Canadian Underwriter

New Florida property insurers have confidence in risk data but next hurricane could cost more than $30 billion: A.M. Best

July 21, 2015   by Canadian Underwriter

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Insurance carriers covering property in Florida have a “relatively high degree of confidence” in their risk data, but the next hurricane to hit the state could cause losses “much larger” than those from Hurricane Wilma in 2005, A.M. Best Company Inc. suggested in a report released Monday.

Wilma was the last “significant” hurricane to affect Florida – with estimated losses of US$29.4 billion – stated A.M. Best, an Oldwick, N.J.-based ratings firm, in a report titled Florida Property Insurers Remain Untested: Will 2015 Be the Year? That figure includes losses outside of Florida. [click image below to enlarge]

Next hurricane to hit Florida could cause losses "much larger" than those from Hurricane Wilma in 2005, A.M. Best suggests

“It is not matter of ‘if’ but ‘when’ the next major hurricane will hit the state and losses could be much larger due to the extensive property development and increased building costs,” stated A.M. Best. In the report, A.M. Best noted there has been a “material shift” in the Florida property market as some carriers reduced their Florida property exposure and Citizens Property Insurance Corp. – established by the state government in 2002 – began a program to return policyholders to the private market in 2013.

A.M. Best reported Citizens had more than 1.47 million policies in force in 2011 but fewer than 700,000 in 2014. Citizens’ share of the market fell from 27% in 2007 to 15% last year. Between 2004 and 2014, State Farm’s market share in the Florida market fell from 6.7% to 2%, while Allstate’s fell from 6.7% to 2%, Liberty Mutual’s fell from 2.7% to 0.9% and Travelers’ fell from 2.3% to 0.6%.

“Not only was there a rise and eventual fall in Citizens share of the market, there was also a material shift among the leading insurers with large national writers and their subsidiaries giving way to newly formed or local Florida-only property writers,” A.M. Best said in the report. “Many of the big names in Florida lost market share in favor of smaller players.”

The carriers whose share is growing have an “opportunity to capitalize on extremely favorable reinsurance market conditions,” A.M. Best suggested. “However, there is significant risk in these strategies as proper risk management, risk analytics and overall infrastructure to effectively manage the growth are in some cases untested.”

Most carriers “do extensive exposure modeling,” A.M. Best added. Catastrophe modeling “is a critical component in assessing the probability of loss in a particular geographic area, construction type/year or occupancy just to name a few modeling factors. The characteristics of each individual risk are evaluated and premium rate levels determined as in any other class or type of business.”

Many companies find the Florida property market attractive, A.M. Best noted.

“There is a relatively high degree of confidence in the risk data being collected and analyzed,” the ratings firm noted. “The estimated gross and net probable maximum losses are felt to be more reliable now than in the past, although they remain potentially limited and dependent on the specific location/property details.”

Reinsurers, A.M. Best suggested, are assuming Florida property risk at “increasingly more favorable rates and terms.”

Last January, A.M. Best said in a separate report that property catastrophe prices declined, in some cases, by 20% in 2014, due in part to lack of market changing losses, increased retentions by ceding companies and the inflow of capital from insurance-linked securities.

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