FL insurance: Sounds expensive, but it’s cheap

Paige St. John, a reporter who previously had done good work on Florida’s dysfunctional homeowners insurance market, absolutely bollixes her stories on the reinsurers who ultimately bear the losses when storms hit the state.

The new thesis:

A Herald-Tribune investigation shows that since the state’s last spate of hurricanes, a dramatic shift has taken place. Two-thirds of property insurance premiums now leave Florida as unregulated payments to largely offshore reinsurers – companies that sell hurricane protection to insurers and that operate without rate control or consumer oversight.

They, more than state insurers and state regulators, determine how much Floridians must pay to live in the state, and whether property insurance is available at all.

Florida’s growing reliance on this profit-driven market is eroding its ability to withstand the inevitable disaster.

In the past four years, Florida-based home insurers paid out $15 billion for private reinsurance.

There has been no storm to trigger payments. Most of the money is gone, pocketed by a reinsurance industry that plays by Wall Street rules, able to rack up profits no regulated insurance company would be allowed to keep.

There’s so much wrong here, and we’re only seven paragraphs into a two-part series.

Paige and I agree there’s a problem. She believes that homeowners insurance is too expensive, and the blame falls to reinsurers. I blame a market made dysfunctional by artifically low rates.

(An aside: A reinsurer is the company that sells insurance to an insurance company. A regular insurance company protects its customers from the shocks that can harm a family. But it also wants to protect itself against bigger shocks – as when a hurricane wipes out a town where the company wrote 50% of all risks. The protection it buys is reinsurance.)

The reporter lays out her case here and here. I encourage you to read both pieces. I laud the reporter for snagging a trip to Bermuda (and maybe another one to Monte Carlo) in pursuit of the series.

Here’s the outline: After Hurricane Katrina, the nation’s biggest insurers – State Farm and Allstate – decided they didn’t want to write coverage too close to the coast. They couldn’t write the business profitably. Since then, no insurance company has filled the hole they left – 2.2 million customers in Florida alone.

Florida has turned to Citizens Property Insurance – a state-run company chartered as an insurer of last resort – and a bevy of tiny companies, companies so small that the merest hurricane would drive them into the Everglades of financial swampiness. To ward off the risk, the tiny companies buy reinsurance.

And reinsuring Florida property risks is really expensive. Reinsurers charge more to take on Florida risks than any other business they accept. In the end, much of the premium a Florida homeowner pays passes through the insurance company and ends up in the accounts of a reinsurance company.

To the reporter, this is a bad thing because:

  • There haven’t been any storms in Florida since 2005, so the reinsurers have made a lot of money.
  • The reinsurers are forcing insurers to jack up their rates. So reinsurers are why rates are so high.

The first point neglects an important fact: Every year, reinsurers bear tremendous risk during hurricane season. If you don’t believe me, cancel your homeowners insurance. Or better (and wiser), check this chart, generated by the public hurricane loss model at my old school, Florida Internatonal. It shows the expected loss from hurricanes of various intensities were they to hit major Florida cities:

That's billions with a 'b'

So if a force five hurricane hit Tampa, insured losses would be $35.6 billion, enough to dwarf the $15 billion in premiums brought in by those greedy reinsurers over four years. And if a force four storm hit Miami two weeks later, that’s another $12.8 billion. Were a force five storm to hit Miami, pass into the Gulf, turn back at Tampa, cross the peninsula and leave as a force two storm over Fort Pierce, the insured loss would exceed $72 billion.

But, in fairness, the losses wouldn’t really be $72 billion, since the chart comes with a footnote:

The kicker

Losses would be a few billion (or ten) more.

Oh, and two years after this estimate, force 3 Hurricane Wilma caused more than $10 billion in damages, mainly in Dade and Broward counties.

So there’s a lot of risk there. To take it on, reinsurers command a pretty price. And if nothing happens, they benefit from accepting the risk.

Think this way: If I hire Sheriff Gary Cooper, but the bad guys don’t show up, it doesn’t mean the sheriff has ripped me off. He protected me from whatever might have happened, but we were both lucky that nothing did.

So does that mean reinsurers are forcing rates higher? I’d say no – rates aren’t high enough. Again, the article points out that insurance on a $100,000 home in the Keys could cost $13,000 a year. From what I know about the Florida homeowners market, those numbers sound reasonable. And that’s a lot of money.

But consider: The reinsurers are in the market because the normal homeowners’ powerhouses, State Farm and Allstate left. If Allstate thought it could make money charging $13,000 for a policy, it would sell that policy.  So would State Farm. The fact that they remain aloof, five years after Katrina, tells me that rates are too low.

Now there are two solutions. One is to deregulate rates. That would bring companies back to the state and minimize the influence of those nasty reinsurers. However, rates would rise, not fall.

Alternatively, Florida could enact (and enforce) building codes even stricter than the current ones – require that every home in the state be retrofitted so that it could withstand a force five hurricane. That also would be expensive. But when it was complete, homeowners rates would plummet.

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One thought on “FL insurance: Sounds expensive, but it’s cheap

  1. […] covered this territory before, so I’ll summarize here: Florida’s HO rates are too low. I know that sounds […]

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