The Upside Down Florida Property Insurance Market

Somewhere between middle and high school I came across my first Stephen King book, The Stand, and like countless millions of others was hooked. I’ve read them all at least once and it’s clear that those often scary, strange places that pour out of Mr. King’s mind are fun to fans of his books, movies and television shows around the world.

Fans of his work most certainly include the Duffer brothers, the creators of the wildly popular Netflix science-fiction series in which Stephen King is often credited as being a big influence. Or, as King himself recently said on Twitter, “Watching Stranger Things is like watching Steve King’s Greatest Hits”.

The evolving Florida property insurance market in 2020 reminds me of that scary place The Upside Down (the alternate reality where the monsters live) from Stranger Things that’s heavily influenced by Stephen King’s prodigious work.

Although it’s early in the year, it is entirely possible that the key insurance story of 2020 will be the impact that a dramatic increase in the cost of reinsurance (the insurance that insurance companies purchase to protect themselves by spreading their own risk to losses) along with the fact that those same reinsurers have reduced the amount of coverage they are willing to offer.

This evolving issue is increasingly having an impact on property insurance rates for homes and businesses, insurer capacity and, in some cases, the very ability of insurance companies to stay in business. It is as if the Demogorgons, Mind Flayers and Shadow Monsters that lurk in the Upside Down have taken over the property insurance and reinsurance market.

While the Florida market has never returned (and likely never will) to the idyllic pre-Hurricane Andrew of 1992, one where the cost of property insurance was low and insurers were falling over themselves to write coverage, it has, until recently, gone through a relatively stable period (at least for Florida) that now seems to have come to an end.

Supported by abundant, low cost reinsurance, insurer competition over the last decade or so has, at times, been robust. New insurers were formed and began aggressively writing property coverage, some insurance companies gobbled up a large number of policies that were formerly written by Florida’s windstorm insurer of last resort, Citizens, and occasionally even a well-known Best & Company rated, insurer would stick its toe back into the Florida market to write some coverage.

In fact, until last summer, the abundance of low cost reinsurance and the cost of capital to even the newest of insurers, provided what I call an illusion of stability, that seemed to some to make Florida’s market feel a bit like the quiet town of Hawkins, Indiana where Will, Mike, Eleven, Dustin, Nancy and the rest of the children lived a pretty carefree life before trouble arrived in Stranger Things.

Here in Florida that trouble arrived last summer and the monsters are not make-believe. As I wrote in a blog last August entitled The Importance of Leveraging Reinsurance in Florida, that you can read by clicking here, most of Florida insurers, especially homeowner’s insurers who focus entirely on writing coverage in Florida, generally can’t do so without abundant, low cost reinsurance. 

As long as the cost of the coverage that they purchase to protect themselves (and their client’s) remained low and the reinsurers were willing to write coverage, everything seemed fine. That illusion started to vanish last summer following intense hurricane activity in 2017 and 2018 (Harvey, Irma, Maria, Beryl, Chris, Florence, Michael and Oscar to mention a few of the named storms). The global reinsurance market reacted by raising rates and reducing some of the coverage it offers. And when that happened, the rating agencies that provide financial stability opinions about insurers such as the one (Demotech) that rates most of the Florida focused home and property insurers began to take notice.

By September 2019 the Upside Down reality began setting in as the State of Florida ordered Florida Specialty Insurance Company liquidated after trying to save the company for nearly a year. The insurer had written about 90,000 policies in Florida (40,000 Homeowners and 28,000 Mobile Homes). The company also wrote Dwelling Fire, Renters and Wind-only policies but today they are gone. And what was the final straw for Florida Specialty? A downgrade in their Demotech Financial Stability Rating (FSR) from A (Exceptional) to M (Moderate), a downgrade that meant lenders could not accept the insurer’s coverage as it was no longer deemed secure and viable. When asked why the insurer failed, the Florida Department of Insurance’s Office of Insurance Regulation told industry news publication The Insurance Journal: 

Over the last year Florida Specialty was required to file a corrective action plan that included a solution for the ongoing operation of the company including a sale, merger, change of business plan or other measures to address its “hazardous financial condition.” It also requested information regarding its reinsurance program to demonstrate that Florida Specialty had sufficient catastrophe insurance to provide for the upcoming hurricane season, requested a schedule of outstanding claims and renewals, and placed a limit on its expenditures.

There’s that word again: reinsurance.

And when the president of the rating agency Demotech, Joe Petrelli, was asked about the insurer going out of business, he explained that: we were concerned about the cancellation of the company’s reinsurance.

As 2019 ended, word within the industry began to spread that the changes in the reinsurance market could be an issue for many insurance companies and consumers. And then came the start of 2020 and the headline in the Insurance Journal: More Than a Dozen Florida Insurers Face Ratings Downgrades. The article, without mentioning the insurance companies by name, details the concerns that the rating agency Demotech has with dozens of insurers and whether they are financially stable. You can find the full article by clicking here, but here are a few of the ‘highlights’:

The rating agency responsible for assigning financial stability ratings (FSR) to more than 40 Florida domestic insurers has warned that several carriers will receive downgrades due to deteriorating conditions in the state’s property insurance market, and more than a dozen more could be downgraded in the next few months.

Demotech’s President Petrelli explained that his team “reviewed the third quarter 2019 financials of carriers, it requested year-end projections of operating results for nearly half of the 40-plus carriers it reviews and rates. “Having provided these carriers with ample time to implement revised business models, secure capital infusions, implement rate revisions, re-underwrite established books of business and utilize other enterprise risk management activities, it is apparent that few have returned to profitability.” 

He noted that as many as 18 out of the 40 plus companies Demotech reviews “will not produce a level of pre-tax profitability consistent with sustaining an FSR at the A level nor position themselves to do so in the near term.” Thus, that means those 18 insurers will very soon either likely sell, merge or close. Petrelli cited several factors that have affected the financial stability of carriers in the Florida market over recent years, including:

  • Insurer investor capital appears to be exiting rather than entering Florida.
  • The rising cost of reinsurance in in 2019.
  • Rates are below where they should be because companies have taken smaller than needed rate increase, according to Demotech.
  • Judicial decisions that Demotech says have revised the claim settlement landscape.
  • The revised rules of engagement for claims settlement, as set by the judiciary, have had an undue impact because the natural disasters of 2016, 2017, 2018, and the hail and tornadoes of 2019, have increased the number of claims that could be subject to the new rules of engagement.

As you can see, in addition to claims, litigation and inadequate rates, there’s that word again: reinsurance.

And then on January 15th the state learned that Anchor Property & Casualty Insurance Company, a Florida focused insurer that began operations in, just, 2014 by taking about 50,000 policies from the state insurer Citizens, was cancelling its policies as of April 1st by transferring them to another insurer, Homeowner’s Choice (HCI). The acquisition of Anchor P&C’s policies was announced by HCI as ratings agency Demotech stated that Anchor would be downgraded from a Financial Stability Rating (FSR) of A (Exceptional) to M (Moderate), the same fate that Florida Specialty just suffered. Demotech said Anchor Property & Casualty’s ratings revision was based upon “significant alterations to its business model”. You can bet reinsurance availability played a role in changing that “model”. 

And that brings me to the past week, which started with a company by the name of Security First, yet another Florida focused home insurer, who announced their plans to non-renew 7,000 Florida policies. Now it’s not the first time an insurance company announced it was jettisoning some policies (and will not be the last) and it’s entirely possible that the insurer has no issues what-so-ever (I sure hope they don’t), but in such an increasingly volatile market it’s clear that what they are doing to reduce their risk is also related to the current reinsurance market. Here’s what they wrote: 

You should have received an agency bulletin from us that advised agents that current market conditions combined with increases in reinsurance costs projected again this year are creating a more challenging homeowner’s market in Florida.  At the time of reinsurance renewals last year (July 1), property catastrophe reinsurance rates increased between 5% and 25% for insurers previously hit with hurricane losses.  We are expecting similar increases this year.

As a result, we are closing many coastal Census Block Groups to wind coverage and we’ve made the tough but necessary decision to non-renew approximately 7,000 policies with an effective date beginning June 1.  The reason for the non-renewals is for capacity exposure management.  This is the first time in the company’s history that we’ve non-renewed policies for hurricane exposure and the decision was not taken lightly.

That news was then followed by word that a company by the name of TypTap would cease writing new business in several Florida counties, Miami-Dade, Broward and Palm Beach as of February 24, when they wrote:

TypTap Homeowners will be suspending new business effective February 24, 2020 in the following counties: Miami-Dade, Broward, Palm Beach, Orange, Osceola, and Seminole. The remaining eligible counties will stay open for new business. All new business in these counties must have an effective date prior to Monday, February 24th.

Every summer we watch any number of insurers stop writing new business for a few months as the hurricane season begins to manage their exposure to a large storm. Announcements like TypTap’s are generally not uncommon in the late Spring and early summer, but it is an unusual sign of the times in the current market from, perhaps, the growing impact of less affordable reinsurance.

And, speaking of reinsurance, here’s what my long-time friend Jeff Grady, the President of the Florida Association of Insurance Agents, had to say in a September 2018 article in the Sun Sentinel about ‘insurer innovations’ including the then news that TypTap had become the first insurer in Florida solely licensed to sell flood insurance to compete against the decades old federal program from FEMA, the National Flood Insurance Program:

Insurers “have a lot more capability to do these things because reinsurance” — that is, insurance that insurers have to buy to make sure they can pay claims after a catastrophe — “is more affordable”.

There’s that word again.


And just as I was about to publish this blog came the news on February 26th that yet another Florida focused property insurer, Windhaven/The Hearth, has abruptly gone out of business. Here is what the insurer published on its website:

The news was so recent and sudden that Florida’s largest insurance trade organization, the Florida Association of Insurance Agents, was not aware of it until my office contacted them for their perspective. Here’s what they wrote back in response:

Thanks for the email regarding Hearth/Windhaven…

I have verified through a staff member that all employees were laid off effective Friday February 29, 2020… I have tried to call Windhaven and phones are down. I have calls into the OIR and DFS to gain additional info on this bulletin…Let me know if you have additional questions and thanks again for sending us the notice…

You can read more including the Breaking News from the Insurance Journal in an article entitled Windhaven Insurance Ceasing Operations, Assets to be Auctioned Off by clicking here.

My how things have changed in a year and a half since Jeff made that statement about the then attractive reinsurance market. No one in the Florida property insurance business is calling reinsurance ‘affordable’ today, not since last June’s renewals, and that, combined with the concerns that financial rating agencies like Demotech are sharing, bears watching very closely as insurers and the rating agencies that follow them adjust to the new, “Upside Down” marketplace. A marketplace in which I’d not be surprised to see more downgrades, mergers, non-renewals, large rate increases and, perhaps, even worse in the short term.

Despite the market’s volatility, you can continue to count on our truly excellent team of professional agents and underwriters here at Morris & Reynolds to find you the best possible solutions for all of your insurance needs. We offer more insurance company options than just about anyone else and have seen many challenging insurance markets (and ‘monsters’) over our 70 years in business. Enough to fill many Stephen King books or seasons of Stranger Things for sure. As always, thank you for allowing us to provide your protection. 

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