Florida’s Coastal Property Insurance – Who Let the Rain Out?
Hurricanes and Climate Effects on Florida’s Homeowners Insurance Market
Citizens Property Insurance Corporation (“Citizens”) is a non-profit, Florida government formed property insurance provider. Citizens is the provider for homeowners who cannot find insurance in the private market, such as homeowners located along the Florida coast. Private insurers traditionally stray away from coastal homeowners, because their assets are considered too risky due to their proximity to the water and the frequency of hurricanes affecting Florida. For example, in 1992, Hurricane Andrew devastated the state, incurring $26 billion of damage and resulting in $25 billion of payouts. It is the second costliest natural disaster in America’s history. In the wake of Andrew, Florida formed a host of preventative and safety vehicles to address natural disasters (e.g. “Florida Hurricane Catastrophe Fund,” “Florida Commission on Hurricane Loss Methodology”), and Citizens being one of them. By creating a safety net in the property insurance market, Florida hoped to create a more competitive environment. Instead, Citizens became the largest state property insurer, insuring $137 billion of residential property (FSU report).
Citizens poses a big risk to Florida’s financial position, which is exacerbated by climate change. Rising tides and extreme weather increases the likelihood of property damage along Florida’s coastline. Fifty percent of Citizen’s total property exposure is situated along the coastline. By the year 2060, it is estimated that Florida’s coastline will rise between 9 and 24 inches. Coastal flooding will become more prevalent, increasing the likelihood of property damage and payouts. Furthermore, in 2011 alone, the state broke 34 heat records, 27 rainfall records, and experienced cases of extreme drought in multiple counties. Between 2000-2013, widespread tropical storms and hurricanes resulted in 24 major disaster declarations. The increased frequency of extreme weather could result in more hurricanes, resulting in more payouts. It’s clear that climate change will affect Florida’s property insurance market.
In the event that Citizens incurs a deficit from a natural disaster, all Floridian policy holders (private or not) will cover the deficit by rate increases in their premiums. In effect, the entirety of Florida would continue to insure the coastal homeowners, who are already more affluent than the average Floridian, until the deficit is covered. As one could imagine, the average Floridian is peeved by potentially covering affluent Floridians who own coastal homes. Firstly, the average Floridian believes that purchasing a home near the coast has inherent known risks, and that they should not be insuring expensive homes on the coasts. One could argue, however, that Florida has a public obligation to insure coastal home. Economic development of the coasts is important to Florida’s economy, driving tourism and commerce. Secondly, coastal homeowners don’t have incentive to mitigate risk. Citizens’ insurance premiums are at a discount to private insurer rates (who mostly don’t even offer options) to ensure affordability, while guaranteeing insurance.
What is Citizens doing about its potential liability? First of all, Citizens is trying to decrease the number of policy holders. Citizens has implemented a “depopulation” strategy whereby it incentivizes private insurers to take over its own policies. The depopulation strategy has worked to an extent. Citizens has 489,000 policy holders as of 2016, down from a peak of 1.47 million policy holders in 2011. However, not all is perfect. Private insurers are acquiring less risky, less exposed properties, while Citizens is holding onto riskier, greater exposed properties. Secondly, Citizens is increasing its premiums by 8-10% per year in order to cover its payouts based on recent trends, but it is not planning for the future of climate change. Citizens could do more to offer a more competitive property insurance market. Namely, it could offer tax incentives to attract more insurance companies. The social benefit of reducing risk Floridians hold could outweigh the lost tax revenue from insurance companies. Florida could also require insurance companies operating in the state to insure a mix of coastal and non-coastal homes, so that they have a portfolio of risky and non-risky properties.
Florida’s property insurance will continue to heat up as the world’s climate continues to change. (word count 680)
Because Florida has deemed these costal regions safe for residential development, it seems rational that they should need to ensure that there is an insurance market in place. I’m not sure I agree with the notion that a tax advantage would incentivize private insurers, however. The P&C insurance market is competitive enough to provide coverage where it makes sense financially to do so. Florida has had to establish an insurer of last resort because private insurers will not knowingly accept such high-risk properties. While a tax benefit would help mitigate the financial risk to a certain extent – the upside is limited. Conversely, they’d be exposing themselves intentionally to downside risk through exposure to an almost guaranteed loss of unknown magnitude. This means their reinsurance rates would increase and risk to capital ratios would increase, making it even less financially viable.
This is an interesting post on a quite counter-intuitive product. It almost seems that the Citizens is part of the government’s welfare system to subsidize disaster reliefs to its citizens. What it means is that, such policy product would not exist in a free market because the payout number and % must be so high to offset any premiums collected collected at affordable levels. Maybe that is also why there is not much private insurance options. Due to the high frequency of disasters in this region, there is simply no insurance algorithms to work to make it an economically viable product. On the other hand, because of the climate change, this insurance bearer – the government – has no choice but to withstand all the financial impact caused by the climate change which seems to be only getting worse and worse each year. No wonder that the government has to increase the premium by 8-10% every year and is still looking for private insurance players. I question if this policy is an efficient use of the government capital to deal with climate change (no proactive measures in this case) or disaster relief itself. By offering the insurance, it simply does not de-incentivise people to purchase homes in risky areas that are more prone to future disasters from climate change. And as a result, the government is losing more money on this product and having less money on other disaster relief initiatives.
It seems to me that a prime solution to this would be to scale down the role of government in tackling this problem. By subsidizing the risk that coastal homeowners take on when purchasing in a disaster prone area, Citizens is artificially driving up the cost of insurance for all Florida citizens. I like the “de-population” strategy that ATN mentioned in their post, but I would be more supportive of the government offering tax incentives to private insurers. This would potentially increase competition, drive down premium costs for the majority of Florida’s insured, and more effectively dis-incentivize those who might be considering a beachfront home through higher coastal insurance premiums. While Citizens’ business model is not going to directly affect climate change itself, it seems that changing its approach to this problem could result in more lives saved during hurricanes and natural disasters as those people choose to move further inland and away from danger.