Widespread damage from Hurricane Ian is yet another disaster for Florida’s already unstable insurance industry. Even though Florida home insurance rates are almost triple the national average, insurers have been losing money. Six have failed since January 2022. Ian’s insured losses are now estimated to exceed US$40 billion
hurricane risk may seem like the obvious problem, but there is a more insidious driver in this financial derailment.
Reading: Why are insurance companies leaving florida
finance professor shahid hamid, who heads the insurance lab at florida international university, explained how florida’s insurance market got so bad and how the state’s insurer of last resort, florida homeowners insurance citizens, who now have more than 1 million policies, can weather the storm.
why is it so hard for florida insurers to survive?
Florida insurance rates have nearly doubled in the last five years, but insurance companies continue to lose money for three main reasons.
One is the increasing risk of hurricanes. Hurricanes Matthew (2016), Irma (2017), and Michael (2018) were all destructive. But much of Florida’s hurricane damage comes from the water, which is covered by the National Flood Insurance Program, rather than private property insurance.
another reason is that reinsurance prices are going up: that’s insurance for insurance companies to help out when claims rise.
but the main reason is the “benefit allocation” problem, which involves contractors after a storm. It’s partly fraud and partly it takes advantage of lax regulations and court decisions that have affected insurance companies.
It usually looks like this: Contractors will knock on doors and say they can get the homeowner a new roof. the cost of a new roof is perhaps $20,000 to $30,000. then, the contractor inspects the roof. often, there isn’t really that much damage. the contractor agrees to take care of everything if the homeowner assigns the insurance benefit to him. contractors can then claim whatever they want from the insurance company without needing the owner’s consent.
If the insurance company determines that the damage was not actually covered, the contractor sues.
so the insurance companies are forced to fight the lawsuit or settle. either way, it’s expensive.
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Other lawsuits may involve homeowners who do not have flood insurance. Only about 14% of Florida homeowners pay for flood insurance, most of which is available through the federal National Flood Insurance Program. some without flood insurance will file damage claims with their property insurance company, arguing that the wind caused the problem.
How widespread is the problem with these lawsuits?
Overall, the numbers are pretty amazing.
About 9% of homeowners property claims nationwide are filed in Florida, yet 79% of lawsuits related to property claims are filed there.
The legal cost in 2019 was over $3 billion to insurance companies alone fighting these lawsuits, and all of that will be passed on to homeowners in higher costs.
Insurance companies had an underwriting loss of over $1 billion in 2020 and again in 2021. Even with premiums rising so much, they are still losing money in Florida because of this. And that’s part of the reason why so many companies are deciding to leave.
Assignment of benefits is likely to be more prevalent in Florida than in most other states because there are more opportunities due to all the roof damage from the hurricanes. state regulation is also relatively weak. this may eventually be fixed by the legislature, but that takes time and groups are lobbying against the change. It took a long time to pass a law that attorneys’ fees should be capped.
how bad is the situation for insurers?
We have seen around a dozen companies declared insolvent or abandoned since the beginning of 2020. At least six folded this year alone.
thirty more are on the florida office of insurance regulation watch list. around 17 of them are likely to have been or have been downgraded from a rating, meaning they are no longer considered to be in good financial health.
Rating downgrades have consequences for the real estate market. To get a loan from federal mortgage lenders Freddie Mac and Fannie Mae, you must have insurance. But if an insurance company’s rating is below A, Freddie Mac and Fannie Mae won’t accept it. Florida established a $2 billion reinsurance fund in May 2022 that can help smaller insurance companies in situations like this. if they are lowered, the reinsurance can co-sign the loan for mortgage lenders to accept.
but it is a very fragile market.
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ian could be one of the costliest hurricanes in florida history. I have seen estimates of $40 billion to $60 billion in losses. I wouldn’t be surprised if some of those companies on the watch list leave after this storm. that will put more pressure on citizens’ property insurance, the state insurer of last resort.
some headlines suggest florida’s insurer of last resort is also in trouble. is it really at risk and what would that mean for residents?
citizens are not facing collapse per se. the problem with citizens is that the number of their policies usually increases after a crisis because when other insurers close, their policies are transferred to citizens. sell those policies to smaller companies, then another crisis strikes and the number of policies goes up again.
Three years ago, citizens had half a million policies. now he has double. all these insurers that left in the last two years, their policies have been migrated to citizens.
ian will be expensive, but citizens have a lot of cash right now because they had a lot of premium increases and built up their reserves.
Citizens also have many backup measures.
Features the Florida Hurricane Catastrophe Fund, established in the 1990s after Hurricane Andrew. It’s like reinsurance, but it’s tax-free, so you can build reserves faster. once a trigger is reached, citizens can go to the catastrophe fund and receive a refund.
more importantly, if citizens run out of money, you have the authority to impose a surcharge on everyone’s policies, not only on your own policies, but also on florida insurance policies. You can also impose surcharges on some other types of insurance, such as life insurance and auto insurance. After Hurricane Wilma in 2005, citizens imposed a 1% surcharge on all homeowners policies.
Those surcharges can bail out citizens to some extent. But if the payouts add up to tens of billions of dollars in losses, you’ll probably get a bailout from the state, too.
So, I’m not so worried about the citizens. however, homeowners will need help, especially if they don’t have insurance. I hope that Congress will pass some special funds, as it has in the past with hurricanes like Katrina and Sandy, to provide financial assistance to residents and communities.
shahid s. Hamid, Professor of Finance, Florida International University
This article is republished from the conversation under a creative commons license. read the original article.
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