Florida Market Report

Insurance Costs are Up in a Brutally Hard Florida Property Market – The background and the strategy

The insurance market in general

Two markets are forever cyclical: the stock market and the commercial insurance market.  Their behaviors are similar.

The insurance market goes from soft patches where coverage is affordable and plentiful, to hard markets where availability is restricted and prices rise, sometimes brutally.

The Hard Insurance Market

We are coming to the end of one of those dramatic hard markets now.  This hard market has to end because of pure economics.

Windfall Profits Cause the Turn

Premiums will have risen over time so much that insurers are making windfall profits.  They can just continue to enjoy the high profit margins, or …. make even more profit in total by increasing market share.  They can write more business at the existing high levels, though at a slightly lower margin, by competing for business on price.  They will rebel against the herd to profit individually via higher volume.  When that happens, some other insurers will lose business to the first-mover, and they will also have to reduce price to maintain their book of business.  It becomes contagious and the core of the hard market starts to break down.

Knowing What to Do

It is at this point that the buyer of business insurance has to know how to react.

The insured needs market intelligence and the knowledge and ability to break through the resistance.

Because commercial insurance is sold through independent brokers, you will not know immediately that the market dynamic described above is happening.  Brokers neutralize any downward price move for their own business reasons, and due to lack of market knowledge.  We need to break through the broker block and tap into any opportunity for downward price movement.

Here are a few insurer results for the first quarter of 2023, to give a flavor of the current state:

• Allianz – “stable underwriting results”
• AIG – “strongest first quarter underwriting results”
• Swiss RE: “improved profitability in all main businesses absorbed large natural catastrophe losses”

The Florida property insurance market in particular

Natural catastrophe losses worldwide were high in 2022 and have been trending higher the last 5 years or so.  Insured natural catastrophe losses worldwide in 2022 totaled $115b, up from the 10-year average of $81b.

Florida had the distinction in 2022 of being the home of Ian, the second largest hurricane ever in terms of insured losses, with about $55b. The largest, Katrina in 2005, which did hit Florida, comes in at $90b in current dollars. Ida in 2021 was third at $36b.

Now the Good News

Insurers are in the business of taking losses.  That’s their job and their business model.  The question is, have they taken enough in premium to pay those losses, and pay expenses and make a profit?  With the last few years’ merciless premium increases, the answer now seems to be “yes, they have.”

Let’s refresh on the cyclical nature of the business as discussed above.  Hurricanes create financial loss, which creates premium increases, which create profits, which cause pricing to stabilize and eventually come down!

This evolution of insurer attitude is the result of both recent- year price increases and tort reform/insurance legislation passed in 2022 in Florida aimed at improving the insurance environment.

Broker Interference in the Market Mechanism

Brokers, like the insurers, are enjoying the high insurance premiums.  Their compensation is a flat % of the premium and that % does not reduce in times of premium inflation. The higher the premium, the higher the broker compensation.  In addition to the up-front percent commission there is also the contingent commission arrangement that brokers have, which resembles profit sharing.  Brokers are not necessarily hoping for an end to the hard market. 

There is another phenomenon related to the broker/insurer relationship at play as well.  Brokers and insurers are bound together financially.  In a changing market, what underwriters want most from brokers is an ear to the ground on pricing, and an agreement to work together.  The underwriter hates to leave money “on the table.”  A common underwriter-to- broker question would be: “Can we keep our price level?”  In other words, “I’m counting on you to help me keep the business while at the same time maintaining price.”

Think back to the stock market again.  Why do we need to consider taking profits in stocks?  Because the market, when way up can come down fast, too fast for us to react before prices have crashed.  Why not this same speed coming down for commercial insurance premiums?  The broker shock absorber action.  In a world where the insured’s information is limited, the insured may be happy with a 5% reduction presented with much fanfare by the insured’s broker.  The low bar is set and then exceeded.  That’s not good enough.

Accelerate the Downward Price Movement

Break through the blocks and put steps in play to accelerate the downward price action.  This involves market intelligence – having the awareness that the market is at this stage, and the knowledge, ability and willingness to take control of the marketing effort.  We must know which insurers are competing (and there always are some who are smart enough to be the leaders) and access those markets through other channels, while simultaneously making sure the incumbent broker does not block new players from the market.

Knowledge also means being savvy about new ways of managing risk such as Parametric Insurance.  Under this method, an insurer will pay an agreed amount based on the occurrence of an event as defined in the contract.  For example, the happening of a hurricane at a specified magnitude at a specified location will result in payment of a pre-determined policy limit.  This is not traditional insurance.  In the right circumstances this can supplement other risk and insurance programs.

Be among the first to know the market has turned, and aggressively manage the process to push through the downward stickiness and achieve early premium reductions along with creative solutions.  Have a risk management professional on your side.  The risk management fee will be insignificant in comparison to the potential cost savings.

June 2023

Licata Risk Advisors

© Licata Risk & Insurance Advisors Inc. 2023

Jun 09, 2023