Florida’s Property Insurance Market Is ‘Spiraling Towards Collapse’ Due to Litigation
Insurance News for 1/22/21
Florida’s Property Insurance Market Is ‘Spiraling Towards Collapse’ Due to Litigation
Florida’s property insurance market is “spiraling towards collapse” and requires immediate attention if there is any chance of protecting the market, consumers, and ultimately, the state’s economy, according to an analysis about to be presented to the Florida Legislature.
The report points a finger at the state’s “litigation economy” as the main contributor to insurance market woes— seeing it as more of a direct cause than the many weather events Florida has suffered.
Among its findings:
- Litigation frequency and severity represents an additional expense load of 17% (and rising) on all earned premiums for insurers in Florida compared with other catastrophe-prone states.
- The fees paid to attorneys by Florida carriers far exceed the damages paid to the insureds.
- In 2019 alone, Florida insurers paid almost $3 billion in lawsuit costs that translated into higher premiums for insureds.
- Although the volume of claims after storms is a factor in costs, claims unrelated to catastrophes account for approximately 60% of all litigation.
- Florida consumers are paying a “hidden tax” to fund the litigation that averaged about $680 per family in 2020.
The report, “Florida’s P&C Insurance Market: Spiraling Towards Collapse,” was authored by Guy Fraker of Cre8tfutures Innovation System & Consultancy. Fraker has worked with the insurance industry for 30 years, including on auto insurance and autonomous vehicles, and with primary carriers, reinsurers and related sectors.
In tracing how the market got to this crisis point, the report identifies four Florida laws passed between 2011 and 2019 as fostering the litigation crisis. They are statutes governing assignment agreements, mandatory replacement cost coverage for residential roofs, multi-year statute of limitations to file a first notice of loss and the one-way attorney fee.
Also, two state Supreme Court rulings have exacerbated matters.
This litigation environment has carriers steadily hemorrhaging capital and surplus. Fraker’s report says the roughly 6% of homeowners insurance claims being litigated are equal to the cost of a “good solid Cat 3 hurricane” every 12 months.
“This market is at a critical inflection point. The longer and broader these trends continue, the more likely the state will face a recovery measured in generational time horizons,” the report warns. “The time for hoping some theoretical break point doesn’t materialize is over.”
Fraker was commissioned last year to do the Florida market analysis by insurers, lawsuit reform groups, and others. Florida State Senator Jeff Brandes, a member of the Senate Banking and Insurance Committee who has been sounding alarms about the Florida property insurance market, helped spearhead the effort.
Fraker’s study argues that the state’s residential P/C insurance marketplace “faces a convergence of existential threats in the form of increasingly unpredictable claims litigation, from rising costs of risk capital and from its persistently high exposure to natural catastrophe risks.”
The report argues that “targeted legislative reforms are needed in order to preserve the insurance industry’s viability while serving property owning Floridians and Florida’s economy,” while adding that “without intervening public policy solutions, the residential property insurance marketplace will experience failure.”
Fraker said in an interview with Insurance Journal that he agreed to do the report on “behalf of Florida’s economy and Florida’s consumers, not the industry [or] any other stakeholder groups.”
In compiling the report, Fraker said he interviewed insurance executives from companies, regulators, lobbyists/advocates, plaintiff counsel firms, defense counsel firms, building and roofing contractors, consumer advocates, reinsurers, ratings agencies, as well as investors and a climate scientist. He also analyzed litigation records and reviewed thousands of documents from regulators.
While Florida has faced three consecutive years of major hurricanes from 2017 to 2019, insurers have insisted that the insurance problems are tied to an exponential increase in litigation.
Florida domestic carrier results showed a continuous drop in surplus over the last five years that culminated in a single year underwriting loss of more than $1 billion through the third quarter of 2020.
Florida Insurance Commissioner David Altmaier told the Senate Banking and Insurance Committee on Jan. 12 that carriers were on pace to nearly double their losses in 2020 compared with 2019, as their surpluses fell from $6.7 billion to $6.1 billion in just the first three quarters of the year. The combined ratio for Florida domestics was over 100% in the third quarter of 2020 and has been “trending upward for several years.”
Carriers writing property risks in the state have been responding by pulling back capacity in certain areas including south Florida and more recently central Florida, along with filing for rate increases. Altmaier said insurers submitted 105 rate filings in 2020 for increases of 10% or more and 55 of those filings were approved; in 2016 only six rate increases were approved.
Florida’s insurer of last resort, Citizens Property Insurance Corp., has received a flood of new policyholders over the last year as consumers struggle to find coverage in the private market.
The problems are also starting to impact Florida insurers’ ability to get reinsurance capital in the catastrophe prone state.
“These losses are having a direct impact on the surplus position of our industry,” Altmaier said. “As capital and surplus deteriorates, companies lose the flexibility to be able to write additional business … that has consequences for the consumer.”
Fraker blames a convergence of several events that have “moved the market from stabilizing towards total collapse.”
Fraker said four individual Florida statutes governing assignment agreements, mandatory replacement cost coverage for residential roofs, multi-year statute of limitations to file a first notice of loss and the one-way attorney fee statute were passed between 2011 and 2019 “individually and in an isolated form without real consideration for how they might someday form a relationship.”
Additionally, two Florida Supreme Court decisions – Joyce vs. FedNat (2017) that found a contingency fee multiplier does not need to be reserved for rare and exceptional circumstances; and Sebo vs. American Home Assurance (2016) where the court shifted to using the Concurrent Causation Doctrine that permits a covered cause of loss (such as wind) to combine with damage caused by non-covered cause of loss – helped propel the market towards crisis.
“The combination of these policies and court decisions represents an ideal combination for significant financial exploitation,” the report states. “The volume of claims following each major storm became the fuel and the architecture for an economic engine distinct to Florida generally referred to as ‘Litigation.'”
Insurers have racked up more than 200,000 lawsuits since 2013, many of them stemming from non-catastrophe water damage and roofing claims, and many of them with assignment of benefits agreements attached. After reforms were passed in 2019, there was a dip in AOB lawsuits, particularly for Citizens, Fraker notes. However, by the third quarter of 2020 plaintiff attorneys had established a work around to AOB with a “Demand to Pay,” instead filing first party suits against carriers.
According to Fraker, the cost of this litigation cannot be understated. He found that while there has been an obvious influence of catastrophic storms on claim frequency, non-catastrophe claims have accounted for approximately 60% of all litigation filed against Florida’s domestic companies while 40% of the litigation is associated with cat losses.
In analyzing more than 3,000 insurance cases, Fraker found that litigation costs are 17% higher for Florida insurers than in other catastrophe-prone states. The fees paid to attorneys by Florida carriers for this litigation are on average more than 750% of the damages paid to the plaintiffs/insureds. In one case Fraker examined, the plaintiff attorney was awarded 21,041% of the damages in fees.
Insurers have paid out more than $12 billion in fees to attorneys since 2013 and were engaged in more than 221,000 suits between 2014 and 2020, according to the report.
The costs of all this litigation equals approximately $3 billion in expenses “being forced upon Florida property owners,” the report states. In 2019 alone, Florida insureds paid between $2 billion and $2.7 billion in costs allocated to suits in the form of increased premiums.
Fraker said just 8% of damages are paid to insureds while plaintiff attorneys receive about 71% of the insurance litigation cash flow “because they are allowed to, not because plaintiff attorneys are motivated to do harm.”
Insurer defense costs range from 237% to 307% of damages, or 21% of total litigation.
“Florida’s P&C litigation economy may be rooted in hurricane recovery. However, like every emergent economy, the state’s litigation economy required nurturing and protections in order to become established,” the report says. “Yet, unlike an economic system balanced by governance relevant to all stakeholders, Florida’s litigation economy operates almost entirely at the expense of insurers, then ultimately the State’s economy and resident consumers. As a result, the value of corporations, the value of jobs, and spendable consumer income is either destroyed or greatly degraded.”
It isn’t just Florida insurers paying the price of the litigation. Reinsurers and investors are paying close attention to the Florida market because it is no longer profitable, and they are now seeing a negative return on their investments.
Fraker quoted one executive he spoke with for the report as saying, “I’d rather invest in time shares on the West Bank than to invest in the Florida insurance industry.”
“Understand this proxy for an additional tax generates zero community, county, or state benefits because these billions are diverted away from Florida’s economy,” the report notes.
There isn’t likely to be relief from rate increases for consumers either, as reinsurance rates increase for carriers and uncertainty about future litigation costs make it difficult for the industry to reliably model for litigation, the report notes.
Florida carriers already pay 30% to 35% more on reinsurance premiums than other hurricane prone states and soaring litigation costs creates more concern. Fraker said insurers have underestimated preliminary damage assessments immediately following a hurricane by an average of 300% because of unforeseen litigation costs and that is also influencing reinsurance rates.
For reinsurers as well as domestic carriers reflecting upon 212,000 litigated cases since 2015, the inability to reliably model litigation “is the final push off the cliff for Florida’s P&C market.”
Fraker said because “there’s no way to reliably forecast the dollars and cents of this litigation storm,” he created a new financial construct called the litigation probable maximum loss (LPML). It is similar to the probable maximum loss (PML) model companies use in modeling catastrophic storm damage, but the LPML forecasts the range of litigation frequency and severity from thousands of insurance litigation data points extracted between 2016 to 2020.
“Output from forecasting litigation costs through this construct is an assessment of litigation frequency and severity uncertainty, which is significantly influencing reinsurance rates in Florida which then becomes a cost burden affecting Florida’s domestic carriers, and ultimately for Florida consumers,” the study notes.
Florida consumers are the ultimate victims of what is happening Fraker says, as they are essentially paying a “hidden tax” to fund the litigation. This hidden tax averaged $487 per family in 2019, and is growing annually by 25.6%, totaling about $680 per family in 2020. That “tax” is being paid to less than 2,500 attorneys and contractors in the state.
Meanwhile, the narrative by plaintiffs’ attorneys that insurance companies created this crisis because of poor claims’ handling practices is a “catastrophic PR failure” on the part of the industry, Fraker said.
“The reality is whether it’s a catastrophe claim or not, 92.5% of all claims are closed within a year; 80% of the claims that require more than one year involve representation by a third party,” he said. The carriers in the marketplace have between a 95.2% and a 98.3% policyholder retention rate, he noted.
Source: Insurance Journal 1-20-21 Author: Amy O’Connor
Top Insurance Regulatory Developments of 2020: Part 1
COVID–19 Pandemic Turmoil
The COVID-19 pandemic has had severe adverse consequences to virtually all U.S. businesses, including insurance. While the business interruption insurance coverage litigation dominated this year’s insurance news and impact on property and casualty insurers writing this type of coverage and their insured business customers, state insurance regulators also faced important challenges in the wake of the pandemic. Their responses included:
- Imposing moratoriums on cancellations and non-renewals of certain types of insurance policies for insureds’ failure to pay insurance premiums based on COVID-19 related financial hardships
- Requiring deferrals of insurers’ collection of insurance premiums
- Requiring refunds of auto insurance premiums based on reduced risk exposures because of shelter-at-home governmental state of emergency orders
- Facilitating remote testing and licensing of insurance agents
- Facilitating use of electronic signatures, remote online notaries and telehealth
- Requiring waivers of cost-sharing (deductibles and co-pays) under health insurance policies for COVID-19 testing
- Requiring early refills of prescription drugs covered under health plans
- Suspending deadlines for insurance claim filings and appeals
- Scrutinizing network adequacy requirements for health insurers
All-in-all, state insurance regulators reacted swiftly and adroitly to the pandemic spurred challenges facing the insurance industry and the insurance customers they protect.
On the federal side, the U.S. House of Representatives introduced in May the Pandemic Risk Insurance Act (“PRIA”), modeled after the Terrorism Risk Insurance Act of 2002, as amended (“TRIA”). PRIA has been characterized by Congresswoman Maxine Waters as “a reinsurance program similar to [TRIA] for pandemics, by capping the total insurance losses that insurance companies would face.” PRIA would require participating insurers to “make available” insurance coverage for a “covered public health emergency,” which includes “any outbreak of infectious disease or pandemic” on terms that do not differ materially from the terms applicable to losses arising from other events. Like TRIA, participating insurers would need to satisfy individual and industry-wide deductibles before seeking federal reimbursement for losses. Critically, however, as currently contemplated, participation in the Pandemic Risk Insurance Program would be voluntary in nature, whereas TRIA is a mandatory program applicable to certain commercial property and casualty insurance policies.
InsurTech Growth and Regulatory Reaction
Despite, or perhaps because of, the COVID-19 pandemic, no area of tech was hotter than insurtech in 2020. With multiple companies going public through both SPAC transactions (Clover and Metromile) or direct listings (Lemonade, Root and OSCAR), as well as investments valuing others at well over a billion dollars (Hippo), insurtech went from niche to mainstream fast, fueled in part by the sector’s focus on automation, efficiency and digital platforms which allowed them to scale despite COVID-19 restrictions.
Recognizing the rapid development of technology enabled insurance platforms, the National Association of Insurance Commissioners (“NAIC”), reacted with both reforms to previously outdated laws inhibiting these insurtech business models and increased focus on the potential future regulation of big data, artificial intelligence, machine learning and accelerated underwriting in the insurance space.
On the reform side of things, the NAIC updated language in its Model Unfair Trade Practices Act regarding anti-rebating and inducement that previously restricted nearly all rebates and inducements to allow for the provision of certain services and items at reduced or no cost, if such items or services result in risk-mitigation, along with other accommodating revisions. This change has been the focus of insurtechs for a number years, and would allow, for example a commercial insurance carrier to offer its insureds a free water leak detection system, as a way of mitigating damage from burst pipe failures.
As far as increased regulation of insurtechs, while the NAIC has not adopted or recommended any specific model laws or regulations with respect to artificial intelligence and machine learning, the Big Data and Artificial Intelligence Working Group adopted the “Principles of AI”, outlining the five principles it will use in evaluating regulation of AI, namely that the insurance industry’s use of AI must be (i) fair and ethical, (ii) accountable, (iii) compliant, (iv) transparent and (v) secure, safe and robust. In addition, the NAIC’s Producer Licensing Task Force is in the process of finalizing a white paper on the role of chatbots and artificial intelligence (AI) in the distribution of insurance and the potential need for regulatory supervision of these technologies, something the insurtech industry will be keenly focused on in 2021, especially in light of the recent adoption of the B.O.T. Act by California. Similarly, the Casualty Actuarial and Statistical Task Force adopted a white paper on the regulatory review of predictive models, while the Accelerated Underwriting Working group continued its work on developing regulatory guidance regarding the use of external data and data analytics in accelerated life underwriting.
Data Privacy and Security Regulation Expansion
California Consumer Privacy Act
Like all other businesses that collect or receive consumer non-public information about California residents, the insurance industry will be affected by the California Privacy Rights Act (“CPRA”). The CPRA, which was adopted in November 2020 by way of voters’ passage of California ballot initiative Proposition 24, augments and strengthens consumer privacy protections under the California Consumer Privacy Act, the enforcement date for which occurred on July 1, 2020. The CPRA, among other newly created consumer privacy rights, gives consumers the right to limit the use and disclosure of a new category of “sensitive” personal information, including health, financial, racial and precise geolocation data. It also allows consumers to correct inaccurate data about them and establishes the California Privacy Protection Agency, a new state agency that will enforce the CCPA in lieu of the California attorney general.
National Association of Insurance Commissioners Data Security and Privacy Laws
The NAIC’s Data Security Model Act, which is a cybersecurity breach law applicable to most insurance industry licensees, has now been adopted in one form or another in eleven states. During 2020, Indiana, Louisiana and Virginia became a part of this list, which is likely to expand in 2021.
The NAIC’s Privacy Protections (D) Working Group, formed in late 2019, began its work in 2020 on reviewing the needs and area for modernizing the NAIC’s Insurance Information and Privacy Protection Model Act (created in 1982) and Privacy of Consumer Financial and Health Information Regulation (created in 2000 in the wake of the Gramm-Leach-Bliley Act). The potential upgrades to these two models may take the form of certain concepts from the CCPA and the European Union’s General Data Protection Regulation.
NY Department of Financial Services First Cybersecurity Regulation Enforcement
In July 2020, the New York Department of Financial Services brought its inaugural enforcement action under its cybersecurity regulation against First American Title Insurance Company for alleged unauthorized access to hundreds of millions of documents containing consumers’ non-public personal information, due to a known vulnerability in the company’s public-facing website making the data accessible without any login or authentication requirements. This case serves as a strong warning that the NYDFS will pursue other alleged violations of its cybersecurity regulation.
Race Equality and Insurance
In the wake of the national awakening regarding the impact of race on various institutions across the United States, the NAIC formed NAIC Special Committee on Race and Insurance (“Special Committee”), and asked itself, “Does the disparate impact of risk-based pricing decisions constitute unfair discrimination?”
Nearly all states follow some version of the NAIC’s Unfair Trade Practice Act (“Model Act”), which prohibits, generally, the “unfair discrimination” of “individuals or risks of the same class and of essentially the same hazard” with respect to both rates and insurability.” The Model Act further specifically prohibits taking into account sex, marital status, race, religion, or national origin of the individual, but only with respect to insurability, not as to the rates charged to such consumers (except in the case of race, which was prohibited pursuant to the Civil Rights Act of 1964). Notably, only a handful of states have explicit laws limiting the use of certain of these factors in certain lines of insurance (for instance, Michigan now prohibits all non-driving factors in the determination of personal auto insurance rates and New York, through its Circular Letter No. 1, now essentially requires life insurers to prove that all AI, machine learning and “alternative data” and their sources do not have a prohibited discriminatory disparate impact on protected classes). Instead, most states have not detailed with much specificity what constitutes unfair discrimination in their statutes or regulations
The NAIC, state insurance regulators, consumer advocates, and the insurance industry as a whole are especially focused on the exponential growth of the industry’s reliance on artificial intelligence, machine learning, and big data. Some observers have predicted the end of most risk-based underwriting and pricing as we now know it for much of the insurance industry in light of these issues, much in the same way health insurance underwriting was simplified via the Affordable Care Act. However, it is more likely that regulations will focus on monitoring to ensure such disparate impacts do not occur and will be promptly remedied when they do.
Pharmacy Benefit Managers Regulation
During the past few years, several states passed legislation aimed at regulating pharmacy benefit managers (“PBMs”) for the protection of small or mom-and-pop pharmacies that, in some cases, were receiving from PBMs reimbursements for prescription drugs covered by health plans less than the pharmacies’ costs of purchasing these drugs. In December 2020, the Supreme Court, in Rutledge v. Pharmaceutical Care Management Assn. (an 8 to 0 opinion), ruled that an Arkansas PBM statute was not preempted by ERISA.
The Arkansas law requires that PBMs (a) frequently publish their maximum allowable cost (“MAC”) lists for prescription drugs when their wholesale cost increases and (b) reimburse pharmacies for their purchases of prescription drugs at a price equal to or greater than their wholesale cost and allows pharmacies to refuse to sell a prescription drug if a PBM’s reimbursement rate is lower than a pharmacy’s purchase cost. The Court found that ERISA did not preempt the Arkansas PBM law because, while the law did have the effect of increasing the costs of an employee benefit plan, the law did not force employer-sponsored group health plans to adopt any substantive plan changes, noting that not all states laws that affect an ERISA plan and the Arkansas PBM law does not refer to ERISA, does not apply exclusively to ERISA plans and applies to PBMs regardless of whether they manage an ERISA plan. This decision overturns a 2018 case from the Eighth Circuit that held ERISA preempted a similar North Dakota law and should forestall an appeal pending in the Tenth Circuit of an Oklahoma District Court case upholding an Oklahoma PBM law against an ERISA preemption challenge.
Source: Insurance Journal 1-22-21 Author: Brian Casey, Zach Lerner and Ben Sykes
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