Will Ian be the Final Straw for Insurers in Florida?

October 14, 2022

Limitless blind greed will insure that Florida communities will build back after Hurricane Ian. And Florida Republicans will be looking for a socialist bailout for their (completely predictable) flood insurance woes.

New York Times:

The scale of the destruction from Hurricane Ian threatens to destabilize Florida’s insurance and real estate markets, as devastated residents file a record number of claims for damaged or destroyed homes.

Privately insured losses from Ian are expected to reach $67 billion, not including flood insurance, according to an estimate by RMS, a catastrophe modeling firm. That is in line with other forecasts and puts Ian, which slammed into Florida two weeks ago, close to 2005’s Hurricane Katrina, the most expensive disaster in United States history.

And it’s about twice the toll, in current dollars, of insured losses from Hurricane Andrew in 1992, which had been the most expensive storm ever to hit Florida and bankrupted some underwriters while causing others to flee the state.

Data now makes it clear that Ian is part of a trend: Climate change is making hurricanes and other disasters more destructive and pushing up the cost of home insurance until it’s out of reach for many people. More violent storms, flooding and wildfires in states like Louisiana and California are causing insurers to pull back from those markets.

“You can’t just build in high-risk areas indefinitely, and expect it to be insurable at an affordable rate,” said Zac J. Taylor, a professor at Delft University of Technology in the Netherlands who focuses on the impact of climate change on insurance and real estate, and who grew up in Florida.

Ian’s aftermath shows how climate change is increasingly eroding the financial underpinnings of modern American life. Without insurance, banks won’t issue a mortgage; without a mortgage, most prospective homeowners can’t buy a home. With fewer buyers, home prices fall, and new development can slow or even come to a stop.

“You need a private insurance market to have a mortgage market,” Dr. Taylor said. “Will working- and middle-class homeownership remain viable in Florida in the long term?”

For generations, the Florida coast has been defined by homes on the beach. That was supported by Florida’s insurance market, which, in a way, was as carefully manufactured as the coastal subdivisions that Ian destroyed.

And just as fragile.

After Hurricane Andrew smashed tens of thousands of homes near Miami in 1992, the state strengthened building codes and set up a series of quasi-public entities to do what the private market wouldn’t: insure Florida homes against wind damage from future hurricanes, at a price that homeowners were willing to pay.

(In Florida, like the rest of the country, flood insurance is sold separately from homeowner’s insurance; the vast majority of flood coverage is sold or underwritten by the federal government.)

Those quasi-public entities include Citizens, a state-mandated company meant to cover homeowners who can’t find private insurance. Citizens is funded by premiums but if it needs more money to pay out claims, it adds a surcharge to the private insurance bills of homeowners around the state.

Since Andrew, most large national insurance companies either dropped Florida or write few policies. In their place emerged a network of smaller insurance companies. But their small size isn’t the only thing that sets those companies apart from other insurers.

In most insurance markets, companies typically try to maintain cash reserves big enough to pay out all or most of the claims they expect to face in a given year. In Florida, the model is different: insurers avoid building up large surpluses, which lets them keep rates lower than they would otherwise be.

Instead of relying primarily on their own surpluses, when a storm hits, Florida insurers depend heavily on what are called reinsurers: Companies, many of which are based in Europe, Bermuda or the Caribbean, whose business is selling insurance to insurance companies, in the event they face claims that exceed their cash reserves.

The problem with that arrangement is that reinsurers, which include Lloyd’s of London, Munich Re and Swiss Re, renegotiate with Florida insurers every year. And if they decide risks are too high, they can raise their rates as much as they like — or simply walk away.

One common complaint is the ease with which policyholders can sue insurance companies in Florida. Last year, while Florida accounted for just 7 percent of all homeowners’ claims in the United States, it saw 76 percent of all homeowners’ lawsuits against insurers, according to data released in July from the Florida Office of Insurance Regulation.

Another is continued home construction in coastal areas. In 2011, then-Governor Rick Scott, a Republican, closed the state agencythat had limited home building in vulnerable areas, calling it an impediment to growth. Coastal construction jumped: Between 2010 and 2020, the population of Lee County, hit especially hard by Hurricane Ian, grew by almost one-quarter.

“These problems have been brewing for years,” said Keith Wolfe, president of U.S. property and casualty for Swiss Re. He said Hurricane Ian would “test this system that frankly has a lot of broken pieces to it.”

Even before Ian struck, reinsurers started offering less coverage than the state’s insurance companies wanted. Citizens, the government-mandated insurance plan, was only able to buy half as much reinsurance as it wanted at a price it was willing to pay, according to Michael Peltier, a spokesman. And the available coverage came at a high cost, with some reinsurers raising prices by as much as 50 percent.

Rising rates from reinsurers have been pushing Florida’s insurers into deeper financial distress. As a group, the state’s property insurers have lost money every year since 2017, according to state data. Last year, the state’s insurers lost more than $600 million — in a year when no hurricanes made landfall in Florida.

Whatever happens to Florida’s insurance market, experts say the siren song of Florida’s coastal towns will continue, their sunshine and azure waters indifferent to the worries of bankers and insurance actuaries. People will still want to live there. The question is how they’ll pay for it.

A post-insurance housing market in Florida could take many forms, said Benjamin Keys, an economist and real estate professor at the University of Pennsylvania’s Wharton School, who has studied the effects of climate change on Florida real estate.

Homeownership could become the preserve of the ultra wealthy, who can afford to buy homes without a mortgage and pay to rebuild without insurance. Or the market could shift toward rental properties, with buildings owned by trusts or other deep-pocketed companies, Dr. Keys said.

For now, the power rests with reinsurance executives in places like London, Munich and Zurich, whose decisions over the next few months will determine what happens along Florida’s coast.

Munich Re, a giant “Re-insurer” – companies that back up the major insurance carriers that most of us know – warned about climate change in the 1970s. (see below)

New Republic:

Though it’s a critical lifeline to people rebuilding from climate-fueled disasters, the insurance industry isn’t preternaturally well equipped to weather rising seas and temperatures. Historically, insurance has protected against seemingly random and uncorrelated events, from car accidents to lightning strikes, kitchen fires, and burglary. “The problem with climate change is that now you have a systemic risk that’s getting worse. You don’t have a random pool where some people will be OK and some people won’t,” said Rachel Cleetus, policy director with the Climate and Energy program at the Union of Concerned Scientists. That assertion is backed by data: According to a recent report from the National Oceanic and Atmospheric Administration, the number of billion-dollar weather-related disasters per year is rising. In coastal states like Florida, Cleetus adds, “you find out that almost everybody is exposed.”


One Response to “Will Ian be the Final Straw for Insurers in Florida?”

  1. rhymeswithgoalie Says:

    I think Fannie Mae and Freddie Mac should set their own criteria for not approving (i.e., buying) mortgages, based on the location and not just the finances of the applicant. While blue-lining is reminiscent of red-lining (and, sadly, may overlap in historically marginal areas), it’s for a defensible goal, and for the protection of consumers as a whole.

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: