“The Perfect Storm: Unveiling the Surge in Homeowners Insurance Rates in Florida

Published by Eric Miley at May 15, 2023

Why Are Homeowners Rates So High in Florida in 2023?

Recently, many have seen their homeowners insurance rates almost double and even triple in some cases. Why is this happening? Why now?

Common misconceptions regarding rising homeowners insurance rates include attributing them solely to weather-related events, insurance company greed, individual claims, home improvement projects, or state regulations. However, homeowners insurance rates are influenced by a complex interplay of factors beyond these simplistic explanations, such as a combination of rising costs, extreme weather impacts, litigation, and Assignment of Benefits (AOB) abuse contribute to the challenges faced by homeowners.

Exploring the Factors Behind the Soaring Homeowners Insurance Premiums in Florida

Get ready for a significant surge in homeowner's insurance premiums as Insurance Informative Institute projects a staggering 40% increase in rates throughout 2023. Florida homeowners are already burdened with triple the national average, making it crucial to understand the factors behind this alarming trend. Marking its place in history, on September 28, 2023, the Tampa Bay Area experienced the landfall of the 5th largest hurricane ever recorded in the United States. With wind speeds reaching an astonishing 155 miles per hour, this category 4 storm wreaked havoc, leaving a lasting impact on Florida's insurance landscape.

Hurricane Ian's Impact: Understanding the Rise in Homeowners Insurance Costs

Hurricane Ian’s devastating blows are still being felt as insurance premiums skyrocket to cover the rising cost of storm repairs. The damage estimate to the United States due to Hurricane Ian was 112.9 billion dollars. 109 billion dollars of that cost occurred within the sunshine state. This staggering total catapulted Hurricane Ian to the 3rd highest costing hurricane in US history, earning its place as the #1 most expensive hurricane in Florida’s history! The deadliest hurricane on record in the United States since 1935, this magnificent storm caused 144 fatalities. 60 billion dollars of insured property damage from Ian has caused many Florida insurance companies to reduce their client rosters with many choosing to no longer offer policies to Florida. These facts have sent shockwaves as homeowners are left scrambling to find new providers and deal with rising costs.

Citizens Property Insurance Corporation, a state backed insurance company, is expected to reach 2 million policies in 2023 after absorbing clients dropped by private insurance companies. The Tampa Bay area received the brunt of Hurricane Ian’s devastation. In Lee County alone, 30,000 homes and 1218 businesses were damaged, and 5,000 homes and 275 businesses destroyed costing more than 7.9 billion dollars.

Home and business owners are not the only ones feeling the financial pressures; insurance companies are feeling the impact as well. The hardest hit insurance carrier, Berkshire Hathaway Inc. suffered a $3.4-billion-dollar loss. Florida’s largest insurance company, Citizen’s Property, came in second place for highest loss reporting $2.6 billion. Even with a host of staggering financial losses across the board, full cost totals are still unknown. Risk model predictions expect catastrophic loss with the top three assessment firms predicting a staggering $31-63 billion dollars. Considering these statistics, it is not surprising that since January 2022 we have seen 7 insurance companies file for insolvency.

While the unprecedented financial debacle caused by Ian is a significant factor in raising rates, it is not the only factor.

Record Flooding and Global Warming: Factors Contributing to Higher Homeowners Insurance Rates in Florida

Rising water equals rising rates. Storm damage plus global warming has caused record flooding. Flood damage is typically covered by the National Flood Insurance Program versus private insurance companies. The National Flood Insurance Program provides $1.3 trillion in coverage for more than 5 million policyholders in 22,500 communities nationally. Due to the rapid changes in weather severity and record insurance losses, FEMA has changed how it sets its flood prices. This new fee calculation includes a variety of factors including the cost to rebuild a structure, proximity to the ocean, and rainfall totals. FEMA’s stance is this new fee criteria will help create a more just system. “The new methodology allows FEMA to equitably distribute premiums across all policyholders based on the value of their home and the unique flood risk of their property. Currently, many policyholders with lower-value homes are paying more than they should and policyholders with higher-value homes are paying less than they should,” FEMA April 1, 2021 release no. HQ-21-079

Experts warn of reinsurance rates catapulting to an alarming % 40-50 in June of 2023. Citizen’s Property Management Company, one of Florida’s largest property insurance companies, estimated needing $4.25 billion in reinsurance coverage this year; twice the amount held in 2022. What is reinsurance? Reinsurance refers to a second insurance company assuming all or part of the risk on behalf of the original insurance company. In Layman’s terms it’s an insurance policy for insurance companies. How did Covid, cash home purchases, and a retirement culture impact reinsurance rates? During the Covid housing boom, buyers flocked to Florida in droves after selling their homes in other states. With this culture shift came an increase in cash home purchases.

The state of Florida is one of a few that does not require homeowner’s insurance. In Florida, most insurance policies are paid in escrow as a mortgage requirement. Reinsurance is often an insurance company’s largest operating cost; those premiums are impacted by policy locations. This can be particularly tricky, as we have seen certain areas more prone to cash purchases than others. With Florida’s heightened popularity for both relocation and investment properties, low to middle income homes were quickly gobbled up during the Covid housing boom. Many of these homes are located just outside of the coast. Those cash buyers who choose to exercise their right to not elect investing in insurance may inadvertently cause rates to climb for more expensive properties located on the coast since there is less risk distribution.

In recently devastated areas, such as Tampa Bay where we saw tremendous loss of high dollar coastal homes, we will still experience rate increases since many insurance companies have pulled back from covering these areas due to future storm risk. This increased storm risk factor has compounded multiple companies have stopped offering coverage in these areas. Unfortunately, the trickle-down factor of rising reinsurance rates is passed onto homeowners.

Navigating the Complexities of Assignments of Benefits (AOB) and Lawsuits in Homeowners Insurance

In addition to this complex web is Assignments of Benefits (AOB), fraudulent activity, and lawsuits. How is fraud and lawsuits impacting homeowner’s insurance? What are Assignments of Benefits (AOB)? An Assignment of Benefits is when a third party, like a contractor, can collect payment for services directly from the insurance company instead of receiving payment from the homeowner. AOBs were originally intended to allow homeowners to initiate immediate repair after a loss without having to pay for the costs out of pocket. This arrangement can seem ideal especially during a catastrophe when out of pocket expenses are high and quick repairs are necessary.

The downside of the AOB arrangement is that it has created an industry fraught with fraud and lawsuits. A typical AOB transaction is initiated by either the homeowner or by a contractor contacting a homeowner offering services without out-of-pocket costs. In case of fraudulent contractors or scam artists, the repair quote will outweigh the actual cost to repair the damage. Ex. A new roof pays out at a higher rate than a patch repair, the contractor “ups the claim” by stating the need for a new roof. If the insurance company disagrees with the service provided and refuses to pay the contractor in turn sues the insurance company for non-payment. The cost from litigation and settlements is then passed on to the customer through higher rates.

Another reason for additional insurance litigation involves flooding. Flooding is typically not covered by private insurance, yet only approximately 14% of people carry the national flood coverage on their properties. The problem comes from severe flooding in previously known dry areas. With increased global warming and storm severity, we are seeing record flood levels. Homeowners, contractors, and insurance companies find themselves at odds over policy coverage.

Insurance Litigation and Fraud: How They Affect Homeowners Insurance in Florida

The truth is Florida has an insurance litigation problem. Nationwide Florida only accounts for 9% of homeowner property claims, but 80% of property claim lawsuits originate in the sunshine state. While the numbers for litigation costs for 2023 yet, we know that 2019 the industry spent over 3 billion dollars in legal defense.

With underwriting loss totaling over 1 billion dollars in 2020 and 2021, it is an easy assumption that 2023 will be the most expensive year yet after this season’s historically devastating hurricane season. Not only have we seen the folding of several insurance companies due to these rising costs, but we have also seen a huge fall in the ratings, as 17 companies are set to lose their A status, alerting to a significant decline in the financial health of the insurance industry.

The Link Between Insurance Company Ratings and Mortgage Rates: Implications for Florida Homeowners

How do insurance company ratings influence mortgage rates? Government sponsored mortgage companies, like Fannie Mae and Freddie Mac, known for their affordable housing loans require homeowners’ insurance policies to be held by A rated agencies. The Federal Housing Finance Agency (FHFA) has strict criteria to provide opportunities with less income. May 2022 saw Florida lawmakers scramble to help insurance companies offset the loss of their A rating status by offering small companies.

They created a $2 billion program “Reinsurance to Assist Policyholders” funded by taxpayers; this acts as a co-signer for B rated insurance companies, guaranteeing the payment of any claims. This new fund will create a buffer among mortgage companies to overlook the lower rated insurance company. Even with the surge of a 2 billion buffer, there are grave concerns that this measure will simply not be enough. With critics claiming that number should be double, there are warnings that even that number may be conservative compared to the actual need. Another further, shortcoming of the reinsurance act is it is only for a major catastrophe like a hurricane it will not cover “localized” weather events?

What is a localized weather event? A localized weather event is non-catastrophic weather such as tropical storms, thunderstorms causing lightning, hail, wind, and tree damage. This new legislature also seeks to help in the following ways:

Sets limits on attorney fees for insurance litigation. Florida has one of the highest national averages for attorney fees. This new legislation aims to combat fraud by limiting fees.
Sets regulatory mandates regarding the investigation of insurance companies and especially reasons for bankruptcy.
A matching grant program of $150 million for matching grants for up to $10k for improvements to strengthen weak structures prior to storms.
Prevents insurance companies from insuring roofs under 15 years old due to replacement expenses.

While these measures help circumvent fallen ratings impacting mortgages, limit litigation fees, help homeowners with coverage for new roofs, offer some great opportunities, and require investigating closing agencies it does not appear it will take any pressure off climbing rates.

Bibliography:

WUSF Public Media

Florida homeowners will face a projected 40 percent increase in property insurance rates

https://wusfnews.wusf.usf.edu/local-state/2023-04-04/florida-homeowners-to-face-a-projected-40-percent-increase-in-property-insurance-rates

S&P Global

Hurricane Ian weighs heavy on property insurers' Q3 catastrophe losses

https://www.spglobal.com/marketintelligence/en/news-insights/blog/banking-essentials-newsletter-3rd-may-edition

FIU News

The big reason Florida insurance companies are failing isn’t just hurricane risk – it’s fraud and lawsuits

https://news.fiu.edu/2022/the-big-reason-florida-insurance-companies-are-failing-isnt-just-hurricane-risk-its-fraud-and-lawsuits#:~:text=Insurance%20companies%20had%20a%20more,companies%20are%20deciding%20to%20leave.

Washington Post

Insurers slashed Hurricane Ian payouts far below damage estimates, documents and insiders reveal