As parts of Florida continue to cleanup following the devastation of Hurricane Ian, insurers and real estate markets may be among the ruins.
Excluding flood insurance claims, insured loss estimates now top $80 billion and could continue to increase as insurers assess the damage, a lengthy process in many cases. When the tallies are complete, Ian is expected to be among the costliest storms to hit the US and much costlier than Andrew, which swept across Florida 30 years prior.
The damage to homes and property is front and center, but another wave approaches on the horizon, threatening Florida’s insurance market and by extension, its real estate market. As the cost of storms increases and their frequency accelerates, insurers face one of two choices: raise rates or pull out of riskier markets, including hurricane-prone Florida. As some insurance providers leave the state, those remaining have little choice but to raise premiums to match the rising risks. Some areas may find few if any insurers remaining, a situation that could change the landscape of Florida’s real estate market as well.
Long the dream destination of retirees as well as families of all ages, a vibrant mortgage market made homeownership possible for many households in the state. But a mortgage market needs an insurance market to remain viable. Lenders can’t take the risk. Throughout the nation, home lenders and insurers provide two pieces of the puzzle that make homeownership for middle-class and working-class families a reality. In Florida, if the insurance industry can’t carry the burden, the mortgage industry can’t write mortgages.
That could leave Florida real estate in many areas open only to cash buyers and those willing to accept uninsured risk — or risks that may be prohibitively expensive to insure.
Andrew to Ian: Florida’s Home Insurance Dilemma
1992’s Hurricane Andrew brought a wave of changes to the market, forcing new building codes and sweeping changes to the insurance market that included state-sponsored insurance. Among these changes, Citizens Insurance, a non-profit backed by the state, attempted to fill the gaps as private insurers raised rates, pulled out of the state, or closed their doors.
Andrew was the catalyst. For over a decade, the storm ranked as the most expensive natural disaster in the nation’s history. But Ian’s estimated costs nearly triple those of Andrew, the storm that changed Florida’s insurance market dramatically.
Insurers use premiums to build reserves, which they then use to pay claims. In the case of Citizens, however, shortfalls in premiums become surcharges to policyholders throughout the state, adding to already high insurance bills. And with fewer private insurers to choose from in Florida, homeowners experience increased costs due to several factors, including higher premiums, climbing surcharges, and increased deductibles for storm-related claims.
Following Andrew, many larger insurers pulled out of the state or became more selective about where they would write coverage. In the years following, smaller insurers became the primary providers, although using a different business model.
Rather than building large cash reserves, many of the remaining insurers in Florida rely on reinsurers, companies that insure the insurers themselves if claim costs exceed reserves. The system works until it doesn’t; rates from reinsurers aren’t fixed. Instead, they change each year, based on risk, and realized losses.
While the reinsurance strategy keeps rates lower in some cases, a storm like Ian will make reinsurers reconsider rates or in some cases whether to continue insuring in the region at all.
The Reinsurance Wild Card
Increasing storm damage amid rampant development is just part of the challenge. The vast majority of the nation’s home insurance lawsuits against insurers take place in the Sunshine State. Litigation costs add to Florida’s insurance expenses, ultimately adding to premiums as well.
Both Citizens and private insurers purchase reinsurance to navigate the stormy path, but reinsurers are showing signs of risk fatigue, with some raising reinsurance costs considerably. Insurers, including Florida’s insurer of last resort, can’t purchase all the coverage they need at a price that keeps premiums within the range of affordability.
The costs of reinsurance add to insurer expenses even in years that have relatively few storm-related losses. Insurers in the state have lost money, on average, every year for the past four years. Ultimately, rising costs appear in premiums, causing owners of average homes to pay rates that far exceed the mortgage payment for their homes. In some cases, no private insurance options exist at all.
Damage from Ian is expected to exacerbate the problem, adding to reinsurance costs and forcing premiums to swell higher. If the trend continues, fewer insurers will be able to offer coverage. Already, Citizens is expected to become the state’s largest insurer. When founded, the goal was to keep the program manageable by limiting enrollment.
Policymakers in Florida can’t control the weather, but they may be able to keep the plates spinning a bit longer. Florida has its own reinsurance program called the Florida Hurricane Catastrophe Fund. However, it’s limited in how much it can pay out annually. As an option, Florida officials may expand the fund’s limits. Such a move would affect taxpayers statewide, including those in lower-risk areas.
A Potentially Chilling Effect on Florida Real Estate
Throughout the US coastal regions, there’s no place quite like Florida, with some parts of the state best described as a tropical paradise. Despite the storms, people will always seek solace in the Sunshine State to fulfill a lifelong dream of planting their toes in the sand. But the insurance challenges, which then become mortgage and affordability challenges, mean fewer people will be able to fund their dream of living in Florida.
“Florida homes that sustained substantial flood damage from Hurricane Ian will likely see a significant impact to both their insurance premiums and market value.”
– David W. Clausen, CEO, Coastal Insurance
Cash may become king, making Florida real estate a haven for only the wealthiest among us, those with the money to rebuild if nature brings her coastal fury. As Florida’s insurance landscape changes, homeownership becomes less affordable by the day in some areas. Already, higher premiums and reduced insurability have begun to chip away at home values in certain regions throughout the state.
The Florida real estate market of the future may be best suited to those with cash and a higher risk tolerance. Andrew started the trend 30 years ago. Now, we wait for the final tallies from Ian, Florida’s costliest storm to date, to better understand what this means for both current and future Florida homeowners.
Reach Out to the Licensed Florida Experts at Coastal Insurance
Florida households have special insurance considerations. From windstorms and flooding to personal property and even liability risks, there’s simply more at stake. At Coastal Insurance Solutions, we work with Florida homeowners across the nation to protect your home, your family, and your unique lifestyle. Connect with our concierge team of luxury home insurance advisors to learn more about the best ways to protect your Florida home and lifestyle. Our team of Florida licensed insurance advisors will help you compare rates from the finest insurance luxury home insurance companies like Pure, Vault, and Cincinnati.