Three years ago, FedNat Insurance Co. decided it was a smart business strategy to expand deeper into the South to diversify its coverage area.
But in 2020 and 2021, major storms hit Louisiana and Texas, and the Florida-based property insurer lost tens of millions of dollars.
Now the impact of those storms is being felt in Florida. On June 29, FedNat will cancel 68,200 homeowners insurance policies in the state.
FedNat’s withdrawal is the latest in a stunning series of insurance cancellations, non-renewals and company liquidations that have left Florida residents struggling to find coverage at the start of a rainy season. hurricanes which are expected to be exceptionally strong. Premiums are skyrocketing and experts say an insurance crisis threatens the state’s economy.
“It’s not a viable market. Homeowners can’t find coverage,” Insurance Information Institute spokesperson Mark Friedlander said in a recent webinar. The webinar, hosted by credit rating agency AM Best, focused on a “crisis” Florida insurance market.
The retrenchment has forced hundreds of thousands of Florida residents to seek coverage through state insurer of last resort, Citizens Property Insurance Corp. The influx raises fears that a major hurricane could deplete the program’s reserves and force millions of residents to pay an insurance surcharge.
The number of citizen policies reached 883,000 in May. That’s more than double the 420,000 fonts the program had three years ago, but well below its record high of 1.5 million fonts in November 2011. Growth accelerated over the year elapsed and is expected to continue, undermining citizens’ long efforts to “depopulate” by shifting policyholders to private insurance.
“This is one of those stories that, unfortunately, the news doesn’t get better,” Kelly Booten, Citizens’ chief operating officer, said at a June 8 advisory board meeting. “We continue to grow as companies drop their policies or temporarily shut down.”
Citizens’ financial exposure nearly tripled to $294 billion from $107 billion in May 2019 as private insurers target expensive homes to cancel or not renew.
Nearly half of citizens’ exposure – $141 billion – is in the three hurricane-prone southeastern counties of Broward, Miami-Dade and Palm Beach, even though those counties account for just 28% of the people of Florida.
“Citizens are growing at a rate that is unsustainable,” said Kyle Ulrich, president of the Florida Association of Insurance Agents, during the recent AM Best webinar.
He noted that five Florida property insurers have been declared insolvent since April.
“Citizen policy counts,” he said, “is widely regarded as an indicator of the health of the underlying market.”
Homeowners and renters who still have private insurance in Florida face rate increases of 30% to 100% and premiums that become more expensive than their mortgage payments, Friedlander said.
“Floridans pay the highest average premium in the country,” Friedlander said. “The owners cannot afford to pay this premium. They will be forced to sell their properties.
Crisis born of storms and “secondary perils”
Florida’s insurance crisis could portend a broader trend. Experts and officials have long warned of looming insurance gaps as climate change intensifies property damage from storms, wildfires and floods.
The Treasury Department’s Federal Insurance Advisory Committee is studying “the potential for major disruptions” to coverage in U.S. regions “that are particularly vulnerable to climate impacts,” according to a committee presentation this month.
In California, after wildfires in 2017 and 2018 cost property insurers $20 billion, insurers raised rates and canceled or elected not to renew hundreds of thousands of policies in high-pressure areas. risk, according to state figures and a new Congressional Budget Office. report. State Insurance Commissioner Ricardo Lara imposed a series of moratoriums prohibiting insurers from dropping policies in wildfire-prone areas.
In Louisiana, FedNat and other insurers recently announced the cancellation of tens of thousands of policies as they struggle to pay claims from Hurricane Ida, a devastating Category 4 storm that caused tens of billions of dollars in damage in the state in August.
“Other states that may not be watching Florida closely should pay attention,” said Paul Handerhan, president of the Florida-based Federal Association for Insurance Reform, a nonprofit consumer advocate. lucrative.
Florida’s insurance crisis is driven by complex factors unique to the state: an insurance market dominated by small local businesses; a legal system that insurers say invites lawsuits to challenge claims; and extensive exposure to the effects of climate change.
One of the fastest growing states in the country, Florida’s development has exploded in coastal areas vulnerable to hurricanes and flooding. Three-quarters of Florida’s 21.5 million people live in a coastal county, according to the latest Census Bureau figures.
“We’re building a lot of homes in high-risk areas,” said Charles Nyce, a risk management and insurance expert at Florida State University.
Florida insurers cover wind damage and other perils, with the exception of flooding, which is covered under separate policies typically underwritten by the federal government’s flood insurance program.
The insurance downturn has occurred primarily in the past two years, a period in which Florida has been spared any major hurricanes. The timing has led some people — including Florida lawmakers — to downplay disasters and climate change and focus on issues like insurance fraud and attorneys’ fees suing insurers. .
“Florida’s property insurance crisis is a man-made disaster, not a natural disaster,” Friedlander of the insurance institute said, noting the absence of major hurricanes in recent years.
Although Florida’s last major hurricane occurred in 2018, the state has nonetheless seen a series of minor hurricanes and tropical storms, like Elsa and Fred last year, as well as unnamed storms, wildfires forest and other events.
A report released last month by AM Best found that Florida’s “greater frequency of secondary perils” – such as severe thunderstorms, hail and windstorms – contributed to the insurance crisis.
And although Florida was spared 2020’s Hurricane Laura and other recent major US storms, the state’s last two major hurricanes were devastating and helped trigger the insurance crisis.
Hurricane Michael, a Category 5 storm, demolished the state begging in 2018. Hurricane Irma in 2017 damaged the entire state and is listed by NOAA as the sixth costliest disaster country since 1980.
Irma and Michael “have caused extensive damage within the state that has left insurers with substantial losses,” AM Best’s Chris Draghi said during the recent insurance webinar. Draghi calculated that from 2017 to 2021 Florida property insurers lost a total of $3.2 billion.
A fragile market
Florida-based insurers such as FedNat began writing home insurance policies in other states just as they were hit by major storms. The business expanded in Louisiana when the state was hit by Laura in 2020 and Ida in 2021, and in Texas when the state suffered major damage and power outages following the winter storm of 2021.
FedNat said in a November 2021 financial statement that its geographic expansion “was well-intentioned” but coincided with “the unprecedented number of catastrophic weather events that have affected Texas and Louisiana over the past 15 months.”
Insurers have recovered some losses through their reinsurance policies, which pay a share of catastrophic claims. But those payments prompted reinsurance companies to raise their rates sharply, leaving some primary insurers without the excess loss coverage required by the state.
Southern Fidelity Insurance Co., which insures 78,000 properties in Florida, was declared insolvent by the Florida Office of Insurance Regulation on June 9, after its reinsurance coverage expired and the new coverage “was not realized.” , according to a recent order.
Southern Fidelity’s losses occurred even though it raised rates last year by an average of 84.5% and dropped 19,000 policies that generated excessive claims.
“Reinsurance has become very expensive because they have suffered big losses with the hurricanes and they are having a hard time finding investors willing to invest in insurance in Florida,” said Nyce, the expert of the USF. He said NOAA’s recent forecast of an “above normal” Atlantic hurricane season this year has further discouraged potential investors.
Reinsurance is particularly important in Florida, where the property insurance market is dominated by local insurers that are too small to accumulate reserves to cover catastrophic losses.
The market is a legacy of Hurricane Andrew, the infamous Category 5 hurricane that devastated the state in 1992 and drove major national insurers such as Allstate Corp. and State Farm Insurance to stop or reduce coverage for homes in Florida.
“You have a bunch of small businesses that are heavily dependent on reinsurance and not diversified,” Nyce said.
After 2005, when hurricanes Katrina, Rita and Wilma hit Florida, the state did not experience another major hurricane until 2017. This extraordinary period allowed insurers to lower their rates and easily buy insurance. reinsurance.
“This lack of storms hid market fragility,” Nyce said.
The insurance crisis has become so perilous that Governor Ron DeSantis called a special session of the state legislature in May to consider measures to strengthen the insurance market.
DeSantis, a Republican, has worked with the Republican-controlled legislature to enact laws dealing with insurance fraud, legal fees and reinsurance, but analysts doubt they will solve the insurance crisis.
“Property insurers will continue to face near-term financial difficulties,” AM Best wrote after the legislative session. “Many major carriers that rely on reinsurance still face an existential challenge.”
“The problem is that each of these reforms will take time because they are not retroactive,” said Handerhan, the consumer advocate. “The Legislature had the opportunity to make other reforms that would have had an immediate impact on rates for consumers, but they did not.”