The Reasons Behind Insurance Rates Adjustments
May 21, 2020
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Living in paradise isn’t without its drawbacks.  At least, financially speaking.  All the beautiful beaches, great weather, and idyllic postcards belie the fact that the Florida peninsula is prone to being ravaged by floods, tropical storms, and massive hurricanes.  It may not be a surprise that Florida homeowners already pay some of the highest insurance rates in the country.  Unfortunately, they will also need to prepare for further increases in their premiums beginning on the next policy renewal.  Let’s take a look at some of the reasons contributing to the inevitable rise of insurance costs here in the Sunshine State.

The primary factor driving up insurance coverage is the rising cost of reinsurance.  Reinsurance is essentially an insurance policy taken out by the insurance company in order to guarantee claim payouts and to avoid bankruptcy in the event of a particularly bad year.  This financial security is mostly sourced from the global capital markets—from investment groups, for example.  When an insurance company has few claims to cover, they can continue the routine purchase of reinsurance at routine prices.  However, when claims go up dramatically (as would be the case after a severe hurricane), the reinsurance business becomes more risk-averse, demanding that insurance companies pay more to cover the elevated risk taken on by the groups forming the insurer’s financial backstop.  Part of these costs is then passed on to the customers as increased premiums.

You may have noticed that insurance premiums on Florida properties were relatively stable during the last decade or so, as Florida had a bit of a lucky streak regarding major hurricanes.  But that changed in 2017 with hurricane Irma and in 2018 with Michael, both of which led to staggering financial losses.  Initial estimates came in at under $10 billion for Irma and around $3.5 billion for Michael.  Years later, however, those estimates had grown to approximately double their amounts, as more damage reports were eventually filed and claims paid out.  The insurance industry commonly refers to these types of unexpected costs as “loss creep”, which is another major factor explaining the rising premiums for Florida homeowners—even now in 2020.  Essentially, when the good luck runs out and a catastrophe finally strikes, it sends financial shock waves through the insurance markets, inevitably hitting customers’ wallets in the process.

Insurance companies have also cited the rising cost of property and repairs as another reason for having to raise premiums going forward.  Unsurprisingly, paying out on expensive homes in storm-prone areas has an adverse effect on their bottom line.  When this happens frequently, it can further increase premium costs for the entire client pool.  To deal with the inherent risks of insuring Florida properties, some private insurers are actually dropping their riskier clients or are refusing to take on new customers living in areas with higher claim rates.  While exclusion may be a viable strategy for some insurers, raising premiums to account for the elevated costs is the more typical solution, albeit one that comes at the expense of the homeowner.

Other reasons for rising premiums include lawsuits, attorney fees, and misuse of claims.  As litigation becomes increasingly more common, insurance companies are more frequently losing larger amounts of money in the courtroom.  It’s also suspected that misuse or abuse of claims may be on the rise: 2020 in particular has seen an uptick in claims as the Covid-19 pandemic has shuttered many businesses and devastating family incomes, creating scenarios of financial desperation.  Whether a claim is fully legitimate or not says nothing of the bottom-line effect on the insurance market: expenses go up, premiums inevitably follow.  Taken together, the variety of legal challenges facing insurers is yet another significant factor eroding away the industry’s profitability, leaving Florida homeowners to foot a higher bill on their property insurance.

So, is this the price of living in paradise?  It would seem so.  Simply put, the near-term future of the insurance market in Florida doesn’t look particularly great for any of its participants.  Premium costs will inevitably rise in the second half of 2020 as well as going into 2021.  It’s worth mentioning also that climate change isn’t doing Florida any favors, either: as flooding becomes more common and storms increase in strength, the insurance industry from top to bottom will have to adapt and compensate.  In the meantime, it’s probably a good idea to prepare yourself and your family for the coming premium hikes.