With a new year upon us and a fresh Legislative session, Floridians are once again looking to their elected representatives to provide relief from the spiraling cost of homeowner’s insurance. They should temper their expectations. Understanding the cost drivers behind the rate increases might help one to recognize the limits of the Legislature’s capacity to provide relief.
Insurance costs are primarily governed by two factors: the risk of occurrence and the asset exposure. With 1,200 miles of tropical shoreline, Florida is uniquely vulnerable to hurricanes and tropical storms. With warming tropical waters, the risk of these highly destructive storms is increasing. Climatologists predict that hurricanes will become more frequent and more powerful. Clearly, the Legislature is powerless to change this. While many lawmakers are in a state of denial as to climate change, in Florida, it is real.
With regard to asset exposure, the coastal and near-coast development in Florida results in a massive potential for loss. The devastation to these communities from landfalling hurricanes is immense. The wind-driven waves atop the storm surge can destroy even the best-built homes. While there have been efforts to guide development to less vulnerable areas and to construct more storm-resistant buildings (such as Babcock Ranch), the more common approach is to allow all development regardless of vulnerability.
Over the last 20 years, Florida’s growth management laws and rules have been gutted and the counties have been shielded when they violate their own Comprehensive Plan. (Any challenge is considered, per se frivolous – the challenger must pay the cost of defending against the protest if they don’t prevail. This has completely stifled challenges, no matter how obvious the violation to the Comp Plan.) In any event, the infrastructure has already been built. Altering the asset exposure factor is a long-term project that would not yield insurance cost savings for many years. Unfortunately, in the short-term, the Legislature is powerless to change this too.
Given the limitations to change risk or exposure, what’s a Legislature to do? They are pretty much limited to shifting the burden of cost. Something along the lines of two years ago when they gifted $3 billion of taxpayer money to the insurance industry to subsidize reinsurance costs. Along the way, more and more policies are being written by the state-sponsored insurer of last resort, Citizen’s Insurance Company. And each year, as actuaries and risk management professionals look at Citizen’s, they note that the rates are insufficient to provide reserves and reinsurance to cover losses likely to occur.
When Congress questioned the risk posed by Citizen’s, the state responded that they would merely use their power to assess a fee on all insurance issued in Florida. That hardly seems like a solution to our soaring insurance rates.
A real solution must consider the long view and stop encouraging (subsidizing) unwise development in coastal and low-lying areas. Republicans normally embrace free market forces and eschew government subsidies to individuals.
Insurance companies know how to calculate risk and projected loss. Let the insurance companies exclude those areas they deem to be too risky (a currently prohibited practice called “redlining”.) There will be carriers that step into the niche and offer high-risk coverage to those high-risk properties, albeit at great cost. As this market paradigm takes effect, the result will be fewer homes and businesses built in high-risk areas.
Those who choose to buy or build there will bear the full cost of their decision. Expanding the coverage in Citizen’s creates an unacceptable financial risk to the State of Florida and its citizens; it’s a risky bet with catastrophic consequences if we lose.
Kim Smith is a retired State of Florida financial professional living in Tallahassee.
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Clinton Mora is a reporter for Trending Insurance News. He has previously worked for the Forbes. As a contributor to Trending Insurance News, Clinton covers emerging a wide range of property and casualty insurance related stories.