Impact of Florida Legislative Reforms in the Property Market

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Helping clients understand the Florida market

The litigious claims environment in the Florida property market had historically affected availability and affordability for property insurance in the Sunshine State. In this episode, Randy Fuller, Florida Segment Leader, and Wade Stier, Managing Director and Head of Guy Carpenter’s Tampa Office, take a historic look at the property claims environment in Florida, how litigation costs had increased, and how legislative efforts have enhanced the industry’s view of risk in Florida.

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Eric Stenson: I’m Eric Stenson from Guy Carpenter. Welcome to this episode of Fo[RE]sight: A Guy Carpenter Podcast series, bringing you unmatched insights on trending challenges and our solutions, delivered by Guy Carpenter experts on the vanguard of thought leadership within the reinsurance industry.

The property reinsurance market in Florida has always had its challenges, with the impact of recurring hurricanes being exacerbated by soaring litigation and claims costs. Reform legislation has targeted some of the bigger concerns. But a year after the changes were signed into law, how did these revisions affect establishing a view of risk in Florida?

In this episode, Guy Carpenter's Randy Fuller, Florida segment leader, and Wade Stier, managing director and head of Guy Carpenter's Tampa office, provide a historic perspective of Florida property market address how the reforms have affected Florida, and take a look at expectations in the market going forward.

Thank you very much to Randy and Wade for sharing their insights with our listeners. Randy, for those who are not familiar with the issues in the Florida property market leading up to the reforms, can you provide some background?

Randy Fuller: Thanks, Eric. Sure, I'll give just a little background on the issue. So, Florida has had a long history of higher-than-average rates of fraudulent claims in property insurance. Over the years, bad actors have found different ways to exploit the system. Some people might recall 15 years ago with sinkholes that were a big issue in Florida. But more recently, starting in the late 2010s, a cottage industry started to take off around suing property insurers.

This resulted in skyrocketing litigation rates across the industry. And plaintiffs’ attorneys actually established a system for generating illegitimate or inflated claims that were intended to go to suit, and then ultimately generate legal fees that would be paid by insurers. To give an idea of how bad litigation got in Florida, the OIR, Florida Office of Insurance Regulation, estimated that Florida accounted for nearly 80% of the nation's homeowners insurance lawsuits, but only represented about 9% of the nation's homeowners insurance claims.

So, litigation rates were nearly ten times the national average. This went on for several years, and ultimately, several property insurers ended up going insolvent, investors became unwilling to put money to work in the state, and there was difficulty securing reinsurance support for Florida risk. It got to the point where a collapse of the entire property insurance market was a real possibility, and availability and affordability of coverage has become a major problem for many Floridians.

Eric Stenson: Thanks, Randy. I can certainly see how that could become unsustainable. Wade, what exactly did the legislature do to combat these issues?

Wade Stier: Thanks, Eric. The core issue that tilted the tables in favor of attorneys was a law that enabled the dynamic to actually exist. It said that if you sue an insurance company and win a single dollar more than what you were originally offered, the insurance company must pay all of the claimant attorney's fees. This was often referred to as a one-way attorney fee statute.

Florida was the only state where this type of requirement actually existed, and it facilitated very harmful activity with little downside to the offenders, but ultimately greater harm to the actual Florida consumers. To start combating these issues, in 2021, the Florida state legislature passed a measure that softened this law, but it didn't completely repeal it.

Later, in December of 2022, as the market continued to have more issues, and more pressure mounted, Florida lawmakers approved legislation that completely repealed the one-way attorney fee statute. With the political pull of the trial bar, many people throughout the industry thought this would never happen. The law also eliminated the ability for the use of assignment of benefits for property claims, which was also a path lawyers use to instigate litigation.

In addition, the time limit to report a claim was reduced to one year. Originally, this provision allowed property claims to be filed up to five years after the damaging event had occurred. It later tightened it down from five years to three years, then to two years. And now the one-year time limit is in effect for its first year.

Eric Stenson: Thanks, Wade. It's great to know exactly how this has progressed. Randy, what was the immediate reaction from the industry?

Randy Fuller: The industry really applauded the changes. While one-way attorney fees were widely known for a long time to be at the heart of the issue, in the past, the state of Florida just wasn’t willing to take it head on. So, the fact that they really targeted the core issue was a relief. Many reinsurers that had previously reduced their exposure to Florida or exited altogether due to their concerns about the legal environment, were pretty suddenly willing to write business again.

We also saw some carriers increase risk appetite, interest in starting up new companies increased, and we saw a greater interest in depopulating Citizens, which is the residual market carrier for Florida property. Immediately following the reforms, essentially, the outlook for Florida risk became much more positive.

Eric Stenson: Thanks, Randy. Those are certainly encouraging signs. Wade, now that we've had more than a full year under the new law, are we seeing signs that the reforms were effective in addressing some of the issues you mentioned earlier?

Wade Stier: Absolutely, Eric. It was actually quite surprising just how effective the reforms were and how quickly they started to be seen in the numbers. Many of the carriers saw an immediate overnight drop in the number of claims that were being reported on a day-to-day basis. At Guy Carpenter we also track lawsuits served to property insurance companies. And, in 2023, saw the fewest number of lawsuits seen in the past 6 years.

Suits were actually down more than 40% from their peak in 2021. Additionally, 2023 was the first year since 2015 that the Florida property market achieved underwriting profitability with a sub-100% combined ratio, and that capital base actually grew. We are also now starting to see data from catastrophe events that occurred in early 2023, and this allows us to measure the development patterns compared to the previous storms, proving that all the legislative changes are working.

Randy Fuller: Right, so, for example, we have a client that experienced a severe convective storm event in April of 2023, which is now a year old. And this event also happened post-reform. So, we're able to look at how the outcome is behaved differently under the new law. And, just for a little bit of background, under the old law, severe convective storms were commonly a target for door knockers that would promise free roofs even with little or no damage to homes.

And so, we often saw meaningful losses coming from severe convective storms for what appeared to be very minor events. Anyway, when we looked at the client's losses one year after the event compared to the losses within the first 3 months of this 2023 event, it had developed by about 42%. And, this might seem significant, but their previous severe convective storm events prior to the reforms had typically developed by 200 to 300% within a similar timeframe.

So, this is an extreme improvement and a very encouraging sign that the reforms have been effective. Additionally, now with the event being a year out, no new claims can be reported for the event since it's reached the new one-year reporting limitation, which also brings much more certainty to the company and its reinsurers on what the ultimate outcome will be.

Eric Stenson: Thanks, Randy.  We definitely appreciate you laying out how it proceeds along. What changes might we be seeing in the market given how impactful these reforms have been? Today and looking forward?

Wade Stier: We do continue to see appetite opening up for Florida risk within various corners of the market. Primary carriers now have more confidence that they can operate profitably in the state, which is the key, which means they are more willing to write new business. We continue to see reinsurance support increase, which also helps to feed the ability for primary carriers to grow their books of business.

New carriers are also being formed with a much higher likelihood of success than there was prior to the reforms, which is great.

Eric Stenson: Thanks, Wade. That certainly offers a lot of clarity. Randy, what do you see as the biggest challenges the market faces now, operating within this new legal environment?

Randy Fuller: In my view, the biggest challenge for the market right now, in this new legal environment, from both a primary and reinsurance market perspective, is determining what the new price of risk should be going forward. It’s difficult to quantify just how much of the law's cost that’s now priced in the Florida risk was due to issues driven by the one-way attorney fee law.

But just based on what we've seen in the first year, we know that it’s significant. The challenge is that there was a lot of time, a lot of data, and a lot of losses that went into getting to this point and establishing the current view of risk. And for some, they'll want to see a similar quantum of data or experience to support revising that view of risk.

Again, going that route could take years to get there. At this point, we're seeing a wide range of stances around adjusting views of risk. There are some primary and reinsurance providers taking a more proactive approach to estimating the impacts, allowing them to compete more aggressively and secure target business. As we mentioned earlier, the quantitative evidence continues to build, and as with any efficient market, those that move most quickly to accurately price the risk will ultimately end up in the best position.

There are certainly going to be opportunities for arbitrage here, as the market continues in this transition period, to adjust the view of risk to meet the new legal environment.

Eric Stenson: Thanks very much, Randy. Could you and Wade share some key takeaways for our listeners when it comes to the Florida property market?

Randy Fuller: So, the biggest takeaway here is that the legislative reforms are working, and that reducing social inflation makes outcomes less uncertain than they were under the old law. We're seeing capital come back into the state. Risk appetite is beginning to grow again on both the insurance and reinsurance sides. There’s really a lot of optimism looking at opportunities for the market going forward, and ultimately the reforms will make doing business in Florida more sustainable, and coverage should become more affordable for policyholders of the state. We’ve seen some early indications of this, and we believe it's just the beginning.

Wade Stier: Just to add to what Randy just said, you know, as the Florida market continues to get healthier, Guy Carpenter can help clients connect the dots in this steadily evolving insurance environment. Whether it’s evaluating portfolios, working with managing a client’s net appetite, a captive insurer or some other vehicle, or just sourcing reinsurance capacity to encourage healthy growth, we’re always ready to provide guidance to our clients, whether they’re established or new, as they find their footing in Florida property lines.

Eric Stenson: Thanks very much, Randy and Wade. We appreciate your sharing insights on the Florida property market, how legislation has helped address social inflation concerns in Florida, and how the market might evolve in the future. Anyone wanting to learn more or who would like to engage with the guy carpenter expert directly should visit GuyCarp.com and click on Explore Solutions.

Please look for the next episodes in our series as we address additional themes connected with the reinsurance environment. And thank you to our audience for sharing this time with us and listening to Fo[RE]sight: A Guy Carpenter Podcast Series.