The headline of this piece is the multi-billion-dollar question facing the Florida Governor, its legislature, as well as insurance and reinsurance industry experts. Historically, the industry has worked successfully with the State of Florida to navigate other challenging market swings; however, this time it’s different.
Typically, increasing rate and pricing environments would last 12 to 24 months. The current hardening pricing market has been in place for over four years. During that time, we’ve seen pricing increases for Florida property owners range from 100% to over 400%. We’ve also seen properties going uninsured either because they can’t find coverage, or they can’t afford the limited coverage available.
How did we get here and what will the next 12 to 24 months in the Florida market look like? Read on.
What got us to this point?
Call it a perfect storm (pun intended) of several factors happening simultaneously, including increased litigation costs for property claims, greater frequency of large catastrophic losses, effects of the Champlain Towers collapse, a booming Florida economy, and the fallout from inflation.
Property Claim Litigation – Over the past five years, the effect of litigation costs on property claims in Florida has been equivalent to the State being hit by a major hurricane. Some estimates have costs exceeding $50 billion over that time period.
Frequency of Large Catastrophic Losses – Insured losses related to catastrophic events over the last five years averaged $70 billion, compared to $22 billion for the five years prior to that. Insured losses for 2022 alone are expected to top $70 billion with the majority coming from the two Florida hurricanes, Ian and Nicole. Calculations are ongoing, but estimates have those storms’ insured losses exceeding $50 billion. The tripling of expected losses is the key context to understanding why property owners in Florida have experienced steep premium increases for wind coverage.
Condo Collapse – As suggested in my previous blog, the collapse of Champlain Towers South has changed how high-rise condominiums are underwritten and priced. Pricing for older high-rise condos has increased by over 400% or more in the last five years. At the same time, much greater underwriting data is being required, including structural engineering assessments focused on re-certifying the structural integrity of the building. Older condos have taken the brunt of the increases with some simply unable to find coverage.
Florida’s Booming Economy – Since COVID, the State of Florida has seen a massive migration of individuals, families, and businesses wanting to move to the State. This movement has resulted in massive development, increasing property values, and putting a significant strain on the availability of quality labor and the cost of construction materials. These trends, in turn, have had an upward ripple effect on the cost of claims payouts.
Inflation - Inflation, supply chain disruptions, construction costs, and the labor shortage have driven up costs, particularly in the commercial space, by more than eight percent. Insurer FM Global’s Building Cost Index tracks cost by geography. For the first six months of 2022, it was up eight percent for Florida. Comparing July 2021 to July 2022, however, shows a 25% increase. We expect a surge in this percentage as Ian's repair costs are factored into indexing for the rest of the year.
What does the future for Florida property owners look like?
This week, Florida Governor Ron DeSantis called a special session of the Florida Legislature to address the current property market instability for both homeowners and commercial/residential property owners. Early predictions are that major legislation will be passed to curtail litigation costs affecting homeowner insurance carriers. We also anticipate the State and its insurer of last resort, Citizens Insurance Company, will take the lead on addressing the lack of capacity and pricing for commercial and residential properties. As in the past, we also expect the traditional insurance/reinsurance carriers as well as the alternative capital market to be a significant part of the solution, both short-term and long-term.
In the near term, if the legislature can address the litigation cost for homeowners’ carriers, we would expect to see more carriers coming back into the Florida marketplace in the first quarter of 2023. This would stabilize the rate environment and over time, if the legislation holds, reduce the cost of overage.
For commercial/residential properties, much depends on storm activity. If the recent level of losses continues, the cost of insurance will stay at current levels or increase. This will require property owners to deploy other risk mitigation strategies to harden their properties, as well as work with lenders to modify the level of insurance required to secure financing terms. If the weather cooperates, then we could see a stabilization of the Florida market by the end of 2023 into 2024.
Stabilization, though, will require significant involvement by the State of Florida and Citizens Insurance Company. Both Citizens and Florida’s Hurricane Catastrophe Fund took significant liquidity hits from the recent storms. Significant involvement by these entities going forward means that Florida taxpayers will be at risk for assessments should another major storm hit Florida in 2023.
In this difficult and ever-changing market, experience and a specialty approach can make all the difference. If you have questions or need help navigating the current challenges in the Florida property market, connect with a specialist at Risk Strategies.