What Jeff Atwater gets wrong, and right, about Florida reinsurance
Atwater accurately refers to an average drop of about 15 to 20 percent in the cost of reinsurance globally in the last year, as well as pointing out that property insurers in the past have claimed that their rising cost of reinsurance coverage is a reason they have had to increase rates on their customers.
Reinsurance coverage, however, is merely one of many insurance cost drivers. According to a report by the Insurance Information Institute, non-catastrophic claims in the years following Hurricane Wilma have increased by about 80 percent. This is due to a host of reasons, ranging from statistics that point to a correlation between hard economic times and increased claims, to provisions in law that allow reopening of old claims, encourage public adjuster involvement and litigation, require full replacement costs in home repairs, and so on.
But it must also be noted that in the years that reinsurance rates were indeed on the rise, the Office of Insurance Regulation often rejected requests for rate increases, even when companies legitimately pointed to increased reinsurance costs. Instead, state regulators would require insurers to purchase what was widely believed to be phantom coverage from the state-run reinsurer, the Florida Hurricane Catastrophe Fund, which was dramatically expanded beyond its ability to pay through legislation passed in 2007.
The same Office of Insurance Regulation that rejected insurers’ rate increases because they preferred to purchase actual reinsurance coverage through the private market instead of phantom coverage through the state opined in 2012 that a major shortfall of the Cat Fund would result in the insolvency of roughly half of the state’s top insurers.
Indeed, CFO Atwater does well to bring this issue up, as the decreasing costs of global reinsurance present lawmakers with a golden opportunity to scale-down the capacity of the Cat Fund to a point where it can be reasonably expected to pay claims. Doing so now while reinsurance rates are on the decline will allow this responsible reform to take place without it adversely affecting consumers.