Carriers Were Litigated to Death. Our Research Project Uncovered How.

In late 2021 and 2022, eight Florida-focused insurers failed. Seven were uniquely rated by Demotech, Inc. The eighth, American Capital Assurance Corporation, was dual rated at an elevated level by A. M. Best. Given the abrupt decline in financial stability of the carriers, Demotech, Inc. undertook an internal review of at least 10 prior years of carrier financial information.
After our internal review, in March 2022, we concluded that a research project was necessary. Undertaken by Todd Kozikowski, the research revealed that the meteoric, annual incremental increases in new litigated claim frequency had caused, or significantly contributed to, the insolvencies. The findings of the research project discovered that online technology has been harnessed in an effort to secure an increased volume and frequency of litigated claims.

A Brief Summary of Our Internal Due Diligence

Our internal review confirmed the following were in place more than a decade prior to each carrier’s precipitous decline in financial stability:

• The Florida Office of Insurance Regulation reviewed quarterly and annual statements.

• The Florida Office of Insurance Regulation applied its catastrophe reinsurance stress tests.

• Year-end independent audits were unqualified; in the vernacular, “clean opinions.”

• Year-end statements of actuarial opinion (SAO) as regards loss and loss adjustment expense reserves were “determinations of reasonable provision,” on gross and net loss and loss adjustment expenses.

• Reinsurers sold treaties for catastrophe reinsurance meeting or exceeding the minimum catastrophe reinsurance purchases necessary to qualify for an acceptable rating.

• Carriers made capital contributions, as needed, when necessary.

• Demotech monitored the financial stability of the carriers, reviewed preliminary catastrophe reinsurance programs and final reinsurance programs, and consistently applied its ongoing review and analysis process.

• From 2016 forward, each of the independent audits and SAOs had implicitly reviewed the efficacy of the carrier’s response to the acceleration in litigation facilitated by the changes in claims procedures and protocols introduced by the Johnson, Joyce and Sebo decisions.

• Throughout the years prior to each company’s liquidation, the professionals issuing independent audits and SAOs had implicitly reviewed the efficacy and impact of the carrier response put in place to address the impact of the one-way attorney fee statute.

• Throughout the decade prior to liquidation, the Florida Office of Insurance Regulation documented the level of disproportionate property insurance litigation. Again, each of the independent audits and SAOs had reviewed the efficacy of the carrier’s response to litigation levels and implicitly concluded that procedures and practices were sufficient.

• Advisory organizations publishing homeowners’ loss costs in Florida had referred to “social inflation” or “nuclear verdicts;” however, no specific insights as to the proximate cause(s) of those phenomena were issued.