(Bloomberg Businessweek) — Every year since 2010, Florida has gained about 300,000 residents. The consistent stream has become the state’s lifeblood, keeping taxes low while injecting billions into new-home construction and associated businesses. When Covid-19 hit, there was concern the migration would stop.
The reverse happened. “We’ve never written more [sales] contracts in our 94-year history than we did in June this year,” says Mike Pappas, president of the Keyes Co., a privately held real estate, mortgage, and insurance company based in Miami. “You’re definitely getting, from the Northeast, a surge of people looking for housing.”
Many of these newcomers may not know what they’re getting into. They’ve calculated the cost of their house, their mortgage, their car payments, their property taxes, and their home insurance. What they almost certainly haven’t taken into account is the reinsurance market—where insurance companies go to share risk. The peculiar dynamics of reinsurance and climate have inched the state of Florida toward the precipice of an insurance disaster. Simply put, homeowners’ premiums are set to become very, very expensive.
Floridians are subject to forces that extend far beyond their local insurance companies and date to the 2008 financial crisis. It was then, as interest rates were plummeting along with the stock market, that large hedge funds and pension funds began to look for places to earn higher yields and diversify their risk.
In the 18 months through June 2013, pension funds alone poured $10 billion into insurance-linked investments such as catastrophe bonds and catastrophe futures. All this money competing with that of traditional reinsurance companies helped drive down prices. Tahapan Prenagen As a result, primary insurers could keep their prices low, too, lulling Floridians into thinking the carrying costs of their houses would stay relatively stable.
And, for a while, they were. Then “we got hit with a bunch more catastrophic events across the globe,” and insurance-linked securities started to lose money, says Paul Handerhan, president of the nonprofit Federal Association for Insurance Reform (FAIR). “Then the stock market starts improving, and funds whose capital was tied up in these securities are like, ‘I wish I had my capital back,’ so these vehicles lost a little bit of their attraction.” Alternative capital in the reinsurance market peaked in 2018 at $97 billion and has since slipped to $91 billion, according to a report by insurer Aon Plc.
Despite the state’s uniquely vulnerable coastline, national insurance companies were happy to write homeowners’ policies up and down the state for decades. In 1992, Hurricane Andrew’s $15.5 billion of damage put a severe dent in their goodwill; 12 years later, when four hurricanes hit, major insurers began to leave the state for good.
“Most of the large national bellwether insurance companies that you see commercials for, that an average American would recognize, don’t write homeowners insurance policies anymore in Florida,” says Garrett Mitchell, director for sales and marketing at Insurance Express, an agency based in West Palm Beach. “When they pulled out between 2004 and 2006, there was a major void in the marketplace.”
That void was quickly filled with smaller, Florida-specific insurance companies, which represented 22% of the market in 2004 and 45% by 2011. These mom and pop insurers had the spectacular good fortune to begin writing policies on the cusp of what turned out to be the longest unbroken stretch of hurricane-free weather in decades: Not a single named hurricane hit the state from 2006 through 2015. “It was a record-breaker,” says Karen Clark, founder of a Boston-based natural risk modeling company. There were no previous 10-year stretches like it, she says.
Then Hurricane Irma hit in 2017. Depending which side of the lawsuit you were on, Irma’s $17.4 billion of claims either ushered in a golden age of consumer activism or left an indelible stain on the industry through a mechanism called assignment of benefits claims.
AOBs have been part of Florida law for decades; they allow homeowners to transfer their claims to third parties such as building contractors and lawyers. These third parties then sue the insurance companies on behalf of the homeowner, which often results in a larger settlement. “Even if [insurers] fight, they’ll just lose, so many make the decision to pay the claims,” FAIR’s Handerhan says. “That’s driving the frequency and severity of claims in Florida.” After Irma, AOB claims skyrocketed: There were 153,000 in 2018, up from 79,000 five years before, according to the Insurance Information Institute.
It got so bad that a law was passed in 2019 restricting AOBs, and now “those lawsuits are down,” Handerhan says, but “first-party property lawsuits are way up,” meaning, he speculates, that the same litigation is happening, but it’s homeowners, not contractors, bringing the suit.
The deluge of AOBs came at the precise moment that insurance-linked securities were leaving the market. Traditional reinsurers, newly empowered by a lack of competition, were free to pass the added costs of AOBs on to insurance companies. In 2019 the average cost of reinsurance coverage rose 15%, according to a report by Hyperion X Analytics. This year it climbed an average 26.1%. Insurers shoveled their added costs onto consumers.
Insurers are required to go before state regulators if they want to raise their rates more than 15%, and company after company has made its way to Tallahassee, the state capital, to successfully argue for big hikes. “We asked for 22%,” says Roger Desjadon, chief executive officer of Edison Insurance, whose request was approved and will affect about 50,000 households. But since that time “there have been companies that have filed for 30%, 36% increases, and received them,” he says.
Premiums have gone up across Florida, but competition has gone down. Even as the total number of policies in the state has risen 12% over the past decade, the number of companies offering homeowners insurance has slipped from 199 to 180 during the same period.
Homeowners who can’t find or can’t afford insurance can take out a policy with Citizens Property Insurance Corp., Florida’s state-funded carrier, which was created in 2002 as an insurer of last resort. But Citizens has some downsides. The state is as reluctant as private insurers to underwrite billions of dollars’ worth of property in a flood plain or hurricane zone. As a consequence, it covers a limited amount of policyholders’ private property, “and the paperwork is atrocious,” says Tom Gallagher, the former Florida insurance commissioner who created the program; he’s now chief operating officer of the private People’s Trust Insurance Co.
Homeowners can also sell their houses and leave, a phenomenon that “happens every day,” Gallagher says. “I think there’s people that are tight on money—they bought a home years ago, and their real estate taxes have gone up.” Soon, he adds, “their homeowners insurance has started to go up as much as 10, 15, 20% year after year. Pretty soon that becomes a huge number.” So they sell their house and go where it’s cheaper.
For now, with record-low mortgage interest rates and a steady stream of people moving to the state, there are new buyers willing to shoulder a house’s carrying costs. Should enthusiasm wane, whether from an economic downturn or a devastating hurricane, homeowners could be saddled with a home that’s too expensive to keep and impossible to sell.
Stephen Smith, a semiretired marketing executive in Key West, has lived in a 3,200-square-foot house across the street from the ocean for 21 years. He and his husband’s homeowners insurance premiums are about $4,600 per year; their supplemental flood insurance is $2,600 a year; and on top of that, they have an annual wind damage policy that costs $9,000, meaning altogether the couple pays more than $16,000 every year simply to insure their home. “I’d say we were paying half that 10 years ago,” Smith says, adding that he’s not ready to move yet, but “there will come a time when we sit back and say, ‘This is ridiculous.’ ”
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