Florida already has deep property insurance problems.
Rates are skyrocketing for tens of thousands of homeowners. Four private companies have abandoned the state this year, a dozen more have gone belly up in recent years and others have limited coverage after a string of devastating hurricanes, including Ian last year — the most expensive storm in state history. Business has consequently exploded for Citizens, the state-run insurer of last resort, and so has the risk of financial trouble for Florida if a major metro area like Miami or Tampa takes a bad hit.
A new study and a string of recent financial and industry reports suggest it could get even worse for Florida and other states like California and Louisiana hammered by natural disasters like wildfires, floods and hurricanes.
The latest study, released Wednesday by the First Street Foundation, warns of a looming “climate insurance bubble” — a double whammy of rising rates and rising risks that potentially could have major economic ripple effects on Florida’s housing market and economy. A bursting bubble would work this way: If rising risks from hurricanes and other climate-drive disasters make insurance too expensive for people to buy homes, or banks to give mortgages to homes in vulnerable spots, it could set off a spiral of declining demand and declining property values.
The report from First Street, a nonprofit that analyses climate threats, suggests some 39 million homes across the country could lose value as insurers begin to calculate climate risks into premiums.
“The biggest problem is we’ve been subsidizing insurance and risk for so long, which ended up ultimately promoting development in risky areas for the last half century or so,” said Jeremy Porter, First Street’s director of research and development. “We’ve built up a climate debt that hasn’t been paid yet.”
Judging by soaring home prices in South Florida and across much of the state, the threat of a bubble hasn’t had a major impact on the real estate market — at least yet — though consumer complaints about insurance costs have exploded.
But First Street isn’t alone in warning about climate change’s impacts on the already shaky property insurance markets in Florida and other states. Moody’s Investor Services, in a September report, outlined how the companies that financially back insurance companies are already factoring climate risk into their rising rates, which get passed directly to consumers.
At the same time, plenty of insurance companies have insisted that while they view climate change-linked disasters as a long-term threat, those risks play a lesser role in current premium increases than other factors like bad bills and a glut of lawsuits or fraud. Recovering after a disaster has also gotten more costly because more and more people are packed into some of the most dangerous and hard-to-insure places in the county, like Florida’s coasts.
Florida’s complicated impacts
While Florida’s insurance issues are more complicated than just more floods and storms, they certainly don’t help. And the Sunshine State isn’t the only one feeling the effects of a warming world.
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Sea levels are already several inches higher, which makes coastal flooding more frequent and more intense. Extreme rainfall, scientists say, is also getting more common, raising the risk of rain bombs like the one that crippled Fort Lauderdale earlier this year. Extreme heat and drought conditions make it more likely that wildfires will burn hotter and spread further.
The connection with hurricanes is a little more complicated, but scientists are most confident that climate change is making it more likely that hurricanes could get stronger and wetter.
“When you think about homes, we’re on an ever-steepening curve of risk across the county,” said Rob Moore, a senior policy analyst with the Natural Resources Defense Council. “Wherever you live today, it’s going to be a little more risky the year after that and a little more risky the year after that.”
What is clear is as the cost of insuring against floods, fires and storms rises, an increasing number of insurers are making the call to stop insuring certain areas — or states — altogether.
Donald Hornstein, a professor at the University of North Carolina at Chapel Hill’s law school and a board member of the state’s insurer of last resort, said he doesn’t think of the problem as a bubble, but as an issue that has been simmering for many years already.
“Climate insurance is a systemic and long-term problem. It’s not going to pop. It’s going to get worse,” he said.
What about fraud and lawsuits?
The challenge of assessing the ongoing impact of increasing climate risk is separating it from other factors that go into calculating an annual insurance premium. Inflation, for instance, has driven up the cost of rebuilding damaged properties. And market forces differ from state to state.
Take Louisiana, which has been battered by several intense Category 4 hurricanes in recent years, all on the same spot of high-risk, relatively low-income coast. After Hurricane Laura in 2020 and Hurricane Ida in 2021, a dozen insurers withdrew from the market, and another 50 or so stopped writing new business, said Mark Friedlander, spokesperson for the industry-funded Insurance Information Institute.
As a result, the state-backed insurer went from about 35,000 policies to roughly 130,000 in just two years, an almost fourfold increase. By 2021, Louisiana insurers were paying out $4.62 in claims for every dollar in premiums they took in, Friedlander said.
“Their market is clearly in great turmoil,” he said. “This is clearly climate risk driven.”
Compare that to Florida, where Friedlander argues soaring premiums have been driven more by fraud and lawsuits. Tampa Bay Times/Miami Herald reporting has also shown that bad business practices, including excessive pay for executives, may have also been a factor in the bankruptcy and withdrawals for some insurers in Florida.
And while all those fleeing companies have led the state’s insurer of last resort to climb from about 500,000 policies in 2016 to nearly 1.4 million today, Friedlander said insurers are still more stable here than in Louisiana. In 2022, they paid out $1.36 in claims for every dollar in premiums they took in, he said.
Jeff Brandes, a former state senator with an interest in insurance policy, said he blames Florida’s rising premiums mostly on the massive amount of lawsuits levied against insurance companies, especially in years without a storm.
“Florida had only 8% of U.S. property claims and 80% of the property litigation in the U.S. You can’t be the most hurricane-prone state and the most litigious and expect low rates,” he said. “Insurance is set on an annual basis, so while climate change may be an issue, it’s not an issue people see as immediate for insurance purposes. It’s a future risk.”
How are we quantifying climate in insurance?
Ask insurers directly, and they mostly agree with Brandes. They see climate as a far-off risk, not something that impacts year-to-year premiums.
In a survey submitted in 2021, Berkshire Hathaway, a reinsurer that recently made a $1 billion agreement with Florida’s Citizens, said that while it kept an eye on climate risks in the long term, “to-date, the Group has not yet seen sufficient evidence that Climate Change is affecting weather trends to a degree that would significantly impact immediate underwriting decisions.”
State Farm Florida responded to that same survey warning that “attributing an insurer’s actions in a particular geographic area as a response solely to climate change may create inaccurate impressions. Other issues in that geographic area may also be responsible for any changes made by an insurer.”
But not every company said climate was a far-off risk. Farmers Insurance Group, which withdrew tens of thousands of policies from Florida earlier this year, explicitly said that more common disasters, driven by climate change, have made it harder to insure homes affordably in some places right now.
“As climate change has exacerbated the frequency and severity of catastrophes, balancing insurability and affordability of insurance products is becoming an issue for insurers as well as consumers,” they wrote under a section labeled short-term (1-3 years) risk.
The surveys were collected by California in response to its new laws addressing growing wildfire risk and skyrocketing insurance claims. But while wildfire risk is clearly rising, most of the surveys show that insurers are leaving and limiting business in the state because of its new laws, which ban them from using climate models to understand which areas are safe to insure and which are risky.
That’s a huge deal to insurance companies, which rely on models to decide where to invest safely.
Climate change has created more uncertainty for insurers trying to model and predict future catastrophes. To hedge against that uncertainty, some reinsurers — the companies that sell insurance to the insurance companies to make sure they can pay out claims in a major disaster — are raising their rates, just to be safe.
“We expect the frequency and severity of physical climate-related claims to continue rising, making it harder for insurers to quantify and manage this risk,” wrote insurance analysts from Moody’s Investors Service in a September report. They later added, “reinsurers have responded by raising prices, changing contract terms or reducing exposure to weather-related risk.”
A September study by financial services think tank CSFI found that reinsurers ranked climate change as their No. 1 risk over the next two to three years, above political risk, artificial intelligence and government regulation.
Rising reinsurance prices have an especially big impact in Florida.
Over the past two decades, Florida’s insurance market has shifted away from big, national insurers like State Farm and Allstate and toward smaller, Florida-based insurance companies like First Protective and American Integrity. Florida-based insurers now make up a majority of the state’s insurance market, according to Moody’s Investors Service.
Shifting from national insurers to Florida-based insurers has made the state’s insurance industry more sensitive to price changes in the reinsurance market. “If you look a little bit further into a lot of these Florida-only companies, they’re not terribly large and they don’t have a lot of capital, so they’re very reliant on reinsurance to protect their capital base,” said James Eck, a vice president and senior credit officer at Moody’s Investors Service.
This year, the price for Florida property catastrophe reinsurance has jumped 30-40%, according to Moody’s, causing homeowners’ premiums to rise, too.
“We’re already hearing about similar or even higher reinsurance costs next year,” Friedlander said.
Florida needs a break
The best hope for Florida’s battered insurance market would be a break from an especially active six-year streak of hurricanes.
Hurricane Ian, which caused $60 billion in insured losses last year, took a big bite out of the cash reserves for insurance companies, reinsurance companies and the Florida Hurricane Catastrophe Fund, a state-funded reinsurer that makes sure companies can pay out homeowners claims in full. Hurricane Ian, alone, depleted two-thirds of the Florida Hurricane Catastrophe Fund balance, leaving it with just $3.7 billion on hand.
It will take years to build that balance back up. “Eleven years of minimal storm activity from 2006 to 2016 resulted in the FHCF (Florida Hurricane Catastrophe Fund) accumulating sufficient reserves to prepare for future storms,” the fund wrote in a February report. It noted that it would have to sell bonds or impose a hurricane tax on all Floridian policyholders to make ends meet if another big storm hit this year.
“The market is still healing from last year,” said Eck. “Actually, the past several years for insurance companies in the state haven’t been very good. They’re losing money. Now, reinsurance prices are more expensive.”
“It’s just been a difficult stretch, so it would be good to have a year where they can make a little bit of money and replenish the coffers a bit,” he said, “but we’ll have to see how the rest of the year plays out.”