It’s not inflation or high interest rates in Florida that are going to potentially cause the collapse of the property market. It’s the price of property insurance. In the last two years private insurance companies operating in Florida have had a combined negative net income of over $1 billion. Since 2017 property insurers were hit with 4 of the top 6 most catastrophic hurricanes from a financial standpoint in history. Three of those hurricanes were in 2017 – Harvey, Irma & Maria. The total insurance losses from those events totaled over $90 billion. In 2021 Hurricane Ida is on track to surpass $36 billion in damages.
These property insurance increases are due to a variety of factors outside the property damage alone. One of those factors is the tail end liability from litigation stemming all they way back to Hurricanes Irma, Harvey and Maria. If you remember – not too long ago the court systems were shut down from COVID-19 creating a backlog of litigation that insurance companies didn’t really account for in the premiums they have been charging since 2017. Since the court cases stopped getting processed inside their normal timelines it became more difficult to judge the outstanding claim liability especially with regards to litigation. One statistic presented by Barry Gilway the CEO and President of Citizens (the largest property insurer in Florida) shows that Florida has about 8% of all insurance claims in the last five years but over 79% of homeowners litigation comes from the Sunshine State.
If you can also remember the devastating damage – there were a ton of legitimate roof claims and property damage claims from these hurricanes. Insurance companies like to blame the roofers and the lawyers – but in my opinion the insurance companies are to blame as well. They came into the market making land grabs and were selling property policies for way less than they should have been. This led to an undercapitalized market – and with so much competition the premiums kept going down year after year – even after Irma hit. When some less than financially stable insurance companies have less capital to pay claims – it would make sense to deny more claims and tighten up payments for claims. Why? Because it buys them time to get the capital needed to pay the claims through selling more policies at higher premiums at renewal while they have time to sort out the legal stuff… (At least that’s my opinion of what could have happened with SOME homeowners insurance companies).
The vast majority of insurance companies that we work with are fair with claims practices but talk to any lawyer and they can list of the companies who are less than accommodating. Another issue was the sheer number of claims that needed to be adjusted. Many of the adjusters hired to handle these insurance claims had little to no experience simply because of the volume of claims needing to be adjusted, In 2017 there were three major hurricanes – and simply not enough seasoned adjusters to handle all the claims. The culmination of all this madness has led to a shortage of insurance companies willing to write property insurance in Florida.
In the last 7 months there have multiple insurance companies that have either gone insolvent or pulled out of writing homeowners in Florida. Other carriers like Progressive are imposing restrictions for homeowners stating they will not insure a property with a roof that is over 15 years old – some are now saying 10 years old. Some of the Florida companies that are currently in liquidation are: American Capital Assurance Corporation, Avatar Property and Casualty Insurance Company, Florida Specialty Insurance Company, Gulfstream Property and Casualty Insurance Company, Sawgrass Mutual Insurance Company, St. Johns Insurance Company, Sunshine State Insurance Company & Windhaven Insurance Company.
With all these changes and increases in premiums over the next couple years a few things are becoming increasingly apparent. If we have a devastating storm in 2022 or 2023 we will see a collapse of the Florida property insurance market as we know it. The few companies that are left writing insurance in Florida will not be able to withstand another Hurricane Irma without more than doubling the already increased premium levels. Reinsurance rates are already through the roof and a storm in the next few years will greatly complicate things.
For now – we have an even larger problem on our hands. Many people in Florida are living on fixed incomes. Whether it’s a retiree, single mother or small family – the majority of our residents have their budgets set. Mortgage rates being low over the last few years has led to an increased supply of homes available for sale because more people could afford the payments. What happened? The property market went crazy and people bought homes. In fact, with all the COVID-19 restrictions in states like New York and others – the population in Florida has skyrocketed over the last few years.
What these recent home buyers and new residents didn’t expect was their insurance premium to jump on average 55% over the last three years. The average cost of homeowners premiums in 2019 was $1,989 and in 2022 the average is about $3,585. As someone who owns an insurance agency I am also getting smacked with rate increased – in fact my policy last year was about $3,200 and my renewal came in at $5,900. Some people point to the increased cost of real estate for the jump in premiums but that is an illogical thought process. The large jump in property values has been the land itself – not the value of the home which is insured on a replacement cost basis. While building costs have risen tremendously the last few years they have not risen proportionately with the insurance premiums.
Now lets look at this situation from a mortgage perspective. Between the first quarter of 2018 and the second quarter of 2021 over 1,052,414 homes were bought. All the mathematics the banks used to calculate these homes being affordable didn’t take into consideration a 55% increase in home insurance premiums and certainly didn’t take into account the current state of economic affairs we currently find ourselves in. What’s even worse is that if you cannot afford the insurance on your home – and you have a mortgage – the bank is going to force place property insurance on your home at a rate that is usually 30% above the already high property premiums. For those living on a fixed income creative measures will need to be taken in order to make that math work. Perhaps the introduction of roommates will solve the problem for some but overall I think we are in a moment in time where we could see 2007/2008 all over again simply because homeowners prices are unaffordable.
Sources:
https://www.wbur.org/onpoint/2022/05/03/inside-floridas-property-insurance-crisis
https://www.iii.org/article/spotlight-on-catastrophes-insurance-issues
https://www.insurancejournal.com/news/southeast/2022/05/27/669572.htm
https://www.statista.com/statistics/1268350/number-of-single-family-homes-sales-florida/
