGA directly, he said.
Paul Handerhan, president of the consumer focused watchdog group, Federal Association for Insurance Reform, said consumers whose insurers decline to renew them also face difficulties finding replacement coverage if they have open claims.
“It’s becoming a real problem, especially with the growing number of non-renewals,” he said. Progressive Insurance recently announced plans not to renew 56,000 Florida homes with roofs older than 15 years.
FAIR would like to see a state law requiring Citizens to cover displaced policyholders with open claims. The law could allow Citizens to exclude the damaged section of those homes from coverage until repairs are complete.
Lexington pullout to affect wealthy
Lexington Insurance Co.’s decision to stop insuring private homes as of Aug. 1 could be a signal that costly claims are also affecting viability of the so-called surplus lines market that typically caters to wealthier clients with homes worth $1 million or more.
Most of Lexington’s policyholders don’t have the option to get coverage from Citizens because Citizens only insures homes with replacement values of $700,000 or less in all counties except Miami-Dade and Monroe, which caps eligible replacement values at $1 million.
Lexington told agents last week that it plans to terminate its personal lines coverage program as of Aug. 1.
Lexington’s parent company, AIG, declined to comment on the decision.
Handerhan said he was told that Lexington is pulling out of the homeowner market across the country.
Lexington insures 8,000 homes in the state with replacement values totaling more than $90 million, Handerhan said.
Ryan Papy, president of the Palmetto Bay-based Keyes Insurance agency said Lexington’s decision could prove costly to the growing number of Florida homes valued at $1 million or more.
Lexington customers who must look elsewhere will find “that market is almost empty,” Papy said, adding other surplus lines carriers, such as Chubb and Pure “have no appetite for new business.”
Cost increases “could be substantial — 100% to 200% even,” he said. “Maybe more.”
“The market turmoil is going to begin to affect a different type of customer,” he said of the wealthier homeowners. “That may push things closer to reform.”