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Social inflation at root of Florida homeowners insurer's rate push

Legislation enacted in July 2019 may be curtailing the alleged proliferation of assignment of benefits abuses by third parties in Florida, but some of the state's personal residential property insurers continue to face social inflation in another form.

Florida House Bill 7065 "seems to have the desired impact on some assignments, but certainly not on first-party lawsuits," Edison Insurance Co. CEO Roger Desjadon said during a recent public hearing, in support of a filing to increase rates for owner-occupied homeowners business on form HO-3 by 22.4% on a statewide basis. That was one of at least seven such filings for double-digit hikes submitted to the Florida Office of Insurance Regulation during a three-month period ended Jan. 6 that remained open as of that date.

Desjadon said Edison has been receiving first-party lawsuits at a consistent pace of about 1,000 per year. Executives at Clearwater, Fla.-based Heritage Insurance Holdings Inc. and the Florida state-run Citizens Property Insurance Corp. have expressed similar concerns in recent months about the ongoing effects of first-party suits.

Edison representatives issued a range of statistics during the hearing demonstrating the higher severity of litigated water loss claims relative to those filed without legal representation. From a frequency standpoint, Desjadon said the volume of lawsuits against personal residential property insurance companies in Florida had tripled since 2013 and doubled since 2016. The relative amount of suits filed by someone other than the insured has also soared, he added.

Though "less-than-perfect claims practices" may partially explain the increase, Desjadon argued that it "would be naive to ignore the concerted efforts made by those profiting from increased claim activities."

Rising frequency and severity of litigated water loss claims with an assignment of benefits drove widespread homeowners rate increases in Florida that, in turn, provided an impetus for legislative reform. Revisions to Citizens' 2019 rate filing to account for the expected effects of reform showed an immediate material benefit to customers, as the company lowered its requested increase for homeowners multiperil policies in its personal lines account to just 2.6% from 8.5%.

Other carriers have argued in subsequent rate filings that it remains too early to accurately quantify the benefits of the legislation.

In a December 2019 filing for a 48.3% overall base rate increase for the HO-3 policies in Southern Fidelity Property & Casualty Inc.'s legacy voluntary Florida homeowners program, Capitol Preferred Insurance Co. Inc. indicated that it has "not experienced a significant reduction in assignment of benefit related claims nor the resulting litigation" from the legislation. Southern Fidelity merged into Capitol Preferred in 2019.

Edison, for its part, opted to halve what otherwise would have been the company's projected trend for water losses, bringing it more in line with that associated with other perils. However, the net effect was only to reduce the company's actuarial indication of rate need across the HO-3 and HO-6 policy forms to 34.7% instead of approximately 38.6% on an unadjusted basis, Ryan Purdy, principal and consulting actuary at Merlinos & Associates Inc., explained during the hearing.

Purdy said the Edison data he examined showed that the company incurred $53 million in losses and loss adjustment expenses related to water coverage, relative to only $29.5 million in premium collected to pay for the specific associated costs.

"We need to acknowledge that eventually costs and benefits need to balance," Desjadon said.

Edison previously received approval for an 11.4% rate increase, effective Dec. 10, 2018, relative to an actuarial indication of a 41.9% rate need. CFO Francis Lattanzio, speaking during the hearing, said Edison opted to take "extremely less" than the indication given its limited historical experience but that the current filing "has more credibility" from an actuarial perspective.

"Having seen indications two years in a row that are quite consistent ... our management felt we needed to make a much stronger move to get to adequacy," he said.

The public hearing marked the first such event since October 2013 to be convened by the Florida regulator with respect to a private entity's personal residential property insurance rate filing. In 2012 alone, the regulator held at least nine such hearings on homeowners, mobile homeowners, renters and dwelling fire rate filings by affiliates of State Farm Mutual Automobile Insurance Co., Allstate Corp. and Amica Mutual Insurance Co., as well as several Florida domestic companies.

The regulator said it is required by statute to conduct a public hearing when a requested rate increase exceeds 15% and is based in whole or in part on data from a computer model. Edison used a catastrophe computer model in its latest filing.