Christian Cámara: In Florida insurance market, all is not equal

insurance abuse flooding (Large)

According to a study conducted by the risk assessment group Karen Clark & Co., if Hurricane Andrew hit today, it would cause nearly $50 billion of insured losses, compared to its $15.1 billion in 1992.

Indeed, Florida enjoys a relatively stable insurance market with more companies writing more policies. However, there are concerns that new, untested insurers may not survive a major strike. While it is true that several newer, smaller companies do not maintain the levels of surplus that more established companies do, they make up for it by purchasing reinsurance.

Reinsurance is insurance for insurance companies. Most isolated claims — fires, thefts or damage by random thunderstorms — are paid out of a company’s surplus, while larger losses from widespread catastrophes like hurricanes trigger insurers’ reinsurance contracts. Given Florida’s natural risks, the cost of reinsurance factors heavily in the calculation of homeowners insurance rates.

The good news is reinsurance prices have dropped precipitously over the past decade. This “buyer’s market” has allowed insurance companies to purchase more coverage for less, thus strengthening their finances and permitting them to write more policies. As such, Florida’s property insurers should be able to weather a large hurricane, all things being equal.

The bad news is, all things are not equal.

Currently, Florida’s insurance market is being undermined by a cottage industry exploiting an insurance practice called assignment of benefits (AOB). This allows a third-party contractor — such as a roofer or water-extraction company — to assume control of a homeowner’s policy to collect payment directly from the insurance company. Although a normal practice in other areas such as health insurance, Florida’s litigious environment has encouraged bad actors to inflate their bills and then file frivolous lawsuits for small, simple or even uncontested claims. The result: higher insurance rates.

But leaving AOB abuse unaddressed doesn’t just cause higher rates.

The models used to calculate an insurer’s risk exposure, which then determines how much surplus and reinsurance they must maintain, do not normally factor fraud and abuse costs. Therefore, a storm may actually wind up costing more than models suggest. Therein lies the problem: companies that have amassed enough resources to cover legitimate hurricane claims, as required by law, may not have enough to cover fraud, unnecessary litigation or other AOB-related abuse.

According to the Office of Insurance Regulation, water claims filed under an AOB have much higher severity — generally at least 50 percent more — than claims filed without one. In 2010, only 6 percent of claims were filed using an AOB; by 2015, the figure jumped to 16 percent and continues to rise.

These figures are all related to non-catastrophe water claims, so it’s impossible to predict how many hurricane claims would be filed utilizing an AOB. But one thing is certain: given current trends, if an Andrew were to strike today, the estimated $50 billion price tag may turn out to be a lot more with the addition of AOB abuse — and many insurers may not be prepared for it.

A moderate AOB reform package passed the Florida House of Representatives with bipartisan support this year, but died in the Senate. If higher rates aren’t enough to push senators to pass necessary reforms, perhaps the threat of insolvencies and thousands of unpaid hurricane claims may do the trick.


Christian Cámara (@ChristianCamara) is a senior fellow at the R Street Institute, a member of the Stronger Safer Florida coalition.

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