Real Estate Property Insurance in Florida - An Improving Market

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1 E. Fowler Avenue, Tampa, FL Florida s Insurance Markets: An Overview Background Florida has America s biggest natural catastrophe problem. It has more property and more people exposed to the destructive forces of hurricanes than any other state in the nation. The total value of insured coastal property in Florida is nearly $2.5 trillion (according to 2007 data, the latest available), the highest of any other state. That represents a 27 percent increase in coastal exposure in just three years from $1.9 trillion in 2004 to $2.5 trillion in Additionally, Florida s coastal exposure is almost evenly divided between residential and commercial structures. This means Florida far outranks the number two state, New York, for residential coastal exposure, and is second to New York for commercial structures. Coastal exposure represents 79 percent of all property exposure in Florida, again the highest percentage of any state. Florida has the nation s highest insured losses and most vulnerable landscape Florida s demographics and land-use policies make it certain that catastrophe losses within the state will rise in the future. People are allowed to build increasingly more expensive structures in areas that have been impacted by storms in the past and will be vulnerable to storm damage in the future. When modest homes along the coastline are bulldozed and replaced by mansions or expansive high rise buildings, the cost of the risk exposure is multiplied many times over. An insurer is no longer providing an insurance policy on a home valued at several hundred thousand dollars; the insurance now has to be sufficient to cover the rebuilding cost of a property that is worth millions. The building boom in Florida does mean that newer structures may be more hurricane resistant. Stronger building codes were adopted in 2002, and an analysis of insurance loss data from the hurricane seasons concluded that homes built to the new building codes experienced losses that were significantly less than structures built prior to It is important to keep in mind that building codes represent the minimum construction standard, not the highest standard, and in the most vulnerable locations, building only to the code is not a guarantee of minimal damage. Additionally, 60 percent of Florida properties were constructed before the adoption of stronger building codes, and owners of older homes may have neglected to strengthen their homes or failed to keep up with necessary maintenance, such as replacing older roofs. Most of the costliest disasters in U.S. history have impacted Florida. In fact,

2 2 Florida has the nation s highest insured losses and most vulnerable landscape 19 percent of all U.S. insured losses from impacted the state. This equated to $59 billion in claims paid (in 2009 dollars) for that time period. The decade of the 2000s is labeled The Decade of Disaster. Of the 12 top disasters, eight impacted Florida. Hurricane Katrina was, by far, the most expensive insurance event in the U.S. and world history, and many people do not realize that it impacted Florida with about $600 million in insured losses. That amount, however, pales in comparison to the losses paid for other major hurricanes. Florida s 10 Costliest Storms Hurricane (Year) Total Insured Losses (2009 dollars) Andrew (1992)* $23 billion Wilma (2005)* $9.2 billion Charley (2004)* $8.5 billion Ivan (2004)* $4.9 billion Frances (2004)* $4.9 billion Jeanne (2004)* $3.4 billion Opal (1995) $2.0 billion Dennis (2005) $939.3 million Katrina (2005)* $596.5 million Erin (1995) $492.7 million *Denotes top U.S. disaster. Population growth strains the insurance marketplace Population growth has historically fueled the state s economic engine. Despite the recent crash in real estate markets and high unemployment, Florida will add millions of new residents in the years ahead. This growth will put more strain on the state s fragile insurance markets. The number of people living in coastal areas of Florida has increased by 10 million people since 1960, an overall increase of more than 261 percent through In 1960, Florida was the 10 th most populous state; in 1990, it ranked fourth and is on track to surpass New York as the third most populous state. Population in 2008 was at 13.9 million, according to the U.S. Census and is projected to hit 20 million by More than 400,000 residents moved to Florida during the housing boom that occurred between 2003 and 2006, and while the state did experience a slight decline in population in 2009, the University of Florida s Bureau of Economic and Business Research predicts a return to annual population gains close to 300,000 in 2014 or 2015.

3 3 Regulatory issues Insurance is regulated at the state level, with each state having its own statutes and rules. Regulation plays the necessary role of overseeing insurer solvency, market conduct, and reviewing and ruling on rate increase requests. Florida has experienced frequently changing and complex insurance regulations, which are both challenging and expensive to implement. Because these costs are part of doing business in the state, they are passed on to policyholders. Regulation is particularly volatile for property insurance since it reflects the loss costs from natural disasters. Florida has experienced a hostile regulatory environment with rates suppressed due to public pressure on politicians. Insurers have not been able to charge a rate that reflects their costs of operating in the nation s most catastrophe-prone state, so they have cut back on the amount of property insurance policies they are willing to take, leading to fewer choices for consumers. Insurers cut back to prevent a further weakening of their financial resources, which are needed to pay anticipated claims. Insurers cannot use profits made in one state to offset losses in other states. This is one of the responsibilities of state regulators to keep each state s operations separate. Florida was one of only two states receiving a grade of F from The Heartland Institute, a public policy research organization, in its 2010 Property and Casualty Insurance Report Card. The low mark is attributed to the politicized nature of insurance in Florida, with rates established through the political process rather than matching the rate to the risk. Rates that are too low for the amount of claims paid out has been an ongoing problem for the state-run insurance company, Citizens Property Insurance. Insurers profits and losses Private insurers are prohibited from raising rates to cover past losses and must operate their businesses to have enough money on hand, in advance, to pay for the claims it expects to have in the future. This is not the way the government-run insurer works. Citizens does not collect enough premium to pay the claims that would result from a major storm, and when it runs out of money, it assesses its policyholders and all other Floridians, even those with insurance in the private market, including auto insurance policies. Florida property insurers have been operating in the red on a cumulative basis since Hurricane Andrew struck in It took 11 years for insurers to break even after the losses paid out from Hurricane Andrew. Companies returned to profitability in 2003, and then slid back into the red with back-to-back hurricanes in back-to-back years (2004, 2005). Surprisingly, non-hurricane losses for property insurance in Florida have been

4 4 Insurers profits and losses trending upward. A review of Quarterly Supplemental Reports filed with the Florida Office of Insurance Regulation between 2007 and 2009 show the frequency and cost of claims is up sharply. Loss frequency (the number of times losses occur) is up 26.8 percent; loss severity (the average claim amount) is up 32.5 percent. Additionally, the average loss per policy has risen by more than 65 percent over the same two-year period. About property insurance rates Each insurer develops its own rates based on its individual historical experience and its expectations about future losses. Typically, the longer a company has operated in Florida the better its data and experience in making these determinations. Rates have not historically been sufficient to cover losses paid out. In the past, insurers have overcome that imbalance with investment income, which can mask the need for higher insurance rates. Insurers are conservative investors since money must be readily available to pay claims from major natural disasters, not tied up in investment products. Therefore, many insurers have shied away from the stock market holdings and rely to a greater degree on premiums to pay their obligations to policyholders. Property insurance rates actually dropped between 2007 and 2009, due to state-mandated discounts. The average homeowner insurance premium as of Dec. 31, 2009 was down by 14 percent ($274) since March 3, This was due to the passage of a bill (HB 1A) in January 2007 and a requirement to provide full discounts for mitigation measures. Reductions were mandated despite evidence that current rates were not adequate to cover anticipated claims. This additional loss in premium income prompted many insurers to lose money even without a major hurricane striking the state, and they responded by further curtailing their business. Rates are trending back up as the Office of Insurance Regulation is reviewing insurers financial data and recognizing that rising claims costs is having a negative impact on insurer solvency. Citizens Property Insurance exposure is growing Florida s state-run insurer has increased its total exposure to loss by 163 percent since 2002 to $406 billion in While Citizens is in its best financial position in 2010, it continues to rely on assessments to fund catastrophe losses in the event of a large storm or multiple smaller storms. When Citizens runs out of money to pay claims to its policyholders, it assesses them first and if that is insufficient, it assesses all property and

5 5 Citizens Property Insurance exposure is growing casualty lines, including Florida residents with policies in the private market for homes, businesses and their autos. Excluded from the assessment are workers compensation, medical malpractice, accident and health and federal flood insurance policies. Insurance lines other than homeowners account for 80 percent of the assessment base. Florida Citizens Projected 2010 Assessment Base Homeowners 20% Commercial 13% Auto 40% All Other Lines 27% Citizens report to the Florida Cabinet in April 2010 anticipated what assessments may be needed for different storm scenarios. A 1-in-100 year storm means there is a one percent chance that an event can occur in any given year, comparable to a major Category 4 hurricane. Florida Citizens Assessment Predictions by Storm Size in-5 year None 1-in-25 year $8.6 million 1-in-50 year $2.964 billion 1-in-100 year $ billion How do you pay for risk? Florida s vulnerability to hurricane risk has challenged insurers, regulators, legislators and residents since the wake-up call delivered by Hurricane Andrew in 1992, complicated further by multiple storms in 2004 and There may be no easy answers to making property insurance affordable; however, there is the very rational need to make sure the money is available to pay claims when the next storm strikes. Private insurers pay for storms by accumulating money on the front end, while the state-run insurer finances storms on the back-end with debt. In the 18 years since Hurricane Andrew, many have sought solutions to the challenges of the Florida marketplace and the right formula has not yet been found. The goal would be to work toward promoting an insurance environment that encourages competition and gives consumers choices, which is key to lowering insurance costs.