Skyrocketing property insurance rates will boost the popularity of parametric insurance

The trend: Property insurance rates could rise by as much as 20% to 50%, according to Beazley, reinsurer for Lloyd’s of London.

In Florida, where the fragile insurance market has been teetering on the edge of collapse, Governor Ron DeSantis recently signed two bills into law that seek to reform the insurance business within the state and stabilize its property market.

What’s the problem? Property catastrophe reinsurers, which provide cover to insurers, are coming off five years of earnings wiped out by disasters. Swiss Re Institute says average insured losses for the past 10 years are $81 billion, but this year, mostly due to Hurricane Ian, they’ll top $100 billion.

In Florida, the insurance industry has seen two straight years of net underwriting losses exceeding $1 billion.

• Just this week, Progressive updated its incurred property losses from Hurricane Ian, estimating its losses before reinsurance at $1 billion.
• Six insurers in Florida have gone insolvent this year, while others are leaving the state.

As a result, many Florida policyholders are reeling from large rate increases and policy cancellations.

A supply and demand mismatch: Better policy pricing may improve returns, but pricing for climate change is a challenge.

• Historic data is inadequate, particularly in the face of changing risks.
• Increasingly frequent wildfires, hailstorms, and flooding that don’t approach the magnitude of named hurricanes may not wipe out an insurer’s capital. But they still can keep insurers from reaching profitability.
• Regions that weren’t risky in the past have changed, for example, due to urban sprawl into floodplains.

For some insurance investors, it’s just not worth writing the risk now, regardless of the price rise. They have other options: High interest rates mean non-insurance assets promise better returns with less volatility.

The government (and taxpayers) steps up: Florida has struggled to keep its insurance market afloat since 1992, when premiums paid out over Hurricane Andrew wiped out some insurance carriers and left many remaining companies fearful to write or renew policies in the state. Just this past May, before the official start of hurricane season and the arrival of Hurricane Ian, the state legislature rolled out a one-year $2 billion reinsurance program, drawn from the General Revenue Fund. Topping off that earlier sum, the newest Florida laws will:

• Create an additional $1 billion reinsurance fund.
• Put in place disincentives to prevent frivolous lawsuits, such as removing “one way” attorney fees and assignment of benefits laws that enable contractors to pursue homeowners’ claims.
• Force some Florida customers to leave Citizens Property Insurance, the state-created insurer of last resort, for a private insurer, even if the policy costs more. Citizens recently topped 1 million policyholders for the first time in a decade.
• Set more stringent deadlines through the claims process to insure faster payouts to homeowners. To help at a time when companies are slammed with claims, the law allows insurers to begin the claims process through video, photos and teleconferences rather than sending an agent to every damaged property.

Yes, but: According to Reinsurance News, many reinsurance capital providers don’t think these measures will be sufficient to cover the gaps that will be left in Florida property insurers’ towers next year—unless more can be done to rebuild the reinsurer appetite for risk in the state.

Parametric insurance offers a way out: Our report, The US P&C Insurance Ecosystem, dives into how insurtechs and incumbents like Zurich and Liberty Mutual are taking a page from reinsurers by deploying parametric insurance to cover risks that are too expensive to protect via traditional indemnity coverage.

Because it circumvents claims processing, payouts for parametric cover can take just days versus months or years—crucial time for a company relying on the funds to remain solvent after a catastrophic event.

We expect more incumbents will explore a hybrid approach, offering traditional and parametric coverage as a single product. Such solutions will allow businesses to access more affordable and tailored coverage. For example, small businesses can reduce the premiums paid on their traditional coverage by adding a high deductible to their policy, and then use parametric insurance to cover part (or all) of the amount they must pay out of pocket. We also expect incumbents to partner with insurtechs that specialize in parametric insurance to create these offerings.