Florida Citizens 17% growth in 2020 may drive reinsurance requirements

Florida’s Citizens Property Insurance Corporation is likely to see an increasing need for more risk transfer and reinsurance over the coming year, as it forecasts that its assumption of risk and policies will accelerate, with the state of the Florida insurance market set to drive its portfolio up by 17% over the course of this year.

Florida Citizens had originally budgeted for a decline in the number of policies it would be insuring by the end of 2020, but that forecast has been revised to take into account the still dysfunctional state of the Florida marketplace.

Citizens President and CEO Barry Gilway told the residual market property insurers’ Board of Governors recently that challenges are set to push Citizens portfolio back to growth, when it had declined in size significantly, in terms of number of policies insured, while remaining stable in recent years.

“The property market in Florida is being impacted by a number of factors that are causing dislocation for Florida consumers,” Gilway explained.

“Over the past eight years we have been able to reduce Citizens exposure from $512 Billion to a low of $108 Billion and our share of the residential market has dropped from 23% to 4% reducing assessment potential from $11.6 Billion in the event of a 1- 100 year storm to 0 today. Depopulation of Citizens was clearly driven by the exceptional profitability of the Florida Market from 2013-2016 that created a highly competitive private market. For the past four years our policy count has remained relatively stable in the 420,000 to 450,000 range as we returned to our role as a residual market.”

Gilway said, “Given the current issues in the marketplace this is now changing and once again Citizens is experiencing growth in the number of customers we serve.”

The 2020 budget had Florida Citizens insuring some 431,000 policies by the end of 2020, but the forecast has now been lifted by 17% to 517,000.

The Florida insurance market’s poor financial results have helped to drive the expectation of a resumption of policy growth for Citizens.

At the same time, Gilway also cited the increased costs of risk transfer capital, both from reinsurance and catastrophe bond sources, as another driver for insurers to be able to hold less policies themselves, which will ultimately drive consumers back to Citizens.

Of course, Citizens also suffered the increased costs of reinsurance and cat bond capital in its renewal recently, when it downsized its program and issued fewer cat bonds than it had hoped to.

The hardening of the Florida reinsurance market has “had a significant impact on availability of affordable reinsurance for domestic companies and affordable coverage for consumers,” Gilway explained.

Adding, “The market has not yet seen the additional impact these increased reinsurance costs will have on rates.”

The result is insurers limiting capacity and restricting writings in certain regions of Florida, or cancelling relationships with agencies.

As you’d expect in the Florida market, litigation related to property insurance claims is part of the driver, turning insurers off some regions and resulting in a decline in available capacity there.

It’s also an expansion and growth of assignment of benefits (AOB) related litigation in new areas, away from the Tri-county region where that had been so prevalent, that is driving changes to insurer appetites.

Of course, while litigation continues to drive inflating loss adjustment expenses (LAE) in the Florida insurance market, it is also affecting reinsurers and has been a key driver of the rate increases seen at the June renewals.

Gilway said, “Reinsurers in turn are experiencing this deterioration through the loss development patterns that they are responding to in their pricing models.”

All of this points to a growing portfolio of risk at Florida Citizens, which should drive an increased appetite for risk transfer to support the portfolio as well.

Citizens may require more reinsurance in 2021 it seems and having downsized its purchase this year, it means should pricing at least flatten for the June 2021 Florida reinsurance renewals we could see a much larger purchase from the insurer of last resort.

It may also signal a drive to de-populate faster again, which of course presents an opportunity to those Florida insurance carriers that can manage the exposure and LAE issues more successfully.