These mechanisms contributed to a period of high losses and low surplus, making it harder for private insurances to stay solvent. That led to the reliance on Citizens Property Insurance Corporation, the state-run insurer of last resort. As many Floridians could not find coverage in the private market.
In this episode, we'll turn our attention to what specifically were the reforms, what happened since the reforms, and what may still need to be addressed. To aid me in driving our discussion on our post-reform market are our two returning guests who guided us through part one Klayton Southwood, a senior director with WTW's Insurance Consulting and Technology division, and Travis Miller, President of Radey Law Firm. Welcome back.
TRAVIS MILLER: Thank you. Happy to be here.
KLAYTON SOUTHWOOD: Yeah, great to be back, Chris. Looking forward to a good discussion here.
CHRIS ZANONI: Perfect well, as many of our listeners know, we have typically asked our guests what they do in their life. We've done that in part 1. So I'm going to throw a curveball here. How would you explain what you do to a five-year-old using only food analogies? Travis.
TRAVIS MILLER: That is quite a curveball. It'd be hard for a five-year-old, but with the regulatory and governmental process sometimes, of course, they refer to that as how the sausage gets made. So I think I show up each day and just try to figure out how the sausage gets made.
KLAYTON SOUTHWOOD: That's a good one, Travis. Man, Chris, that's a tough one. I mean, from an actuarial perspective, I guess one of the key issues that we're worried about here in the Florida marketplace is adequate pricing. So if I was going to use a food analogy, it might be making sure that carriers always have enough mac and cheese to stay full and able to function well.
CHRIS ZANONI: Mac and cheese is a favorite of mine, along with sausage. So good analogies there, gentlemen. Going into a reform, Travis, are you able to share details on the legislative reforms enacted to address Florida's unique market dynamics?
TRAVIS MILLER: I think so, hopefully a little better than with the food analogy question there. But last time, of course, we talked about problems that plagued the market, and we talked about Florida really using a piecemeal approach, whether it was the legislature or the regulator or the carriers themselves.
When we saw issues like mold or sinkholes or screened enclosure, there was always a small bite at trying to improve that, really, by redefining perils, by offering coverage exclusions with buybacks, really getting at a specific issue. But as we saw later, that really didn't address underlying concerns with the market.
And unfortunately, in the post-Irma period, those concerns had become so pervasive, so prevalent, that small bites at it weren't going to do the job. In fact, the legislature tried a couple of times through some more interim type of measures to address some of the concerns with solicitations and AOBs.
In the end, though, they recognized in 2022 that they needed a comprehensive set of reforms to prevent a further collapse of the market. And the reason I say further collapse of the market is when you look at what was happening at that time, we had had about a dozen insolvencies. The size of the residual market had tripled. Premiums were going up. Availability of the product was scarce.
So I think you can say that was more or less a collapse of the market or certainly well on its way to it. And so to forestall that and get the market back on its feet, the legislature did several key things, and I'll really point to about four of them. First was they eliminated the statutory one-way right to attorney's fees, and we'll talk more about the attorney's fee reform.
But that was a former statute that allowed plaintiffs the right to recover their attorney's fees when litigating against an insurer, but it did not extend the same right to the insurers even when they prevailed. So eliminating that one-way incentive has been significant in curtailing litigation, especially the types of litigation that really became more about fee recovery than the underlying merits of the issue itself.
The second key thing during that set of reforms was to ban or prohibit the use of assignment of benefits. And you had mentioned to those in the introduction that under prior law, insureds could assign their rights under their insurance policies to another party, typically contractors, and in fact, they could assign rights under their policies to multiple parties.
This sometimes led to multiple parties pursuing claims against the insurers and even multiple parties suing insurers under the very same policy, the very same set of facts giving rise to a claim. So the legislature in the reforms eliminated the use of assignment of benefits and really channeled the claim process through the policy itself as a singular relationship and claim.
The third thing is-- and this one sometimes gets overlooked a little bit, but the legislature mandated that claims must be reported within one year of the date of loss. And I think we alluded to this last time as well. Formerly, the law was as long as three years that an insured would have to report a loss after the date of the event, which was an extraordinarily long period of time, created a lot of challenges with the adjusting process and data quality and figuring out cause and scope.
So by bringing that to a one-year period, the legislature really improved the quality of the information about the claim and the ability of the insurer to timely adjust the claim. And then, the last component that I'll mention about the reforms, as far as the legal adjustments that they made, was they fixed a flaw under prior law that had essentially precluded insurers from availing themselves of proposals for settlement.
You'll sometimes hear about proposals for settlement or offers of judgment. And it's commonly said, of course, that what the legislature did in the reforms is they eliminated the opportunity for insureds to recover their attorney's fees, and that's not at all correct.
The legislature did, in fact, eliminate the statutory one-way right to attorney's fees that previously existed, however, not just in insurance litigation, but in virtually all forms of commercial litigation in Florida, either party can make a proposal for settlement.
And what that means is that whether it's the plaintiff or the defendant, the party can make an honest assessment of its case, and it can put an offer on the table for the other side. The other side can then choose to accept that offer. Or, if they reject the offer, they will have to achieve a result that is measurably better than the offer they rejected.
If they do not, then that party will be responsible for the other side's attorney's fees. So you can see there it's a two-way process. It requires each party to evaluate its case in deciding whether to make a settlement offer. And if it does, it then shifts to the other party to make a good faith, honest assessment of the value of that claim and whether it's going to accept that offer or proceed with litigation at the risk that it could have to pay the initial party's fees.
And so what that does, both sides, it sort of eliminates litigating for the sake of litigation for the sake of driving up fees. Both parties have to make an honest assessment of their cases. So those four elements were really the key statutory or legal elements that changed.
And I always like to mention too, with the reforms that was not the extent of it. There were other things in there, and most notably was the accountability aspects of the legislation. The legislature determined that in exchange or as a result of these legal reforms that the timelines for carriers to operate under in adjusting and paying claims would be reduced. And so that was another significant aspect of the reforms as well.
CHRIS ZANONI: Definitely a number of reforms that came in that are impacting the market. How have the reforms been effective? Klayton, do you mind starting this?
KLAYTON SOUTHWOOD: I think there were a number of very positive indicators that we've seen, Chris. If you look back in time at active Florida personal property carriers, I'm talking about the ones that write more than 50% of their exposure in Florida, as we were getting into the height of the challenges after Hurricane Irma, industry data that I've seen shows that these carriers were writing at a combined ratio of over 130% in 2020.
This group was losing in terms of pre-tax operating loss, losing $1 billion a year at that point because of the challenges in the market. But by early 2023-- and again, this was very early days of the reform, but with the combination of the reform and rate activity that carries were being taken-- effectively the operating loss had been wiped out.
For that group of carriers, in 2023, their combined ratio was down to 99.8. So you had gone from a situation where they were losing significant amounts of money to break even. And then, in 2024, the combined ratio for that group was down to 93.
And so you've gotten to a situation where they were losing $1 billion a year to now having several hundred million dollars in pre-tax net income, just as one example. Another one that I had hit on briefly in our last edition was the issue around the relationship between capital contributions and surplus change.
So if you go back to-- take 2021 for an example, in that year, the carriers in Florida did increase their surplus by a combined about $120 million, but there were about $850 million capital contributions. Just to have a very meager increase in surplus, it took massive capital contributions.
There was a lot of red ink flowing. By 2024, you had almost $1 billion in surplus increases against about $300 million in capital contributions. So dramatic impact. I'll just point to a couple of others and then see what Travis would say. But I think another example is the population of Citizens Property Insurance Corporation.
You go back to the latter part of 2023, when carriers were still trying to understand what the impact was, you had 1.4 million policyholders and citizens. And now, we sit here today and it's more like 775,000. So the depopulation has been pretty incredible. The other thing I would point to is rate activity.
So OIR, the Office of Insurance Regulation in Florida, fairly regularly publishes surveys that talk about the level of rate activity that they're seeing in the marketplace. If you go back to the early part of 2023, the 30-day average rate request in homeowners was an increase of almost 22%.
Flash forward, two years forward, you get to the early part of 2025, and the 30-day average for rate request was zero. So, you've gone from a situation where carriers on average are asking for 22% increases in premium to the point where they're essentially asking for nothing. And since January, I think we've seen, seeing more cases of carriers filing for rate decreases that than even keeping rates flat. So I think there's just a lot of positive signs we're seeing.
CHRIS ZANONI: Pleasant to hear in terms of Citizens' Property decreasing their overall population, rate increases flattening on the insurance side. Travis, how are you seeing it in your world?
TRAVIS MILLER: Yeah, I agree with all of those points. And it's a very common topic here in Florida in the legislative and regulatory circles. And you'll hear comments or at least insinuations that the reforms maybe aren't working as intended, maybe they're not working fast enough, they're not working at a magnitude that it was intended.
You hear these types of things, but I think you really have to take a step back and say, why would you think that when you look objectively at how the market has improved? I did have a funny-- the anecdote very recently with a friend and colleague of mine in this general area.
And talking about some of the criticisms or insinuations that the reforms aren't working as intended, he posed the question to me, well, do you think it's going to take a storm to prove that the reforms are working? And I said, well, no thanks. How about the three we just had?
And I think that tends to get overlooked here a little bit. We had about a dozen insolvencies in the post-Irma period, 2019, '20, '21 type insolvencies that were somewhat removed from the events themselves. So we had carriers going down due to the lingering effects of the environment at that time.
And yet in Florida last year alone, we had three events, and really, there were some PCS events otherwise during the year. So maybe even more than that were either full-retention events or at least significant retention events from the carriers.
Every other time-- and Klayton recounted some of these in part 1-- but every other time we've had severe or frequent events in the Florida market over the last four decades. We've needed immediate reaction and help from the legislature.
And yet in 2024, we have three storms plus PCS events, and everybody says, stay the course. The reforms are working. We haven't seen any insolvencies. So I think that is a huge indicator unto itself. And then, you overlay that with reinsurance has been more available at more competitive pricing.
That, of course, is leading to primary rate levels flattening and decreasing. I think as we go through 2025, we'll see some more of that, new entrants, existing carriers expanding their appetites, the accountability measures leading to faster payment cycles. I think you can just go down the line and say, have the reforms been effective? Well, yes, in almost all phases that I can think of.
KLAYTON SOUTHWOOD: And I think it's a good point that you raise on market entrants as another sign. I mean, you've got a lot of capital flowing into the market. I mean, you had more new entrants since Senate Bill 2-A, specifically 14 new entrants just in the last two-plus years. That's actually while the number of insolvencies was intolerably high. You've actually had more new entrants than you had insolvencies. So I think it's just more evidence that this is working.
TRAVIS MILLER: Right, I agree.
CHRIS ZANONI: So you're taking it from one side of the coin where you're seeing insurers starting to flourish. On the other side, if you take away the right to one way attorney fees, does that lead to injustices?
TRAVIS MILLER: I don't see it that way. I understand the argument, of course, and I see all of the different points and counter points that are made with respect to the reforms, but I think you almost can look at the question itself-- is taking away a one-way right to something an injustice? Well, I wouldn't think so. If it's a one way right, it's restoring balance.
What we had before the reforms was that one way right created significant imbalance. It created what, in essence, became the injustice, which was it incentivized litigation to a degree that losses skyrocketed, loss adjustment expenses were through the roof, reinsurance costs were high.
All of those things manifest themselves in less availability and higher rates, which all consumers pay. Then, you put on top of that the insolvencies that we've been talking about. Those are funded through what, for all practical purposes, is a tax on all Floridians.
So on top of the elevated premiums, you have this taxing mechanism, which is all arising from the pre-reform conditions, that strikes me as being an injustice. It's certainly a result that the legislature wanted to avoid. And again, to what I said on the reforms themselves related to attorney's fees, the legislature did not say that there is no opportunity for the parties to recover their attorney's fees.
There is the opportunity to use the proposal for settlement, offer of judgment process, which is available to litigants, plaintiff or defense. That is two-sided. Each party can evaluate its case. Each party has the opportunity to make an offer. Each party has to evaluate thoughtfully any offer that is presented to it.
This bilateral approach tends to channel the discussions toward reasonableness, toward resolution, toward litigation avoidance, if there's a reasonable resolution to be had. And as I mentioned before, it gets us away from litigating for the sake of litigation for the sake of the fees.
You really don't want attorney's fees to become the driver in litigation. You want it to be the merits of the case. The sooner you can get to that through the notice of intent process, through alternative dispute resolution, through settlement offers that have to be weighed and reasonably considered, the sooner you can get to resolving the underlying case, the better off you are.
And that's where taking away the statutory one-way right, while I understand why some people might want to say that it's an injustice, you have these other mechanisms in place that are really designed to foster and expedite the justice and the process.
CHRIS ZANONI: With these other mechanisms in place, it seems that progress is clearly happening across the board from what both of you are stating, what other factors could threaten the progress that has been made?
TRAVIS MILLER: Well, I'll jump in with a couple, and then Klayton may want to build on those. The first that I tend to see are the inflationary trends. Anything that, independently of the reforms or that are beyond the control of the insurers, tends to drive costs because in reality, consumers want to see savings. Policymakers want to see savings.
It's a lot better to say that there are savings being realized in the market than to say, shouldn't you be thankful your costs didn't go up as much as they otherwise would have? That's just-- it's a tough sell. It may be true, but it's a tough sell to say you should be happy because otherwise it would have been worse.
So we're starting to see the flattening of rates we saw in 2020, a lot of no change or a lot of minus and a lot of decrease filings. So we're on the right track. Hopefully, 2025 will get more into that savings element. But you do have those other issues.
And I go all the way back to the first session with Klayton talking about population growth and coastal development and these things that tend to drive costs that are independent of the reforms. They're just they're just part of the process that has to be insured against.
And then, you overlay some things like that, inflation in the broader economy we saw it with the pandemic and then there was the potential for it with some of the discussion of tariffs. Some of these things are local.
Some of them are global, but when there's rising costs in the process, even if they're independent of the reforms and the operations here in the state of Florida, it tends to diminish the enthusiasm for the reforms or tends to mask the effectiveness that they are showing.
And then the other, of course, is political. You can't avoid that when you're talking about something sensitive like this, that you may want to believe that the effectiveness that we talked about a few minutes ago, the competitiveness, the pricing, the availability, the financial soundness, all of those things, those are terrific. Those are really, really good.
And you would think that would be this indisputable confirmation that the reforms are working. But of course, they may not be working for everybody, and they will have their detractors. And the insurance industry as a whole has its detractors.
So as long as that exists, you have this climate in which we operate, in which some people will say that the reforms aren't working, or they're not working well enough or fast enough. And so you have those just kind of general pressures that always exist.
KLAYTON SOUTHWOOD: I guess, I would add a couple things to that. One is that the carriers in Florida obviously are highly dependent on a well-functioning private reinsurance marketplace. And well, I think reinsurers right now view the Florida marketplace more positively than they have in a number of years, as evidenced by the fact that capital is flowing back in and we're not seeing huge spikes in reinsurance costs like we saw a few years ago.
There is always the threat that events elsewhere in the world, California wildfires, severe convective storms, events overseas could dilute the amount of capacity that reinsurers are willing to allocate to Florida.
And so I think that's a constant concern that hopefully will not get into another situation where huge reinsurance capacity constraints will cause large cost increases for carriers or cause them to have to severely pull back in underwriting or things of that nature. I guess the other danger that's always out there is regulatory restriction.
I mean, I think the OIR really recognizes the need to give carriers some flexibility in pricing and underwriting. But there are certainly jurisdictions around the United States that have suffered from undue regulatory burden.
I mean, for example, a lot of the problems that we have right now in the state of California are caused by the fact that historically, the insurance department did not allow carriers to include the cost of reinsurance in pricing, and they did not allow carriers to use catastrophe models in pricing.
So you would just hope that leadership at the Florida office of insurance regulation would continue on the course of allowing carriers to use tools and to not put undue burdens on them in terms of restricting the ways that they can price business and the ways that they can underwrite business.
That would cause market stress and a pushback to days of large rate increases and large repopulation of Citizens. I mean, I think nobody wants that, but I think it's something that you always have to be at least have in the back of your mind.
TRAVIS MILLER: It's a great point, Klayton. I think it's underappreciated how challenging that job is for the regulator, particularly in very tough times because they have an industry to look out for from a financial solvency standpoint, but they have the consumers to look out for as well in terms of the timeliness and the amount and the fairness of the claims process.
And you can see in the different approaches they take with solvency regulation, rate regulation. But then, of course, market regulation as well, that they are trying to achieve that balance to have a very well-functioning and actually restored and rebuilt market.
And you're right, they pay a lot of attention to that, and they've done a good job of it. As you see us coming out of this post-reform era. And that's important. It's important to the carriers that are here, and it's important to the views of capital providers around the world.
CHRIS ZANONI: Given your expertise for both of you, would you change anything else to restore stability in the Florida property insurance market outside of utilizing an elder wand that Orlando may possibly have hidden in a vault to stop future hurricanes from hitting Florida?
KLAYTON SOUTHWOOD: Yeah, it's a good question, Chris. There's only so much that you can do. I mean, to your point, you can't. You can't wave a magic wand and keep the storms from coming. That's going to happen.
But I would say that in addition to regulatory reforms and things that you can do of a structural nature, in that way, carriers have done a great job, I think, over the years of educating the insurance, buying public on things like the smart use of mitigation devices, mitigation activities, for example, installing fortified roofs on homes to try and mitigate the amount of damage that would happen in a storm.
And I think carriers just have to stay on their toes with continuing to look at smarter ways of understanding risk, smarter use of risk models and underwriting to provide coverage to the insurance buying public at a fair price that treats the consumer fairly at the same time treats the company and its interests fairly as well. So I think to me, those are some of the biggest things that hopefully will continue to see in the market.
TRAVIS MILLER: And those are key points to the long-term health of this market. I'm going to offer one pie-in-the-sky idea that's easier to say than to do. And then maybe just one very practical and simple one.
The big-picture idea is that ideally from a Florida public policy perspective, you'd be able to have all constituents come together and decide on a long-term course that we remain consistent with and stick to. And that is so hard to do because long term means really long term, a decade, two decades, three decades.
When you look at the mitigation discount program, for example, it divides the world into pre-2002 and then the 2002 and newer. And when that system was adopted 2002 and newer was novel. But now, we're so far down the road that there's just so much housing stock that's come online since then. It's not the new thing anymore.
So when you look at these things really have to look at it over the course of a long period of time, and you have population growth. In the last five or so years, Florida's population is up three million people. The number just came out last week, and I think it was 23.3 million. But five years from now they project another three million people.
And where are these people going to live? That affects concentrations. It affects coastal construction. We have really vital parts of Florida's economy. Tourism, real estate development, construction, all of these things come together and people tend to be ok if you talk about adjusting the system in ways that don't affect them.
But when you adjust the system and talk about where we can develop the density, the types of construction, there are all implications to that. You can make housing stronger, but then it's more expensive. And if you make housing more expensive, that has consequences unto itself.
So it's really hard to come up with a comprehensive approach to say, this is how we're going to be fortified against storms. This is how we're going to manage risk. And so we end up in this reactionary posture where we have an ever-increasing number of people, an ever-increasing amount of density in our construction, and we start to outpace in some respects, the capital that's available to support it.
And we're just constantly trying to feed this hungry beast for capital. And that's why periods like the pre-reform period are so intense is because the capital shrinks, but the demand is still there.
So my pie-in-the-sky idea is that various constituents come together, set a course of action that strikes reasonable balances, and we roll with that for 10 or 20 years. That's not going to happen so easily, and I get it. So the main thing we need to do right now is stay the course.
The reforms are working. They're having favorable impacts in all of the areas we discussed, and I think critically, there are some global markets, global capital providers that have seen the Florida cycles. They're not rushing into Florida, but they'll warm themselves up to Florida over time. So when you see more new entrants, expanding capacity, more reinsurance availability, that's something that can even continue from where we are now.
However, given the comprehensiveness of the reforms, if you start backing up, if you start reversing that, I think you could do longer-term damage to the perceptions of those markets. If you lose the appetites for some people that are placing their faith in the reforms, it'll be years before they entertain coming back. And so I think staying the course is important in the short run, but I think it's also critical for the long run.
CHRIS ZANONI: Very interesting insights from both of you where we see that going forward. And it's amazing what some really good sausage and mac and cheese can put together when discussing the Florida property market. Klayton, thank you for joining us.
KLAYTON SOUTHWOOD: Absolutely, Chris. Happy to have had the opportunity.
CHRIS ZANONI: Travis, thank you for joining us.
TRAVIS MILLER: Thank you. I appreciate it as well.
CHRIS ZANONI: To our listeners, thank you for joining us on this episode of (Re)thinking Insurance.
NARRATOR: Thank you for joining us for this WTW podcast, featuring the latest perspectives on the intersection of people, capital, and risk. For more information, visit the Insight section of wtwco.com. This podcast is for general discussion and/or information only, is not intended to be relied upon, and action based on or in connection with anything contained herein should not be taken without first obtaining specific advice from a suitably qualified professional.
