Florida's annual, high-stakes game of hurricane lotto — will we be hit by a major storm this year or not? — kicks off with the start of hurricane season today.
Florida has been spared a significant hurricane hit for five seasons, but that means little to the industry and regulatory forces that set property insurance rates.
Experts predict an active season of three to six intense storms in the Atlantic, with a 72 percent probability of at least one major hurricane making landfall on the U.S. coastline. Regardless of whether that happens, homeowners may still wind up paying more out of their pockets.
Here are five reasons to expect property insurance rates to continue trending up:
1. Natural disasters other than hurricanes hit the reinsurance market hard.
Reinsurance — an added layer of coverage that property insurers buy to protect themselves from catastrophic loss — has always been a key part of the equation in determining homeowners' rates. When companies buy reinsurance, a portion of that tab gets passed on to customers through higher rates.
Insurers have lost more than $70 billion from recent catastrophes such as tornadoes from Alabama to Missouri, depleting the insurance and reinsurance industries of much of their stockpiled capital. As a result, some insurers have turned to Wall Street to raise money, issuing a record high level of catastrophe bonds in the first quarter of 2011.
In a recent report, ratings agency A.M. Best highlighted the above-normal frequency of thunderstorms and tornadoes in predicting property insurers will face higher reinsurance costs. In an analysis last week, Reuters predicted reinsurance rates will rise up to 10 percent for contracts being renewed this summer by U.S. property insurers.
2. New hurricane model opens the door to higher rates.
Property insurers base their rate requests and estimates of potential storm damage by running various storm scenarios through hurricane models.
One widely used hurricane modeling company, Risk Management Solutions, has revealed a new model for estimating wind damage that indicates Florida insurers are more at risk than previously thought as storms move inland.
The new model has already prompted insurance companies to consider buying additional reinsurance. With the anticipation of a busy storm season, "all the stars are aligned … forcing us to buy more reinsurance," said John Auer, CEO of American Strategic Insurance, a homeowners insurer based in St. Petersburg.
3. Friendly regulators and politicians.
The political climate in Tallahassee is far removed from the days when former Gov. Charlie Crist demonized State Farm for threatening to pull out of Florida if it didn't receive hefty rate hikes.
Florida Insurance Commissioner Kevin McCarty has approved double-digit rate increases for numerous private insurers in the past two years. Gov. Rick Scott advocates higher rates for Citizens Property Insurance, the state-run insurer for those who cannot find coverage on the open market. Finally, thanks to the last legislative session, property insurers can more easily raise annual premiums up to 15 percent to pay for higher reinsurance.
4. Citizens Property rate hikes.
Under state law, Citizens Property Insurance is allowed to raise rates up to 10 percent a year. A measure that would have let Citizens escalate rates up to 25 percent annually failed in the Legislature. Nevertheless, Citizens' board has been on a mission to raise rates to where they are "actuarially sound" or, in other words, raise premiums up to a level where Citizens can cover damage claims from a major storm.
As the dominant insurer in Florida with about 1.3 million policyholders, Citizens sets the pace. Its rising rates would allow private insurance companies to raise rates and remain competitive.
5. Nonhurricane costs.
One of the biggest drivers of rising insurance rates the past couple of years has been increased payouts for sinkhole claims.
A new Florida law narrows the definition of sinkhole damage and forces homeowners to pay more of the cost of testing — both measures that should restrict future payouts. Nonetheless, some insurers say they've already been paying more on sinkhole claims this year while waiting for the new law, and that will likely be incorporated in rate filings.