We are on the brink of hurricane season and this year promises to be an active one, so what goes hand in hand with hurricanes? Insurance.
We’re talking here about homeowners’ insurance, although flood insurance is also slated to have increases over the next few years. FEMA is changing the way they calculate flood insurance and revising the factors used to determine their premiums.
High insurance premiums aren’t anything new to Florida. During the 2004 hurricane season, there were five named storms, bringing billions of dollars in damage to the state within a six-week period. After that, many private insurance companies left the state, leaving Citizens Property Insurance Corp., the state-sponsored insurer, as one of the few options.
Homeowners with mortgages, which is about 60% of all owners, are required to purchase property insurance. There are homeowners who have opted to go without insurance if they own their home free and clear or to self-insure. The average annual home insurance cost rose about 20% between 2021 and 2023 according to an insurance shopping site called Insurify, and they are projecting another 6% increase this year.
Why is this happening? Obviously, storms and the higher number of storms that appear in the Atlantic basin are increasing. However, the primary cause is the amount of fraud that has been going on in the state in recent years. In April of 2022, Florida Gov. Ron DeSantis called a special session of the Florida Legislature to address the issue of insurance fraud. At that time according to the Office of Insurance Regulation, Florida accounted for 79% of the nation’s homeowner’s insurance lawsuits.
Insurance companies reported $1 billion in underwriting losses in Florida in each of the last two years, much of it due to lawsuits that resulted when homeowners transferred their rights through the “Assignment of Benefits” form. Homeowners would sign a form transferring the full rights of the policy from the policyholder to the contractor, who was working with an attorney.
Once the rights are transferred, the attorneys pay the contractors, usually for roof replacements or repairs, then file a lawsuit against the insurance company, adding up to three times their standard rate. This type of fraud resulted in insurance companies reporting $1 billion in underwriting losses in Florida for the past two years.
The other generator of increased homeowners’ insurance costs is the increase in reinsurance. Insurance companies require their own insurance in order to write policies assuming some of the risk. Reinsurance has increased rates in recent years because of COVID-19, inflation and climate change.
On the positive side, Florida Senate Bill 2022-D has reined in the litigation of this fraud by 20%. This opened the door for private insurers to come back into the state and start stabilizing rates through competition and lower future premiums. In addition, Citizens Insurance has started the process of “depopulation” of their customers, who are starting to go over to private insurers.
Florida may have the largest hurricane risk in the world but we’re not alone. Homeowner’s insurance has gone up along with everything else all over the country. California in particular has issues because of the wildfire threat, and Louisiana is also one of the major targets for hurricanes coming up the Gulf of Mexico.
Ground Zero and our insurance problems may be overstated, but we are certainly volatile and subject to the whims of the weather. Again, the price we all pay for living on a sub-tropical coast.
