Navigating the Florida homeowners’ insurance market

NARRATOR: You're listening to (Re)thinking Insurance, a podcast series from WTW where we discuss the issues facing P&C, life, and composite insurers around the globe, as well as exploring the latest tools, techniques, and innovations that will help you rethink insurance.

RAVI SHARMA: Hello and welcome to (Re)thinking Insurance. I'm your host, Ravi Sharma. On today's podcast, we'll be discussing the Florida homeowners’ insurance market, tales of the past, where we are today, and where we are heading. Joining me today, I have Klayton Southwood, a senior director in WTW’s Insurance Consulting and Technology practice. And Trevar Withers, a director in WTW’s Insurance Consulting and Technology practice. Welcome to you both.

KLAYTON SOUTHWOOD: Hi, Ravi. Very happy to be here today. TREVAR WITHERS: Thanks for inviting me. Good to see you.

RAVI SHARMA: Well, I'm happy to have you both on the show. Let's start off by learning a little bit about our guests. Trevar, I know you enjoy getting out in nature and hiking. So what's your favorite mountain range?

TREVAR WITHERS: I'd have to say the mountain range in my backyard. I love hiking in the Wasatch Range in Utah, and try to take opportunities to go hiking with my brother when I can in the summertime.

It sounds majestic and it's great that it's so convenient and close to home so you can take advantage of it. All right. Now, what about you, Klayton?

KLAYTON SOUTHWOOD: So I definitely do not do the heavy duty type of hiking that Trevar does. My wife and I really enjoy the Smoky Mountains. We like to go and just take leisurely hikes through the nature. So I would say that's probably tops on my list, Ravi.

RAVI SHARMA: Yeah. And I know there's some nice roads to drive-through as well. KLAYTON SOUTHWOOD: Yeah, absolutely.

RAVI SHARMA: All right. Well, now that we've set our sights high, let's jump into some Florida homeowners. Klayton, why don't you get us started with how the homeowners’ market in Florida has changed over the past few years. We're all familiar with the headlines showcasing population booms, economic development, and natural disasters. But how does that all come together and impact where the market sits today?

KLAYTON SOUTHWOOD: Yeah, Ravi. You mentioned the issue of population booms. I think personal lines insurance market is extremely important to the state of Florida. It's really what makes the economy tick along. If you look at what's happened from a population standpoint in Florida and from the standpoint of property values, between 2000 and 2020, you had growth in the number of households from a little over 6 million to almost 8 and 1/2 million. So pretty robust growth over that 20-year period, and it's just continued since then.

I mean, we've all heard the headlines of the growth in states like Florida. In terms of property values, you go back to 2000, and the total value of the properties in Florida was about $750 billion. That grew fairly steadily from that point dip down during the housing crisis around 2008 or so, but it's been on a steady clip since surpassing $3 trillion by 2020.

So the insurance market is definitely very important to keep the economy rolling along. People have to have mortgages. You have to have that solid base to provide for the ability of the population to continue growing. You also mentioned the history of natural disasters and some of the things that have impacted the Florida market.

And the natural disasters are definitely a big thing. If you go back, say, 30 years ago, Ravi, the Florida market looked just about any other market. And the country, in large respect, dominated by large national carriers, it looked just about any other state to be quite honest. Then along came Hurricane Andrew in 1992, and that started to change things.

I mean, while in the grand scheme of things, Andrew doesn't look like a large storm anymore because of the big storms we've had since, it did send some shockwaves through the industry. A big storm like that coming ashore near Miami in Homestead, it caused the industry to rethink and it caused the big national carriers to wonder about capital deployment.

It started at the beginning of legislative action as the state began to see the concerns that were being expressed by the industry. So you had the formation of things like the Florida Hurricane Catastrophe Fund right after Andrew in response. Fortunately, then you went quite a while before you really had much going on in Florida from a storm standpoint.

I mean, it wasn't until 2004, 2005 that you really had a big major series of events there that shook the industry up again. In 2004, you had Charlie and Frances and Ivan and Jeanne just about back to back in that hurricane season. In '05, you had Katrina and Rita and Wilma. And so while Andrew started to teach the industry a little bit about severity, this was more about frequency.

And this is, again, what really began to shake in the industry and led to the formation of a number of the Florida standalone carriers that we see today as capacity and availability of coverage got further restricted, especially from the big national carriers. Again, though, we went through a fairly long period of calm until about 2017 when the Hurricane Irma comes ashore, and that's when we started to see a lot of the troubles in Florida.

Ravi, a lot of the things that have gone on more recently around assignment of the benefits. Issues with one way attorney fees. Some of the abuses that we've seen, they've really driven up claim costs. So those are the big things that really shook the market. And honestly, the past five or six hurricane seasons have been the most active on record in Florida and has continued to strain the market.

RAVI SHARMA: It's really surreal to sit back and think about the growth the market has seen over the past few decades. Really, a lot of it, like we talked about, some of it's driven by the economic side, and some of it's really driven by the catastrophe side. But the unrelenting economic development that the market has seen as well has just really teed up this perfect scenario or a perfect storm not to have a bad pun there.

But I think it lays a nice foundation for the demand side of the insurance market, but let's shift our focus to the supply side. Trevar, how has the market looked over the past decade? I know capital is getting more expensive and it's gone through varying periods of constraints and surplus, but how has that transitioned to the solvency of the market in its current form?

TREVAR WITHERS: I think that's a great question, Ravi, because there really is an interesting history and how the demographics of the market have changed. In 2005, 10 of the 11 largest carriers in Florida were national carriers. And there's been a steady and driving shift over the 15 or 16 years after that point where in 2021, only 3 of the top 11 carriers are national carriers.

So there's been this dramatic shift away from companies with diverse country wide exposure to specialty carriers that primarily write business in Florida. And that's really the opposite direction that we'd like to see in the insurance market from a diversity perspective, from a stability perspective. And I think that leads right into the next point.

If we think about what combined ratio experience has been in the state of Florida for those carriers that write business there, it's also interesting to see that there has been much more volatility and the combined ratios for the Florida specialty carriers. And that's not surprising.

When you hear the Hurricanes roll off Clayton's tongue almost like a song, you can correlate that directly to how you see these graphs of combined ratios changing over time where there's volatility, and in many years, combined ratios over 120% for Florida specialty carriers and in those same years where the national carriers have performed much better and much closer to a combined ratio of 100. So I think that really illustrates some of the challenges that have been in place. And this shift over time to a specialty carrier has just become a challenge. Klayton mentioned some of the challenges with the legal environment with one way attorney fees and assignment of benefits, and I think there's a correlation there as well with some of the insolvency history that has happened in the state of Florida. In the years leading up to 2022, there was about one insolvency every other year.

In 2022, there were seven insolvencies. So that really shows the stress the market was under. And it's not just from hurricanes. It's not just from one aspect of the legal environment in Florida. There's multiple dimensions and elements that all contributed to that. And they all came together in 2022 to create a really challenging situation that led to seven insolvencies. In 2023, there was one insolvency so far. We'll see how the year plays out, but it certainly has been a challenging market.

RAVI SHARMA: All I can say is, wow. I think the items you touched on there bring us to a good point to discuss market conditions. I know in our preparations for this discussion, Klayton, you shared some mind-blowing stats. Many of them left a breadcrumb trail revealing the core of the problem. Could you share some of those current market conditions in Florida? Maybe contrast those with what we've seen from a countrywide perspective.

KLAYTON SOUTHWOOD: Yeah, absolutely, Ravi. Happy to talk about some of the challenges that Florida specifically has seen. Honestly, first and foremost, it's about litigation. If you look back over the past several years, that's really been the primary driver of the actions that have been taken legislatively in Florida to try and fix the problems.

Governor DeSantis has often cited a couple of key statistics relative to the homeowners market in Florida compared to the rest of the country. The first is that between 2016 and 2021, on average, Florida had about 8% of all homeowner's claims filed, which is about on per with what you would expect given Florida's population relative to the rest of the country. But the number of homeowners related lawsuits relative to the countrywide total has been close to 80% in Florida.

So if you think about that, I mean, it's just mind blowing that up to 80% of all countrywide homeowners’ lawsuits have been coming out of Florida, and that's been a very steady pattern over the past several years. And that's been the root of the problem that these carriers have faced in Florida and the primary reason why we've seen these insolvencies.

And there are a couple of primary things that have driven that, Ravi, but one is assignment of benefits. For those who aren't familiar with assignment of benefits, basically, it's an agreement that's formed when an insured signs a contract with a third party, usually a contractor. A water remediation contractor, a roofing contractor, or something of that nature, to basically step into the insured shoes and pursue the rights against the insurance company and the insurance policy.

So the contractor will say, you've had a traumatic experience with this damage to your home. Let's give you a little piece of mind. We'll just take over the process of negotiating with the insurance company. But then that combined with the one-way attorney fees statute in Florida has really created the problem for the industry.

And I want to make that clear. I mean, it's not just AOB in and of itself because AOBs are allowed in other states too. That's not a Florida specific issue. But the one-way attorney fees statute has been a Florida specific issue. And those two in combination is really what's been the problem in Florida.

With the one-way attorney fees statute, what went on there historically, Ravi, is if an insurer chose to sue their insurer, the insurer will make some an offer for settlement. Typically, what happens then is when the case finally goes to court, if the insured prevails by no more than $1 more than what was offered, then the insurer is not only stuck with paying for the claim, but they're stuck with paying for their own legal fees and the insurance legal fees.

The opposite is not true. If the insurer prevails, they don't have the same ability to collect their legal fees from the other party. And it's been those two things. Fortunately, the legislature has dealt with that. We're hopeful that they've dealt with that sufficiently with the special session that took place in December that we'll talk about a little later, but it's really been those two things that have been the root cause of a lot of pain for-- I mean, honestly, not only for the insurance companies in Florida, Ravi, but for the residents of Florida who are paying the premiums to basically fund all of this litigation that's going on. I mean, it comes back to the policyholders in the end.

RAVI SHARMA: Yeah. The money has to be there to pay the expenses so the insurance companies can stay solvent. And I know litigation is a hot button issue across more lines of business, but when you have a state with 80% of litigation costs, it's quite a heavy burden to bear for the market.

TREVAR WITHERS: It's interesting that heavy burden is in a property first party coverage where you would not expect a lot of litigation.

RAVI SHARMA: We've established a good road map of how we've got to where we're at. But within the past few years, there have been some changes that are still working their way into the current experience period. Trevar, I think now's a good time. Could you talk to us a little bit about the May 2022 reforms?

TREVAR WITHERS: Sure. This reform in May of 2022 was the result of a special legislative session called by Governor DeSantis. And in that session, some of the results Senate Bill 2D was passed that included contractor solicitation prohibitions. And it's a mouthful. But as we think about what's happened with auto glass claims, many companies have found ways to be more restrictive about allowing a body shop to repair a windshield where the customer doesn't have to pay the deductible if there is one.

And some of those similar types of reforms have pushed through to be in place to prevent a contractor from burying the cost of a deductible so the homeowner could avoid paying the deductible. They've allowed separate roof deductibles. So an insurance company can file and get approval to have a separate deductible for their roof, and that was not allowable previously.

And there are some restrictions about how that can be filed. The deductible can be up to 2% of the coverage A limit or 50% of the roof, whichever is lower. Insurers are allowed to put restrictions on roof age. And that's important because a homeowner's policy isn't really a maintenance policy. It's meant to pay for claims when they occur.

And so this allows an insurance carrier to prevent providing coverage for a roof that isn't being maintained and that is very likely to have damage and water leaks and so on. So that restriction allows an insurer to refuse to issue or renew a policy for a roof that's older than 15 years.

The insurance company can't refuse to write the policy solely based on the age if an inspection indicates that the roof has five years or more of useful life. But the homeowner has some skin in the game. They have to pay the cost of inspection. There are additional changes in the reform of May of 2022 that relate to bad faith lawsuits, and attorney fees related to AOB so that it's not such a one way street, as Klayton described, with the attorney fees.

Insurance companies have the ability to collect fees in certain situations related to AOB. In addition to Senate Bill 2D from the May 2022 special legislative session, the Senate Bill 4D was passed, which deals with older requirements that require an insurance company to replace the whole roof if more than a certain percentage like 25% needed to be repaired. And Senate Bill 4D allows only the part of the roof being repaired to meet current building codes.

There were some rules in the past that required the homeowner and the insurer to replace the whole roof with more than a certain amount of damage had occurred. In addition, there's some inspection and maintenance requirements on condos that came out of that, but that's more related to some of the serious problems that occurred with some condominiums that collapsed in Florida.

RAVI SHARMA: Well, I know our listeners are already on the edge of their seats wondering if the May 2022 reforms would do enough to address many of the problems that are facing the market. But it wasn't enough. Even a year later, more reforms made their way through the Florida legislature. So Klayton, could you walk us through the scope of the December 2022 reforms?

KLAYTON SOUTHWOOD: Yeah, happy to do that, Ravi. And I think it's an important point that you raised about not being enough. The legislature over the past five years or so has taken a number of bites at the apple, here but they've really nipped around the edges. And it finally got to the point where with the insolvencies that we saw in 2022 and the stress that was being put on the involuntary market and things of that nature, I think the legislature finally got to the point that they realized that something had to be done.

Another bit of perspective and just an article that I just read this morning that further emphasizes the need for the reforms that have taken place. In 2021, the private industry-- so excluding Citizens Property Insurance Corporation, the involuntary market insurer in Florida, the private industry lost about $1.15 billion total. In 2022, the losses increased to $1.5 billion primarily because of litigation.

I mean, Hurricane Ian and things obviously contributed to that a little, but it's primarily the litigation issue. So once and for all, I think Governor DeSantis was really-- and the legislature really tired of what was going on in the stress and the market and the calls for reform finally led them to take fairly drastic action that we're really hopeful is going to really start to turn this market.

I mean, it won't happen overnight, but the actions that they took are pretty significant. So for example, the assignment of the benefits have now been prohibited. The one way attorney fees are now no longer allowed in suits arising under either residential or commercial property insurance policies. And that's huge because I mentioned earlier, it's really the combination of the assignment of benefits provisions and the one way attorney fees provisions that really caused the root problem in Florida. So getting rid of both of them we think is going to pay tremendous benefits.

There are other restrictions that were placed on claim filing. For example, newly reopened claims now must be filed within a year. Under the old statutory provisions, up to two years was allowed to file a new claim or reopen a claim. Supplemental claims must now be made within 18 months instead of three years.

So this, I think, helps the industry by the more certainty, it holds the policyholders a little more accountable, it reduces the chances of fraud, those kinds of things. But on the flip side, insurers are having to be subject to some additional provisions too that are designed to aid the policyholders.

So for example, some pay requirements that were a part of Senate Bill 2A that passed in December. So for example, the time they have to pay or deny a claim has dropped from 90 days to 60 days. They have to review and acknowledge a claim communication within seven days now instead of 14. They have to begin their investigation now within seven days instead of 14. And they have to conduct a physical inspection of the property within 30 days instead of 45.

While there is definitely more protections in the new legislation that should turn the market around, I think the legislature recognizes some of these provisions to benefit the policyholders were needed too just to make sure that everything is fair and equitable across the board in the marketplace.

RAVI SHARMA: There's just a lot of changes, and I think it's going to take a little bit for this stuff to make its way into the experience period as I mentioned. I know I'll be waiting with bated breath to see how all this market turns in the next few years here when this stuff starts making its way through and we see the industry results, and we'll be keeping a close eye on the rate filings I know that. I know I

have thoroughly enjoyed our discussion today. Let's leave our listeners with one last set of parting thoughts. Could each of you take 30 seconds and give some closing thoughts on where you see the market heading? Trevar, why don't you start us off.

TREVAR WITHERS: Sure. I Think. It's important to remember, as you just said, that the reforms will take time to play out. Some of the reforms are embedded in policy coverage law, so they won't take effect until a policy renews. Other items related to the reform will occur immediately and will begin to have an impact right away, but it is important, I think, to be patient.

Challenges will occur. We know that in the past when there are changes in the law, there are those who are opposed to those changes and they'll make an impact. But I think it is worth noting that the changes in December seem different than those in the past. In the past, as Klayton mentioned, the changes were nipping at the edges. The sub limits were applied, exclusions were applied, things that really restrict coverage for the homeowner.

The reform in December seems different whereas it's trying to attack the underlying problem with litigation so that homeowners can have coverage without a benefit that occurs to a few that decide to pursue litigation. And so in my mind, December feels different than the reforms of the past.

RAVI SHARMA: All right, Klayton, what about your thoughts?

KLAYTON SOUTHWOOD: A lot of them similar to Trevar's, Ravi. Although, I would say that we're certainly not out of the woods yet. And I think Trevar has alluded to that as he was giving his summary as well. I think we are likely to see a few more insolvencies this year. I think it partially depends on what the weather brings this year in terms of hurricane activity.

I mean, I have seen forecasts that we're expecting a below average year in terms of storm activity, which will hopefully help the industry. But there's going to be a lot of stress with June 1 reinsurance renewals coming up. I've heard that there's going to be some pretty big increases again in reinsurance costs because the reinsurers are really taking a wait and see attitude to see what plays out here. I have also heard some chatter about new entrants into the marketplace.

So I think we will see eventually more capital flowing in to Florida. I don't know that we're going to see a return of the national carriers in terms of increasing the size of the footprint. I think it's still going to be domestic here in Florida needing to provide that capacity to the public to satisfy their needs, but I'm hopeful that we'll see less restriction in coverage.

I mean, one way that carriers have responded to all the challenges that they've had over the years is continuing to restrict coverage-- restricting the amount of water coverage, restricting the amount of roof coverage. One thing after another, they've had to implement to try and control their underwriting situations.

And the sad part of that really is that people who have had meritorious claims that bought their insurance for a purpose sometimes have ended up without enough coverage simply because of the defensive actions carriers have had to take and reducing the amount of exposure just to be able to maintain their solvency.

So I'm hopeful we'll see some easing of that too over the coming years as we see how this plays out. I mean, there's still a massive litigation. Even though the legislature took the action and is certainly work its way through, it'll take a while for that log jam to clear up. So it'll be a while, but we're hopeful that we'll see new entrants and reduce premiums and a much healthier market in the coming few years.

RAVI SHARMA: Here's hoping. Thank you both so much for your comments. Trevar, thanks for being here.

TREVAR WITHERS: I'm really glad I could be here. Thanks for inviting me and thanks to the audience for listening.

RAVI SHARMA: And Klayton, thank you to you too.

KLAYTON SOUTHWOOD: I'm very happy to have had the opportunity, Ravi, and hope we've provided some valuable information today.

RAVI SHARMA: Well, for Klayton, Trevar, and myself, we look forward to seeing you next time on (Re)thinking Insurance.

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