As climate change intensifies hurricanes in Florida and elsewhere, the property insurance system has come under pressure, with some carriers abandoning affected states, and others raising premiums to prohibitive levels for many homeowners. Citizens’ Insurance is the “carrier of last resort” for many Floridians. How do these dislocations affect Citizens and the property insurance market overall in coastal states?

The damage inflicted by Hurricane Idalia at the end of August is the most recent reminder of the devastating human and property losses associated with the extreme weather events that are being fueled by climate change.  In the state of Florida, the insurance sector has felt the effects of uncertainty and difficulty in calculating the risks that could occur from environmental disasters.   Florida’s insurance crisis is characterized by growing insurance agency insolvencies, policy non-renewals of and unsustainable reliance on taxpayer subsidies. After the record-breaking damages that occurred during Hurricane Ian almost exactly a year ago in 2022, some insurance carriers have become reluctant to price coastal properties, while other carriers have gone completely insolvent. Citizens Property Insurance Corporation, formerly the insurer of last resort in Florida, is increasingly becoming the only carrier that will price Florida home and property owner policies. 

 Insurance companies rely primarily on historical data in order to price their policies for either individuals or companies. The effects of climate change on specific areas in the United States have been predicted and studied by various organizations and entities. For instance, the Insurance Journal states, 

Under one scenario that models continued increases in global carbon emissions, along with major flooding from rainfall and some bad luck thrown into the mix, most of Miami Beach and parts of Hollywood, St. Petersburg, Florida… will see more frequent flood events by 2050, according to Climate Central’s Coastal Risk Screening Tool. Almost all of the southern tip of Florida, now home to Everglades National Park, will be flooded, the computer simulation shows. By 2100, standing water will reach into parts of Miami, big stretches of Fort Lauderdale and miles and miles of Florida’s east coast. 

These climate change effects are not only a future concern for insurance carriers. WHile data on Hurricane Idilia is still coming in, Hurricane Ian in 2022 was the costliest natural disaster in Florida history, causing over $112 billion worth of damage.  Its devastating financial impacts  were incorporated by actuaries in their risk analysis models, since the potential for higher damages and frequency of events  are used to calculate premiums. 

Actuarial formulas are incredibly sensitive, and being unable to rely on historical data as storm severity accelerates could result in insolvency for the carrier if risk is understated due to obsolete modeling. Carriers risk lost profitability or insufficient funds to pay claimants for damages.  According to Florida’s Department of Financial Services, over fourteen insurance companies are currently in receivership with the Florida state government in order to proceed with liquidation. Two of these companies, United Property & Casualty Insurance Company and FedNat Insurance Company, became insolvent following Hurricane Ian in 2022.

Insurance companies writing property policies in Florida have two major options for their response to this unpredictable risk. The first option is to seek an increase in premiums in order to help account for the potential increase in damages caused by environmental disasters. These worsening catastrophe claims help account for why Floridian homeowner’s insurance is roughly four times the national average.  The second major is to completely  forego renewing policies. The most substantial example of this in the state of Florida has been Farmers Insurance, which sent notice of its intent to discontinue writing business and personal lines of property casualty insurance in Florida during July of 2023. In a statement released about the issue, the company cited the primary reason for this decision as being a need to “effectively manage risk exposure” 

 

Citizens Property Insurance Corporation is the state-backed solution for businesses or homeowners seeking insurance,  and acts as the insurer of last resort, the only choice for policyholders who cannot find coverage through the voluntary market. One of the major criticisms of this program is the idea that the rates that Citizens charges its policyholders are not “actuarially sound”, a term denoting the feasibility of the rates as compared to the actual costs of claims and losses. Although Citizens requested rate hikes averaging 14.2% for personal lines and 12.3% for commercial lines during March of 2023, they still remain far below what would be considered within the normal margins that those lines would normally be priced at if Citizens had no rate caps. Increases of almost 58% for personal lines and almost 69% for commercial policies would be needed to do that, according to information provided to the Citizen board of governors. 

 

While Citizen’s insurance program might work in theory for a small percentage of cases for a short-term period, the program has become overburdened due to the huge influx of policies that have been nonrenewed by insolvent carriers or those that have left the Florida market. Governor DeSantis, acknowledged this is speaking on the structure of Citizens  when he said, “I think most people know Citizens has not been solvent. If you did have a major hurricane hit with a lot of Citizens property holders, it would not have a lot to pay out.” 

Florida law subsidizes Citizens on the backs of the private carriers by requiring that taxes are levied on them if there is a deficit in the budget for Citizen’s accounts. As a result, Citizen’s assessments are commonly referred to as a “Hurricane Tax” The state-backed insurance company has three levels of assessments which are utilized to recoup costs from any claims made by policyholders– Coastal, Personal Lines and Commercial Lines – which are financially independent of one another, and have separate claims-paying resources and capacities. A devastating storm or series of smaller storms could cause a deficit in one or more account, leaving Citizens without enough money to pay all claims. If this happens, Florida law requires Citizens to “charge a series of assessments until the deficit is paid.” 

According to the Florida Insurance Guaranty Association, which is the state-sponsored agency created to protect consumers in case of any insolvencies of insurance companies, a 1% emergency assessment has been passed as a regulatory measure from the Florida Office of Insurance Regulation and will be levied to cover deficits caused by claims related to the receivership and liquidation of United Property & Casualty Insurance Company. “FIGA members will be able to recoup the 1% emergency assessment from their policyholders over the Assessment Year starting October 1, 2023 through September 30, 2024 and continuing until the bonds have been paid in full.” The bond anticipation note is listed in documentation from the Florida Insurance Guaranty Association as costing $150,000,000 to provide expedited interim funding, but can cost up to an additional $750,000,000 to pay any and all covered claims that need to be resolved.

Interestingly, the Florida Legislature acknowledged one of the critical problems with this plan through § 627.3512(6)(a), Fla. Stat. (2022), stating, 

The Legislature finds that the potential for unlimited deficit assessments under this subparagraph may induce insurers to attempt to reduce their writings in the voluntary market, and that such actions would worsen the availability problems that the association was created to remedy. It is the intent of the Legislature that insurers remain fully responsible for paying regular assessments and collecting emergency assessments for any deficits of the association; however, it is also the intent of the Legislature to provide a means by which assessment liabilities may be amortized over a period of years. 

This legislative acknowledgment does not solve the problem: lack of diversity in the voluntary market will push more consumers to seek a policy through Citizens, and it will provide them with policies that subsidize, rather than incorporate, true risk cost. If a disaster strikes again, the voluntary market carriers and its policyholders will have to subsidize even more policies through these levies. 

 

For Florida property owners,  the increased frequency and severity of environmental disasters cannot  be solved through insurance policy solution alone. The increased frequency and severity of extreme weather events creates a vicious cycle: higher claim values and more frequent claims lead to  a need for higher premiums. Insurance companies are leaving the state due to these issues, putting more pressure on  those insurance companies which chose to stay and continue writing policies, and Citizens, which has no choice but to stay. 

 

Climate change presents a formidable challenge for insurance companies nationally, and in Florida particularly. As the state continues to grapple with the challenges of climate change, policyholders, insurance carriers, and legislators must take measures to secure the viability of the insurance sector. Both insurance carriers and the Florida Legislature must innovate to mitigate the underlying risk to property in the state  posed by hurricanes and flooding, and establish more sustainable guidelines for its state-backed system.