The Florida homeowners insurance market has shown signs of recovery since major legislative reforms were introduced two years ago, according to industry executives.

Privilege Underwriters Reciprocal Exchange President Dave Logan noted that while challenges persist, conditions are improving. Don Matz, CEO of Orange Insurance Exchange, described the shift as “the difference between night and day,” with new insurers entering a market that previously faced multiple insolvencies.

Among the new entrants are several reciprocal insurance exchanges, member-owned entities with a unique structure.

A report from AM Best revealed that in these exchanges, a separate attorney-in-fact manages operations, and funds collected go into a pool from which claims and expenses are paid. Matz explained that, in a three-party reciprocal, members insure each other in a shared pool, which can generate dividends through a subscriber savings account if there is an underwriting profit.

Logan noted Pure’s high member retention as a positive indicator for reciprocals, explaining that as member capital builds, reliance on external borrowing decreases. He highlighted that funds within subscriber savings accounts remain inaccessible to members unless they leave, which can promote long-term retention.

The growth of reciprocals in Florida follows significant legislative changes that restricted assignment of benefits (AOB) usage and altered one-way attorney fees, stabilizing the legal environment.

Legal expenses related to AOB and other first-party lawsuits had previously increased costs for insurers, according to a report by AM Best.

Chris Draghi, director at AM Best, noted that reciprocals are particularly suited for catastrophe-prone regions like Florida due to their capital structure, often supported by surplus notes. As these companies are member-owned, they are not solely focused on maintaining a low combined ratio, which is challenging in high-risk areas.

The reciprocal model allows investors to set return rates on surplus notes, providing some insulation against market volatility, Draghi said. He added that payment of surplus note principal and interest requires regulatory approval, further stabilizing the model.

Matz highlighted that reciprocals may be more sustainable in regions with high reinsurance costs. By growing a surplus, these entities can manage capital more effectively without depending solely on low combined ratios for underwriting profits. He noted that reciprocals "seem to work a little better, particularly in catastrophe-exposed areas."

Not a new concept

Reciprocals are not a new concept, as seen in Pure’s history. Founded in Florida in 2006, Pure now serves about 115,000 members, specializing in property and casualty coverage for high-net-worth clients. Logan pointed out Pure’s lower loss ratios in Florida compared to market averages, attributing this to the close relationships the company has with its members.

Logan highlighted Pure’s proactive claims response following Hurricane Helene, with representatives on site soon after landfall. He noted that reciprocals’ alignment of interests between members and the organization fosters member loyalty.

A recent report by Alirt Insurance Research highlighted a resurgence in reciprocal exchanges, with at least 21 new reciprocals launching between 2017 and 2024. Many of these are focused on homeowner insurance in Gulf Coast states, including several new entrants in Florida, where recent legislative reforms have contributed to increased interest.

Alirt cited increased windstorm losses, economic inflation, and a hardening reinsurance market as factors contributing to the rise in reciprocal exchanges. The report identified the deterioration of underwriting results for Gulf Coast property insurers as a major driver behind reciprocal formation in Florida, where 10 reciprocals are now domiciled, five of which launched after 2022.

Matz, who previously led Tower Hill Insurance Exchange, the third-largest personal property insurer in Florida, launched Orange as a reciprocal to meet local demand. He observed that the reciprocal model is gaining traction in Florida, with several traditional insurers also exploring this structure.

Draghi noted that reciprocals' popularity among insurers may stem from their surplus-note structure, which sets a predetermined return expectation for investors rather than relying on full ownership profitability. He cautioned that the sustainability of surplus-note models depends on the reciprocal’s financial performance, as there is no guarantee of surplus note repayment.

Alirt reported that by the end of 2023, 18 newer reciprocals held a combined surplus exceeding $1 billion, supported by $1.3 billion in surplus notes. Across the US, 64 pure reciprocals wrote $44 billion in direct premiums, about 5% of total U.S. direct premium written for that year.

Alirt raised potential concerns about reciprocals’ sustainability, given that some may prioritize premium growth over capital stability, which could affect long-term viability. However, Matz argued that the success of reciprocals, like stock companies, depends on effective underwriting and risk management.

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