Saving the Florida home insurance market will take more than legislation

Florida Governor Ron DeSantis and the state’s lawmakers recently proposed comprehensive litigation reform in the hopes of resuscitating the long-troubled Florida insurance market. On the heels of SB 2-A that eliminated one-way attorney fees and assignment of benefits for all property insurance claims, the new proposal seeks to eradicate one-way attorney fees for all lines of insurance and attorney multipliers that incentivize frivolous lawsuits. The effort aims to restore business conditions in an infamously unfriendly insurance environment.

But will it work?

Billions in capital have been siphoned from insurance balance sheets to attorneys, a legacy that has indefinitely soured the Florida market for carriers and reinsurers. But it will take more than legislation to change that for the following reasons.

1. Citizens doesn’t behave like a residual market 

In states like Louisiana, state-run insurers are a last resort when policyholders can’t secure coverage through the private market, and their rates are required to be more costly than private insurers. The inverse is true of Florida’s residual market: Citizens Property Insurance competes with the private market and is the largest carrier in the state. In fact, Citizens has recently generated an alarming amount of new business – its policy count has more than doubled from 542,739 to 1,145,178 in two short years.

While SB 2-A requires Citizens’ rates to be noncompetitive, the law lays out no clear path to enforce a residual market position. Citizens’ rates throughout Florida are well below those of private insurers that aren’t subsidized by the state and must accurately price the risk they write. Moreover, Citizens’ “glide path” still statutorily caps rate increases at no more than 12% in 2023 and up to 15% in 2026. In a state where private insurers’ rates increase an average of 33% each year to reflect rising reinsurance costs, Citizens’ rating plan if left unchanged will continue to undercut private insurers and amplify market instability.

2. The legal system is still ripe for abuse and fraud

The Florida Office of Insurance Regulation estimates that Florida insurers paid $51 billion over 10 years — 71% of which went to attorneys and public adjusters. While the new reforms take aim at some key factors driving Florida’s excessive litigation, they fall short when compared to other catastrophe-exposed markets.

For example, Louisiana doesn’t permit public adjusters to negotiate with the insurer, and they are required to charge a defined fee. The Louisiana Bar also maintains a 50-page handbook on how attorneys can and can’t market their services. By contrast, even with reforms, Florida’s public adjusters can charge up to 20% of the claims payment in contingency fees, which incentivizes loss inflation. Florida also doesn’t curtail attorney marketing practices.

All the bad actors that caused billions in damage to the market are still active, and if Florida’s attorneys have proven anything, it’s their tenacity and creativity in finding loopholes. Do lawmakers, regulators, and the courts have the same determination to push back?

3. Regulators have been slow to support the industry

To build on the tort reforms, Florida regulators need to take an active role in partnering with the industry and create a business environment that’s hospitable to insurers. In practice, that would mean regulators leverage their broad latitude to write helpful regulations to give insurers tools to push back on abuse and fraud — for example, in reinforcing the intent of the “bad faith” reforms and blocking extra-contractual coverage.

More importantly, it would mean regulators advocate to reinstate file and use and broaden the availability of consent to rate so companies can charge the appropriate amount. At a minimum, FL OIR could commit to 30-day approvals for all actuarially supported rate increases.

4. Few property insurance companies remain in the private market

Since 2020, 15 property insurers in Florida were declared insolvent. While these failures are often blamed on hurricane activity, much of the state’s insurance capital has been exhausted by litigation. Although Senate Bill 2-A and the proposed reforms are a step in the right direction, it will take time to restore market conditions and to bring adequate insurance capital back.

5. Heightened cat activity since 2017 has damaged the ability to generate capital

Elevated catastrophe activity has destroyed tens of billions in deployed insurance capital, which translates to less insurance and reinsurance capacity in every catastrophe-exposed market — not just Florida. Capital isn’t coming back fast enough, as the $55 billion of reinsurance capital erosion at year end 2022 indicates.

While some investors realize the opportunity in catastrophe-exposed insurance markets, the limited new capital largely isn’t allocated to Florida. Plus, global macroeconomic conditions – including the appreciation of the US dollar – have weakened balance sheets and curbed investments. The lack of capital means Florida insurance companies can’t write as much insurance.

No single issue is the root cause of Florida’s difficult insurance environment, and so tort reform alone can’t be the solution. The right conditions will encourage capital to come back, and it will take the collective resolve of politicians, lawmakers, regulators, attorneys, and the courts to make it happen.

Terrence McLean is the CEO of SageSure. Opinions expressed are the author’s.

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