OLDWICK, N.J.--(BUSINESS WIRE)--While many in the insurance industry believe that hurricanes pose the largest threat for Florida’s property market, the assignment of benefits (AOB) issue has maintained its pervasive, negative impact for many carriers. Hurricane losses, AOB issues and adverse loss reserve development have created a difficult market and may be dampening the appetite of reinsurers on whom Florida-focused companies have grown to rely, according to an AM Best special report.
The new Best’s Special Report, titled, “The Florida Market: Bracing for the Next Big Event,” states that Florida’s strained insurance environment has been stoked by the commonly misguided use of AOBs, with contractors soliciting the transfer of claims rights from insureds and subsequently inflating repair costs (primarily water-related), all the while using the legal system to their advantage.
For insurers, the strain has led to an environment marked by significantly higher losses and loss adjustment expenses, depressed insurer operating performance, and adverse loss reserve development patterns, leading to the need for insurers to file considerable rate increases, which unfavorably affected insureds. A new reform law that took effect July 1, 2019, hopes to remedy some of the issues that have generated costly litigation between contractors and insurers. However, whether the law contains any loopholes that can be exploited remains to be seen.
While Florida property writers have experienced pressure from AOB-related claims, they are also have encountered loss creep related to hurricanes Michael and Irma, which has created unfavorable adverse reserve development — more so from Hurricane Irma — and further hurt insurers’ performance.
Reinsurers are holding their ground with higher pricing for Florida, with several industry sources reporting an average increase in reinsurance costs of 15% to 20%, and even higher increases for the more loss-affected insurers. These rising reinsurance costs have the potential to pressure some of the more thinly capitalized Florida-specific companies in the market. The change in pricing is likely to be much more individualized than in years past, as reinsurers place greater emphasis on performance, loss development, program mix and quality of risks. Recent AOB reform may help reverse some of the unfavorable trends, but given the timing, AM Best believes it is unlikely to have a material impact on this year’s renewal period, and urges insurers to remain cautious when developing pricing and setting reserves based on realistic assumptions of improvement.
To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=287141.
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