Florida insurer profitability has continued to decline despite no hurricanes making landfall in the state during the past two years, and with a more active season looming, AM Best says.

“Hurricane Michael in 2018 was the last to make landfall in Florida, following Irma in 2017, but operating performance continues to deteriorate,” a report by the ratings company says.

“Contributing factors include more frequent but comparatively less severe storms, escalating reinsurance costs that narrow profit margins, and social inflation, each of which compounds one another.”

AM Best’s Florida property composite reported a combined operating ratio of 131.5 last year, deteriorating from 113.3 in 2019. Both years reported greater volatility relative to 2018 when the ratio was 108.6 and 2017 when it was 107.4.

Insurers have raised rates but the increases have not kept pace with the elevated pressures on profitability.

Social inflation pressures reflect increased severity of claims and litigation costs, leading to Florida legislators in April passing reforms to ease the legal issues.

The Florida Office of Insurance Regulation (FLOIR) has cited data noting the state accounts for 8% of all homeowner claims opened by US insurers but homeowners’ lawsuits account for 76% of litigation.

AM Best says more clarity on pricing will be gained as the mid-year reinsurance renewal season comes to a close, with rates expected to continue to rise less sharply than last year.

Expectations for a more active storm season may also influence reinsurance purchase decisions, it says.

“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,” it says.

“However, with added challenges from the hardening reinsurance market and social inflation, pressure has started bleeding past operating performance and eroding overall balance sheet strength.”

AM Best says insurers face difficult decisions regarding their risk appetite in Florida, how much reinsurance protection to purchase, and what premium to charge policyholders.