The scale of the destruction caused by 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.
Losses privately insured by Ian are expected to reach $67 billion, not including flood insurance, according to an estimate by RMS, a disaster modeling firm. This is in line with other forecasts and puts Ian, which hit Florida two weeks ago, close to 2005’s Hurricane Katrina, the costliest disaster in US history.
And that’s roughly double the toll, in current dollars, of insured losses from Hurricane Andrew in 1992, which was the costliest storm to ever hit Florida and bankrupt some policyholders while forcing others to flee the state.
The data now clearly shows that Ian is part of the trend: climate change is making hurricanes and other disasters more destructive and driving up the cost of home insurance until it is out of reach for many people . More severe storms, flooding and wildfires in states like Louisiana and California are pushing insurers out of those markets.
“You can’t just build indefinitely in high-risk areas and expect it to be insurable at an affordable price,” said Zac J. Taylor, a professor at Delft University of Technology in the Netherlands. , which focuses on the impact of climate change. on insurance and real estate, and who grew up in Florida.
The aftermath of the storm shows how climate change is increasingly eroding the financial foundations of modern American life. Without insurance, banks will not issue mortgages; without a mortgage, most potential homeowners cannot buy a home. With fewer buyers, house prices fall and new developments may slow down or even come to a halt.
“You need a private insurance market to have a mortgage market,” Dr. Taylor said. “Will working-class and middle-class homeownership remain viable in Florida in the long term?”
A fragile market, even before the storm
For generations, the Florida coast has been defined by beach houses. This was backed by Florida’s insurance market, which in a way was as carefully crafted as the coastal subdivisions Ian destroyed.
And just as fragile.
After Hurricane Andrew destroyed tens of thousands of homes near Miami in 1992, the state tightened building codes and set up a series of quasi-public entities to do what the private market would not. not: insuring Florida homes against damage from future hurricanes, at a price homeowners were willing to pay.
The aftermath of Hurricane Ian
(In Florida, as in the rest of the country, flood insurance is sold separately from homeowners insurance; the vast majority of flood coverage is sold or underwritten by the federal government.)
These quasi-state entities include Citizens, a state-mandated company intended to cover homeowners who cannot find private insurance. Citizens are funded by premiums, but if they need more money to pay claims, they add a supplement to state homeowners’ private insurance bills.
Since Andrew, most major national insurance companies have either dropped out of Florida or written few policies. In their place has emerged a network of small insurance companies. But their small size isn’t the only thing that sets these companies apart from other insurers.
In most insurance markets, companies generally try to maintain cash reserves large enough to pay all or most of the claims they expect to face in a given year. In Florida, the pattern is different: insurers avoid building up large surpluses, which allows them to keep rates lower than they otherwise would be.
Instead of relying primarily on their own surpluses, when a storm hits, Florida insurers rely heavily on what are called reinsurers: companies, many of them based in Europe or the Caribbean, whose business consists of to sell insurance to insurance companies, in case they face claims that exceed their cash reserves.
The problem with this arrangement is that reinsurers, including Lloyd’s of London, Munich Re and Swiss Re, renegotiate with Florida insurers every year. And if they decide the risks are too high, they can raise their rates as much as they want – or just walk away.
“You have to keep reinsurers happy if you want to have reasonable rates for consumers,” said Joseph L. Petrelli, president of Demotech, Inc., a company that assesses the financial health of many Florida insurance companies.
“Lots of broken pieces”
Lately, Florida has made reinsurers increasingly unhappy.
A common complaint is the ease with which policyholders can sue insurance companies in Florida. Last year, while Florida accounted for just 7% of all homeowner claims in the United States, it saw 76% of all homeowner lawsuits against insurers, according to data released in July by the Florida Office. of Insurance Regulation.
Another is the continued construction of houses in coastal areas. In 2011, then-Governor Rick Scott, a Republican, shut down the state agency that had restricted home building in vulnerable areas, calling it an obstacle to growth. Coastal construction has surged: between 2010 and 2020, the population of Lee County, particularly affected by Hurricane Ian, increased by almost a quarter.
“These issues 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 which frankly has a lot of broken parts.”
Even before Ian struck, reinsurers began offering less coverage than state insurance companies wanted. Citizens, the government-mandated insurance scheme, was only able to buy half the reinsurance it wanted at a price it was willing to pay, according to Michael Peltier, a spokesman. And the cover available has been expensive, with some reinsurers raising prices by up to 50%.
Rising reinsurer rates have pushed Florida insurers into deeper financial distress. As a group, state property insurers have lost money every year since 2017, state data shows. Last year, state insurers lost more than $600 million – in a year when no hurricanes made landfall in Florida.
In recent years, Miami insurance agent Garrett Butler has had an increasingly difficult time finding home coverage for his clients. People with modest homes had to pay $20,000 a year or more — if they could find insurance.
Hurricane Ian, he said, “will make the situation worse.”
Although insurance is still available through Citizens, this coverage is capped at $1 million in Miami and the Florida Keys, and $700,000 elsewhere in the state. This is less than the value of most homes in these areas.
Heavy reliance on reinsurance could make Florida’s insurance market even more susceptible to shocks than in the aftermath of Hurricane Andrew, said John Rollins, who worked as chief risk officer for Citizens.
“You’re going to have a really hard time getting a new policy,” he said. “I’m not an alarmist, but I’m very alarmed.”
No easy options
Experts say the storm’s ultimate impact on Florida’s insurance and housing market is hard to predict because no one can say how state policymakers will react.
The state could raise the caps on citizen policies, Rollins said. But Citizens is already well on its way to becoming the state’s largest insurance company; to grow it even faster would defeat Florida’s longstanding goal of keeping enrollment low, so the plan remains an insurer of last resort.
Another option is for the state to expand the Florida Hurricane Catastrophe Fund, a state reinsurance program that was also created after Hurricane Andrew. The fund, which supplements reinsurance that insurers buy in the private market, can pay out a maximum of $17 billion in any given year. But some experts said the fund could be depleted by Ian.
Officials could give the fund permission to make more money available. But raising that money would mean levying fees on insurance customers statewide — something unwelcome in a state notorious for tax aversion.
Governor Ron DeSantis’ office did not respond to a request for comment. A spokeswoman for Florida Insurance Commissioner David Altmaier said in an email that
the bureau “closely and consistently monitors the financial condition and operating results of insurers to protect consumers.”
An uncertain future
Whatever happens to the Florida insurance market, experts say the siren song of Florida’s coastal cities will continue, their sunshine and azure waters oblivious to the worries of bankers and insurance actuaries. People will still want to live there. The question is how they will pay for it.
A post-insurance housing market in Florida could take many forms, said Benjamin Keys, an economist and professor of real estate at the Wharton School at the University of Pennsylvania, who has studied the effects of climate change on real estate in Florida. .
Home ownership could become the preserve of the ultra-rich, who can afford to buy homes mortgage-free and pay to rebuild without insurance. Or the market could shift to 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.
Debbe Wibberg is a real estate agent in Cape San Blas, a slender peninsula just south of Mexico Beach in the panhandle of Florida. She recently applied for a new insurance policy for her own home, a small townhouse not far from the water, and now pays nearly $3,000 a year for coverage.
Her new insurer will not cover homes over 20 years old, Ms. Wibberg said. And some companies have even stricter rules — for example, refusing to cover beach houses with wooden stilt foundations that are more than ten years old.
The decline was even more pronounced for people buying second homes or vacation rental properties, which make up the bulk of its customer base, Ms. Wibberg said. Some of those customers are seeing their premiums go up by 50% or more, which she says is starting to hurt home prices.
If potential buyers started having even more trouble finding insurance, what would happen to the local real estate market?
Ms. Wibberg did not hesitate. “We won’t have any,” she said.