Complex challenges, emerging risks, litigious behaviors and adverse selection has posed unique opportunities to the insurance function of Underwriting. More specifically, property and casualty (P&C) insurance underwriting in the Florida marketplace presents underwriters and underwriting leaders to think about risks and hazards in a whole new approach. In Florida, major perils that have traditionally and currently present an increase in severity and frequency are hurricanes, flooding, sinkholes, fires, and lightning to name a few. We also consider perils such as earthquakes, water droughts, and wildfires in places such as California and other western regions of the United States. Additionally, perils such as hail, tornadoes and snowstorms found in states like Texas, Ohio, Colorado and Kansas continue to realize more rapidly today than ever before. Many risk experts and scientists hypothesize that climate change and global warming are noted as major factors that have led to the increase in these natural disasters.
In the year of 2017, natural disasters cost the US roughly $306 billion in damage with Hurricane Harvey in Texas being the most expensive resulting in over $125 billion in damage. Following Hurricane Harvey was Hurricane Irma which resulted in $65 billion in damage to Florida and the lower Southeast of the US. Less than a month following Hurricane Irma, Hurricane Maria struck Puerto Rico causing approximately $161 billion in damage. Unrelated to hurricanes, in 2017, 71,499 wildfires occurred causing over $14.5 billion to insurers. Overall, major insurers lost billions on natural disasters in 2017 and climate change is noted as a serious threat.
For these types of losses or what we also refer to as “natural risk”, underwriters have been able to avoid and mitigate potential losses by requiring that properties be retrofitted to certain standards to withstand future losses or by requiring that properties have proper mitigation features such as fire alarm systems, up to date property features or wind damage protection to reduce the severity of losses. Losses stemming from these examples are known to be fortuitous and capricious in nature while the price for the risks are appropriately set so that the insurer would still experience an underwriting profit.
In contrast to natural risk, over the past several years, the property and casualty industry has experienced a relatively new type of risk known as “man-made” risks. Man-made risk includes legal hazards, intentional losses, cyber-attacks, and market crashes etc. Man-made risks collectively have resulted in an estimated $320.1 billion of global GDP according to a Lloyd’s survey. Man-made risks have been noted to pose a greater economic threat than hurricanes, floods and earthquakes. Underwriters are now faced with this emerging risk which are not easily quantifiable, difficult to predict, and are not homogenous. This does pose both challenge and opportunity for underwriters to analyze and price these risks in a new way. The pace in which these risks are emerging are somewhat out of sync with catastrophe and actuarial models and have started to cause a disruption within the industry overall.
On a national scale, in 2018 P&C insurer’s financial results were strong and profitable with over $49.5 billion in net income after taxes according to an III study. A majority of the profitability was stemmed by positive results via insurers operations and investment income. However, Florida P&C insurers in particular have not experienced the substantial financial gains that the industry has experienced overall. Over the past five years, the Florida P&C marketplace experienced increased competition dominated by domestic (regional) insurers, as well as increased competition on the agency/brokerage side. We now see an increase in Insurtech firms that offer insurance products direct to the consumer. This increased competition has resulted in a pricing environment that is market controlled, company controlled and government controlled. Two major performance goals of an insurer is new business and retention. The unique competitive environment has presented opportunities for insurers to also present premiums that coincide with premiums that of other firms but are also profitable for the insurer and in line with regulatory and rating agencies expectations.
In Florida, the P&C marketplace has negatively experienced for roughly six years now a legal tool which allows contractors such as roofers, plumbers, water damage remediators, and attorneys to stand in the shoes of an insured and file a claim against an insurer. This tool is known as an Assignment of Benefits (AOB). In most cases, when an AOB contract is signed by an insured, most rights if not all are then transferred to the contractor, leaving the insured out of the loop of the claims activity. This mechanism has resulted in an increase of claims frequency and severity for Florida insurers. Compared to 2015, claims frequency has risen over 40% and claims severity over 20% according to the Florida Office of Insurance Regulation.
Due to the man-made nature of this risk has posed challenges for underwriters to appropriately price and underwrite for future losses. It is not uncommon, for an AOB to file a lawsuit against an insurance carrier when the initial claim settlement is not within their favor. Additionally, Florida retains a “one-way attorney fee” statute (FS 627.428), which allows an award to an attorney for compensation and fees to be included in the judgement when an insurer loses the case in court. However, this statute does not allow the same benefits for the insurer. Payment of inflated legal fees has caused a negative impact to insurer’s profitability and has ultimately resulted in substantial increases of premium to policyholders. P&C insurance carriers in Florida have exhausted most if not all options to protect surplus and are now heavily relying on the Florida State legislature to present reform. Overall, if this matter is not resolved, insurance premiums will continue to increase and there could be a pullback in the desire of insurance carriers and underwriters to do business in the Florida insurance marketplace.
Looking forward, the job of an underwriter has never been as rewarding and challenging than it is today. Finding solutions and creative underwriting strategy is not at the forefront as it relates to insuring both natural risks and man-made risks. There will always be trends, challenges and opportunity within the insurance marketplace. Staying abreast to unique trends, emerging risks and legislative activity within respective industries can help an underwriter to stay more informed and therefore appropriately educate agents and consumers. There are a variety of resources at an underwriter’s disposal such as the CPCU Society, III.org, RIMS, InsNerds and the Insurance Journal to name a few.
About Larry Nicholson
Director, Underwriting and Training at American Integrity Insurance Company VP, Board of Directors at Society of Insurance Trainers & Educators (SITE)
Director, Underwriting and Training at American Integrity Insurance Company
VP, Board of Directors at Society of Insurance Trainers & Educators (SITE)
