Florida's Insurance Waves
Florida’s nation-leading economic fundamentals have continued to drive investor activity. Ranked the #1 state for both in-migration and population growth in 2022, people are flooding to Florida for the top job markets, lack of state income tax, and favorable climate. However, as it relates to real estate, the overarching hinderance in Florida has been the uncertain state of the property insurance market. Recently, the State has been proactive in trying to mitigate this issue.
Property insurance costs have risen at the national level, with Florida and Texas bearing the brunt of those increases. Florida insurance premiums have grown at a +/-33% rate YoY and are projected to top 50% YoY by this summer1. Though these impacts ripple through the entire state, the highest rate increases are felt in South Florida and the Panhandle.
Insurance Affordability Heat Map2
How Florida Got Here: Natural Disasters and Legal Disruption
At high climate-related risk due its unique geography, Florida has been among the most susceptible to greater insurance rate increases. Two major hurricanes battered the state in 2022 alone, causing over $60 billion in insured losses3 – Hurricane Ian, in particular, was the costliest storm in Florida’s history.
As shown4, Florida is currently enduring a hard market in the insurance cycle. A key indicator of an approaching hard market is when insurers get overly aggressive during a period of low rates and eventually start losing profits. This causes rates to rise and insurers to take other protective actions that create a difficult environment for property owners to operate in. As every market has its cycles, Florida will eventually return to a soft market after demand exceeds supply and insurers begin recording large profits, then new carriers enter the market and premium renewals decrease.
Impacts on Florida caused:
A rising number of insurer insolvency
Property underwriting losses amounting to $75 billion since 2017
Florida recording 9% of all US claims and nearly 80% of the nation’s property insurance lawsuits
Florida is a highly litigious environment, and the insurance industry has lost billions to unnecessary lawsuits filed by third-party contractors as a result of the State’s recently repealed Assignment of Benefits agreement, which granted third parties permission to directly bill an insurer in order to settle a claim. A large majority of the $51 billion property insurance claim fees over the past decade were paid to attorneys. In 2021, Florida property insurers paid over $3 billion in defending litigation5.
Reactions to the Hard Market
Insurance carriers take large claim losses and pull away from Florida, prompting rate increases among the low-capacity remaining carriers.
Lenders raise their coverage requirement while insurers strengthen coverage restrictions, threatening developers’ plans and deals in progress.
Lenders may demand more coverage than what insurers are willing to offer, which can force property owners to layer policies to meet lender requirements6.
Property owners must prioritize capital improvements before renewals and renew early.
Reinsurance Outlook
Reinsurance is a crucial component in Florida as it protects insurers from paying detrimental costs on insurance claims. Insurers can transfer an amount of risk to the reinsurer while reinsurers earn a share of the insurer’s premiums sold. However, this is only a mutual benefit in soft market conditions.
Unable to afford reinsurance in 2022, insurers were driven to insolvency after being forced to pay massive sums due to the catastrophic events along with the surge in filed claims.
Florida lawmakers allotted $2 billion in tax dollars towards reinsurance coverage for insurers in 2022.
Reinsurance costs are still projected to increase 10% in the state this year and policy renewals are restricting coverage7.
Rising Replacement Costs and The Demand For Citizens
As the piling factors keep raising insurance rates in Florida while large insurance companies pull away from the state in general, private carriers are taking protective measures by charging higher deductibles and providing less coverage on replacement costs such as wind limits. There are also new exclusions for flood and mold protection.
The inability to afford replacement value can be correlated to the rapid increase in the number of Citizens policies, shown below8. Citizens Property Insurance Corp. is a non-profit, Florida-backed company aimed at providing affordable insurance compared to the public and private market - often considered the insurer of last resort. Property owners have been left without a choice but to enroll in Citizens, who is now raising rates and requirements too. As the topic could unravel its own separate newsletter, this impact on commercial real estate is heavy as some Florida lenders are no longer doing business with Citizens-insured property owners.
Florida’s Response Through Legislation
In response to the legal headwinds, Florida held two special sessions in 2022. In December, the Legislature passed Senate Bill 2A which includes:
Removing one-way attorney fee provisions related to property insurance claims
Prohibiting Assignment of Benefits, which disables a third-party to file a claim and directly bill the insurer
Requiring a breach of contract to be found before a policyholder can sue a property insurance company for bad faith
The outlook of property insurance in Florida remains uncertain in the near term but ensuring stability within the marketplace is top of mind for policy makers and industry leaders alike. Once the insurance market finds its footing, property owners will see an increase in cash flow and exit values down the road. So while things are uncertain today, the State is undertaking measures to fix the market and return insurance expenses closer to historical averages.
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OUR DEALS IN THE MARKET - Click Photos for More Details
https://www.npr.org/2022/10/06/1127083845/hurricane-ian-florida-property-insurance
https://thefloridascorecard.org/
https://www.reuters.com/business/environment/hurricanes-floods-bring-120-billion-insurance-losses-2022-2023-01-09/#:~:text=The%20United%20States%20once%20again,%24100%20billion%20in%20total%20losses.
https://www.bomaorlando.org/
https://news.bloomberglaw.com/insurance/storm-driven-insurer-insolvencies-stir-state-actions-explained
https://www.yardimatrix.com/publications/download/file/3503-MatrixResearchBulletin-PropertyInsurance-February2023?signup=false
https://wusfnews.wusf.usf.edu/local-state/2022-11-26/more-bad-news-for-floridas-struggling-insurance-market-reinsurance-rates-are-going-up
https://floir.com/tools-and-data/residential-market-share-reports
Lawsuit Graph Data https://www.citizensfla.com/documents/20702/16402950/20210630+02Aa+Citizens+Litigation+Compared+to+Florida+Market.pdf/d2c470c2-2cd3-66ef-d515-a70571a9c9f6?t=1623849099267