A.M. Best: Hurricane Irma to Test Florida Market Newbies

Although insured losses as a result of Hurricane Irma will not be as severe as originally forecast, the storm still represents a sizeable catastrophe event that will test the infrastructure and potentially strain the financial wherewithal of some local and regional carriers in Florida, particularly those that are geographically concentrated, according to a new briefing from A.M. Best.

The Best’s Briefing, titled, “Hurricane Irma Tests Newer Participants in Florida Market,” notes that over the past decade, the number of more concentrated local/regional writers in Florida’s insurance market has increased as national writers pulled back on the state.

The state-formed Citizens Property Casualty Insurance Corporation took on much of that risk exposure, and as a result, experienced significant financial pressure. This led to a fairly successful depopulation program, whereby private insurers were given incentives to assume policies from Citizens. This, along with other factors that included benign weather in Florida and favorable reinsurance pricing, prompted many new insurance companies to form.

According to the report, a number of new insurance companies were formed since 2007, writing nearly a fifth of the property market lines: homeowners, farmowners, fire and allied, and commercial multiperil (non-liability). Hurricane Irma represents the first severe event to test the strength of these business models, particularly with regard to risk selection, loss mitigation and potentially their reinsurance programs.

The report also states that with Hurricane Irma occurring in such close proximity to Hurricane Harvey, the demand for independent catastrophe claim adjusters has increased. A.M. Best-rated entities had already started strengthening their claims processes in response to the state’s Assignment of Benefit issues. Newer companies may face additional pressure from a lack of experience as well as limitations due to scale.

The report warns that Hurricane Irma has the potential to amplify the AOB issue, which had already led to performance constraints in the Florida market from an increase in the frequency and severity of litigated water claims. A.M. Best said insurer performance had deteriorated in recent years in large part due to the AOB issue.

“A.M. Best expects that Hurricane Irma and AOB losses will have a much greater impact on operating results for the concentrated insurers, and will continue to monitor the effects of risk-adjusted capitalization,” the report states.

A.M. Best does not expect a significant number of rating actions on its rated insurers to result solely from Hurricane Irma, but reinsurance programs that respond differently from what is anticipated could increase ratings pressure.

A.M. Best said that ultimately, although the aftermath of Hurricane Irma may be bleak for some regional and local carriers, particularly overexposed companies with earnings and potential capital concerns, it believes opportunities will emerge for others.

“An insurer that can effectively navigate through the storm and potentially others during this hurricane season may attract displaced insureds,” the briefing states.

Insurers also may need to rethink their risk selection, risk tolerances and reinsurance purchases, and some may consider diversifying outside of Florida or revamping products. Smaller or struggling companies in the Florida insurance market also could become merger and acquisition targets, the ratings agency said.

A full copy of the special report is available through A.M. Best.

Source: A.M. Best