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AM Best’s composite of Florida property insurance companies hit five-year performance and surplus lows in 2020, and given persisting and significant market hurdles, companies will find sustaining current surplus levels a challenge, according to a new commentary from the ratings firm.

In its Best’s Commentary, “Florida’s Difficult Market Continues to Challenge Insurers,” AM Best states that despite no hurricanes making landfall in 2019-2020, Florida property insurance writers still posted a combined ratio of 131.5 in 2020, an 18.2 percentage-point deterioration from 2019. Both years reported greater volatility compared to 2017-2018 due to social inflation pressures, which has increased the severity of claims and litigation costs; more-frequent severe convective storms; and an increase in roof replacements, Best said.

Insurers have requested material rate increases, often in the double digits, to offset elevated pressure on profitability, and have revised their risk appetite for select pockets of Florida business.

“However, rate increases have not kept pace, leading to declines in underwriting profitability,” the commentary states.

Over the last five years, the mounting pressures also have led to a 9.7% decline in surplus, with aggregate losses reported each year. These actions have led to an increase of in-force policies at Florida’s residual insurer, Citizens Property Insurance Corp. Beginning in 2019 through the first quarter of 2021, Citizen’s personal residential policies in force increased by 29.3%.

In addition, the reinsurance market has hardened, resulting in higher costs for reinsurance protection. Expectations for a more-active storm season also may influence reinsurance purchase decisions. Hurricanes over the last five years have largely been considered earnings events, given that reinsurance programs acted as intended, limiting the impact to the balance sheet.

However, given the added challenges, pressure has started reaching past operating performance and eroding balance sheet strength. Primary insurers are nearing the close of the midyear reinsurance renewal season, which will provide insights to specific shifts in price and its impact.