Assignment of Benefits and Hurricane Loss Creep

We’re putting the finishing touches on a major research project on the assignment of benefits problem in Florida, a phenomenon in which a quirk in that state’s laws becomes a lever with which the less-than-scrupulous can supersize a claim settlement.

Our paper looks at how the problem has spread across lines of business – from no-fault insurance to homeowners to auto physical damage claims – and across the state – what started in South Florida has metastasized into the Interstate 4 corridor. Even far west on the Panhandle,  Escambia County (Pensacola) has had 346 assignment of benefits lawsuits this year through November 9. Five years ago it had 20.

Our research focused on the growth from one line of business to another and the spread of the problem over time. Artemis.bm has an interesting take on the knock-on effect from the way the problem is rolling through Hurricane Irma claims. Artemis is a website that is expert in alternative sources of insurance capital like catastrophe bonds, collateralized reinsurance and industry loss warranties.

That marketplace is fretting, in part, because after one major event, the capital that insured (or reinsured) that event is locked up. It can’t be used to insure against a second event until it is clear that it won’t be needed for the first.

And losses from Irma, a 2017 storm,  keep rising. In August, four insurers raised their loss estimates more than $1 billion.  The total  this month passed $11 billion, according to Florida’s Office of Insurance Regulation. More than 76,000 remain open.

What is causing the creep? Assignment of benefits issues are a prime suspect. Unscrupulous contractors dupe policyholders into letting the contractor settle directly with their insurance company – without letting the insurance company know. The insurer gets the news in the form of a bill to pay – never having had a chance to ensure the repairs were appropriate or done competently.

Disputes often go to court, where if the insurer loses, it must pay the plaintiff’s legal costs as well as its own.

As Irma’s loss estimates grow, reinsurers and alternative capital sources worry that the same thing will happen to Hurricane Michael claims. Michael struck six weeks ago, but the number of claims is accelerating.

Artemis cautions against overreacting to Irma’s situation, but notes that reinsurance markets may need to price for loss creep (read: charge more for reinsurance), which ultimately pushes homeowner premiums higher.

 

 

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