Fitch: Most Florida Specialty Insurers Remain Untested By Hurricanes

The majority of Florida’s homeowner specialist insurers have brief histories, and their ability to manage a large catastrophic hurricane is uncertain despite recent strong performance, according to a new report from Fitch Ratings.

The last hurricane to make landfall in Florida was Hurricane Wilma 11 years ago in 2005. Since then the state’s homeowner insurance market has shifted from large national insurers to newer, relatively small companies focused on Florida homeowner business. These companies now hold a 60 percent market share in the state.

“It’s not a question of if these Florida homeowner specialists will be tested by a hurricane but rather when the next catastrophe strikes will they be prepared to handle a significant increase in claims volume,” said Christopher Grimes, director, Fitch.

Many of the Florida specialists reported favorable profitability and surplus growth in recent years due to the lack of catastrophe losses but are unlikely to achieve ‘A’ category Fitch Insurer Financial Strength (IFS) ratings. Limiting factors that influence ratings include relatively small size and scale, concentrated product and geographic profiles, heavy reliance on third-party reinsurance and concerns regarding capital adequacy given catastrophe exposure.

As the Florida specialists have gained market share, Citizens Property Insurance Corporation, the state insurer of last resort, has scaled back from 20 percent market share in 2011 to six percent at year-end 2015. Improvements in Citizens’ capital position and risk profile enhance the Florida homeowners market’s overall resiliency in meeting obligations under future large loss events. However, the transfer of underwriting risk from Citizens to Florida specialists adds to the market’s dependence on smaller underwriters with more limited capital levels and access to new capital than Citizens.

Additionally, reinsurers provide critical underwriting capacity in protecting Florida specialists from catastrophe losses. The state-sponsored Florida Hurricane Catastrophe Fund assumes the largest level of premium, followed by Lloyd’s of London, Allianz SE; Tokio Marine Holdings, Inc.; Everest Re Group, Ltd.; and XL Group plc. Florida property risk is also passed to the alternative capital markets through a variety of sources such as catastrophe (cat) bonds, sidecars, industry loss warranties, hedge fund-supported reinsurers and asset managers investing in insurance-linked securities (ILS).

“Over the last few years intense pricing competition and excess capital in the reinsurance market contributed to large rate reductions and more favorable terms and conditions, allowing Florida homeowners’ insurers to keep and expand reinsurance programs,” said James Auden, Managing Director, Fitch.

Source: Fitch Ratings