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With Assignment of Benefits Fraud Key in Florida Homeowners, Citizens Projects $85M Loss Next Year


Date: June 13, 2017
Source: AM Best


Florida’s insurer of last resort expects to post a $85 million annual net loss in 2018, up considerably from its $27.1 million annual net loss in 2016. A primary driver of deteriorating results, said Citizens Property Insurance Corp. Chief Executive Officer Barry Gilway, is the steep rise in assignment of benefits claims cases.

“AOB losses are just choking us,” Citizens Property Insurance Corp. board member Freddie Schinz said during a meeting, adding there’s no path to profitability under current conditions.

Assignment of benefits agreements allow home repair vendors to assume a policy, inflate claim costs and file a lawsuit if insurers dispute the bill. The number of AOB lawsuits soared to 28,200 in Florida last year, compared with 405 a year earlier, according to state Chief Financial Officer Jeff Atwater.

Absent legislative reform, state Insurance Commissioner David Altmaier thinks homeowners rates could increase 10% yearly. In 2014, the majority of approved rate filings were flat or for decreases; by 2016, 73% were for increases.

Concurrently, the industry’s direct combined ratio for homeowners multiperil in Florida worsened 9.86 points last year to 67.51, according to BestLink. At Citizens — the fifth-largest homeowners multiperil insurer with a 4.87% market share based on direct premiums written — it worsened 16.99 points.

Absent water loss trends, three-quarters of Citizens homeowners multiperil customers would have seen a rate decrease, but instead rates rose for 80% solely due to water loss trends, Gilway, also president, said during his company’s 2017 rate hearing.

The average loss cost per policy in September 2011 was $367 at Citizens. By September of this year, the number is expected to rise to $2,083. The percentage of litigated water claims has risen and the gulf between the cost of litigated versus non-litigated claims has widened.The AOB abuse is most acute in the southeastern tri-county area of Miami-Dade and Broward.

A.M. Best Financial Analyst Chris Draghi told Best’s News Service the increased frequency and severity of AOB claims is “certainly causing concern. Operating performance is getting pressured.”

Insurers are applying for and getting rate, but he said they’re also geographically expanding, diversifying into other products, tightening risk selection and underwriting criteria, and amending policy language. States such as New York and New Jersey are attracting Florida homeowners writers.

Amended policy language may allow for an inspection by a carrier earlier in the claims process. “If the repair work is done before an inspection is made, there’s little to base their assessment off of,” said Draghi. Insurers are also creating a list of preferred contractors for claimants to choose from if desired.

Tower Hill Group is the second-largest homeowners multiperil insurer in Florida, with a 6.9% market share. Its direct combined ratio for the year was essentially flat at 71.24. “We took our medicine early on,” President Don Matz told Best’s News Service, as one of the first insurers to recognize the worsening water loss AOB and frequency trend, taking a number of the steps mentioned by Draghi.

Tower Hill responded first and foremost, Matz said, in claims: “We’ve tried to get the customer to the good guys before the bad guys get there.” The company distributes educational materials via its website, customer emails and approved dry-out vendors, who he said respond within hours of notice of a claim. The company updates its system twice hourly and notifies agents each time a claim is filed.

On the underwriting side, Tower Hill changed policy language on Jan. 1, limiting emergency repairs to $3,000 or 10% of coverage A until the insurer is notified. It shed business in the tri-county area, keeping risks deemed least likely to file AOB claims. “If all else fails, we take a very aggressive approach. We know the protocol, we fight the inflation and the inherent fraud,” said Matz.

AOB problems are predominantly a tri-county issue, he said, creeping into Palm Beach and appearing a bit more in Orlando and Tampa. He thinks frequency of water claims has risen as homes have aged, while the “one-way attorney fee statute is what’s driving AOB. The law was designed to protect the little guy … it wasn’t designed to protect another corporation in a business-to-business dispute.”

The Personal Insurance Federation of Florida on its website said the long-established AOB legal tool was intended to speed payments to contractors doing emergency repair work in a home, but the process is “being abused by a cottage industry of unscrupulous trial lawyers, water remediation firms and roofers.”

The National Association of Mutual Insurance Cos. is “extremely disappointed” by the Florida Senate’s failure to adopt meaningful legislation on the issue, Liz Reynolds, NAMIC Southeast Region state affairs director, told Best’s News Service. “The House worked to develop a compromise bill and passed it in plenty of time to work with the Senate, but the Senate never engaged on the issue. Because there was no legislative solution, ‘Hurricane AOB’ will continue to be an ongoing disaster for Florida.”

Said Draghi, “When it comes down to it, legislative response appears necessary.”

A.M. Best Director Joseph Burtone said legislation can be “a slow process, while companies need to act decisively. They have to figure out what they have to do to mitigate these losses while the legislative process take its course.”

Gilway said his company has been working on it. It is starting to see the effect of policy changes made a year ago. On July 1, the insurer plans to introduce a managed repair program that Gilway called very aggressive and consumer-centric.

An A.M. Best special report, “Florida Market Faces a New Kind Of Storm,” notes the substantial negative impact AOB issues have had on the Florida market (Best’s News Service, May 23, 2017).