Navigating Florida's insurance challenges with parametric solutions
Florida accounts for only 9% of U.S. insurance claims but represents 79% of homeowners' lawsuits.
Florida’s insurance landscape has been tumultuous, with net underwriting losses exceeding $1 billion consecutively in recent years, according to the Insurance Information Institute.
The insolvency of major insurers, like St. Petersburg-based United Property & Casualty Insurance Company, underscores the gravity of the situation. In 2022 alone, six insurers were placed into receivership due to insolvencies, and Florida’s Department of Financial Services currently lists 14 companies in liquidation.
The state’s insurance woes are further intensified by rampant fraud and misuse of assignment of benefits (AOB). Florida, accounting for only 9% of U.S. insurance claims, astonishingly represents 79% of homeowners’ lawsuits. This misuse of AOBs has led to a disproportionate amount of payouts going to attorneys and claims adjusters, rather than claimants. Such challenges have made Florida a daunting market for insurance professionals.
However, recent legislative reforms targeting fraud and legal system abuse offer a glimmer of hope. These reforms, enacted in December 2022, aim to curb the rampant fraud and legal system abuse. Though these reforms are a positive step, their impact on policyholders might not be immediate. Policies existing before Jan. 1, 2023, will still adhere to the old regulations, and premiums are unlikely to decrease in the near term.
At present, Floridians pay on average the highest insurance premiums in the nation. The state’s insurance market has been pummeled by abuse of the legal system and the misuse of assignment of benefits (AOB) — i.e., an agreement between a property owner and a business to handle claims for property damage. Although AOBs are not unusual in the insurance business, in Florida, they have been a magnet for fraud. A sizable number of vendors and attorneys have inflated their costs by soliciting unwarranted AOBs from tens of thousands of Floridians, resulting in lawsuits against insurers that deny or dispute the claims.
Incredibly, local news reports indicate that of the $15 billion that has been paid out by insurance companies between 2012-2022, only 8% went to claimants while the lion’s share at 71% went to attorneys and claims adjusters. This situation has prompted many insurance industry professionals to view Florida as one of the riskiest places in the world to operate.
Given this situation, it’s clear that there is ample room for new insurance professionals to enter the Florida market, provided that they have the resources, including risk capital, dynamic underwriting capabilities and nimble insurance products that are capable of addressing the needs of property and asset holders.
Recent reforms target fraud, legal system abuse
On the legal front, recent legislation should make insurance professionals feel a bit more confident in plying their wares in the Florida region. Reforms signed into law in December of 2022 aim to tackle the fraud and legal system abuse that have contributed greatly to the state’s insurance crisis. The legislation shortened the period that policyholders have to file a claim and eliminated “one-way attorney fees” for property insurance claims, which required insurers to pay the fees of policyholders’ attorney fees if the latter prevailed in a successfully argued court case. This legislation also eliminated AOBs, addressing much of the insurance fraud in the state.
Still, it will likely take years before policyholders reap the benefits from these reforms in terms of greater cost savings and more options provided by traditional insurers. Furthermore, it must be stressed that the policyholders have also been the victims of unscrupulous practices. A recent investigation by The Washington Post revealed that in the wake of the damage caused by Hurricane Ian, a number of claims adjusters have stated that their managers rewrote their assessments to play down the extent of surveyed property damage.
Impact of reforms on policyholders and the insurance market
While the reforms are a step in the right direction, they will not have an immediate positive impact on policyholders. All personal and commercial policies in force before Jan. 1, 2023, will fall under the previous regulations, including a large volume of disputed claims related to Hurricane Ian. Some insurers have urged judicial officials to make the provision retroactive, but these efforts have been unsuccessful thus far.
Policyholders should not expect premiums to come down anytime soon. In fact, rates will most likely continue to rise. NBC cited a leaked memo from Castle Key, a subsidiary of Allstate Insurance, that stated its intention to increase the insurance rates for condo owners by almost 54%.
All of this begs the question: What can be done, in the here and now, to help Floridians navigate an overheated market where the demand for viable insurance outstrips supply?
What parametric insurance can do for Florida
In recent years, one of the most promising trends in the Florida insurance market has been the adoption of parametric insurance which can offer an effective way to manage and mitigate risk, particularly for homeowners and businesses whose assets are susceptible to severe climate-related events. It can also provide a cost-effective alternative to traditional insurance coverage, which can be more expensive, less flexible and offer less comprehensive coverage.
Parametric insurance pays out a fixed amount of money based on the occurrence of a specific event, like a hurricane, rather than a contingent sum based on the evidence offered by a claims adjuster. In other words, compensation is triggered by the occurrence of a defined event, as opposed to a qualitative assessment of material damage.
Two of the paramount advantages of parametric insurance are its flexibility and speed. Parametric insurance can be customized to meet the unique needs of individual policyholders and can cover a wide range of natural disasters. This means that policyholders can tailor their coverage to fit their specific needs and budget, which can be particularly important for small to medium-sized businesses that may not have the resources to purchase traditional insurance coverage. Since the payout is not based on a damage assessment, claims can be processed much faster than what most traditional claims processes allow for. In the aftermath of a natural disaster, the importance of financial stopgap measures cannot be overstated.
Parametric insurance represents a promising solution for managing risk and mitigating losses in the Florida insurance market. As an alternative to traditional insurance coverage, it can help individuals and businesses recover faster and better protect themselves from catastrophic events in the Sunshine State.
Siddartha Jha is founder and CEO of Arbol. Any opinions expressed here are the author’s own.
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