The recently signed property insurance reforms in Florida may not be enough to save the insurance companies already in trouble in the state. The ratings agency Demotech indicated that perhaps up to 25 more Florida property insurers may be in financial trouble because it will take up to 18 months for the full effects of the reforms to be felt by insurers and consumers alike. Additionally, the reforms do not address all issues facing the property insurance market in the state, but are a step forward.
With the state facing potentially more insurance company failures, the insurance department will be looking at any possible alternative arrangements to ease the burden of an insolvency on the Florida Insurance Guaranty Association (FIGA), insurance companies, and consumers in the state. While FIGA provides a vital backstop in the event of an insurance company failure, it does have yearly limitations on assessment capacity which is capped at 2% of annual written premiums for the year preceding the insolvency in the "other" account. This includes all insurers writing all covered lines of business in the state other than auto, workers compensation and excluded lines (example: Surety and Ocean Marine).
In a year of high insolvency activity it is possible to max out the assessment capacity for that year. FIGA was able to do a year-end 2021 assessment to help cover the early 2022 insolvency activity, which is one statutory option when insolvencies are imminent towards the end of a year. A rash of mid-year insolvencies is a bit harder to plan for and can easily max out the yearly assessment base, especially if there was an earlier assessment in the same year.
The St. Johns' insolvency in February 2022 is an example of an alternative arrangement to ease the burden. Under the St. Johns Liquidation Order rather than cancel all policies 30 days post-liquidation, the in-force business along with the unearned premium was transferred to Slide Insurance Company. FIGA is responsible for any unpaid claims St. Johns incurred prior to April 1, 2022 and Slide would respond to any claim incurred after that date. This helped keep the over 118,000 St. Johns policyholders from having to seek new policies in an increasingly limited property insurance market unless they chose a different carrier. .
With the recent FedNat Consent Order rather than placing the company into liquidation, a large block of the FedNat, Maison and Monarch National policies were canceled early with the Department's approval. Early cancellation is one tool at the department's disposal that can help shore up a troubled company's balance sheet and avoid additional regulatory action such as rehabilitation or liquidation. The remainder of FedNat's Florida policies will be assumed by the subsidiary Monarch National, which will become the surviving insurer.
The claims obligations of the canceled FedNat, Maison and Monarch National policies will be administered by FedNat and run-off over time by the company. The non-Florida business of the companies are being transferred under an arrangement effective June 1, 2022 to SageInsurance, an MGA to a SageInsurance partner carrier.
Assumption Reinsurance
When blocks of business are transferred to another insurer, assumption reinsurance is one method used to facilitate the transfer. While assumption reinsurance is more often used on the life, health and annuity side, due to the long duration of most policies and contracts, it is used in property & casualty as well. Basically, the insurer or liquidator will pay a ceding fee to the assuming carrier, who will issue an assumption reinsurance certificate to the insured that states that the assuming carrier is now the new insurer for the duration of the policy period.
The ceding insurer will retain responsibility for the payment of any claims incurred prior to the assumption date, while the assuming carrier will be responsible for any claims incurred after the assumption date. In the case of insolvent insurers the claims incurred pre-insolvency and before the assumption date will be handled by the guaranty association. With blocks assumed from insurers in run-off, then the claims incurred pre-assumption will be administered during the run-off period by the former company in run-off. Run-off is when a company ceases to write new business, and just exists to run-off the remaining claims of the company.
Rewrite
Another method is to have the policies rewritten by an insurer willing to take the business. When a carrier decides to exit a block of business or withdraw from a state entirely, it may seek another insurer to rewrite the business. The old policy will be canceled once the replacement coverage has been rewritten by the new carrier on their paper. Claims incurred prior the transaction will be the responsibility of the old carrier or guaranty fund in the event of an insolvent insurer, and claims going forward will be handled by the new carrier. Unfortunately, when a carrier decides to exit a state or line of business, the rewriting of business can lead to other carriers cherry picking the good risks, and leaving the bad risks either with the previous carrier/guaranty fund with the 30 days statutory cancellation, or the insured's will need to seek a new carrier on their own.
Early cancellation, assumption reinsurance, and rewriting of blocks of business allows a company to exit unprofitable blocks of business or state(s). By disposing of a company's active policies the insurer will go into run-off mode to pay the existing claims, and to wind down their operations. Once a company has been successfully run off then it becomes a shell company. If the shell company has the financing to become a going concern again, then it may be resurrected, or the licenses of the shell company can be sold to other carriers or investors which saves them the time consuming tasks of becoming licensed in a state(s).
Merger
Mergers of troubled companies into more solvent carriers is another method to avoid insolvency. This can be with a more solid insurer within the same group of carriers, or a smaller weaker insurer may merge into a stronger previously unrelated carrier.
There are a number of alternative arrangements available to lessen the blow of troubled insurers, and the department will be looking at as many as possible when faced with one. However, in some cases the department will have to take quick action should an insurer's condition deteriorate rapidly or when none of these alternative arrangements are available, and liquidation with a finding of insolvency that triggers the guaranty association(s) may be the only available option.