As I watched Hurricane Ian’s devastation on TV these last few days, I was thinking about how my job has been changing. It used to be about finding each of my clients the best insurance. But more recently for some of my clients it’s about finding any insurance. How did we get here and what can we do? It’s a little long this month, but here are my thoughts.
Most of my clients are in California and Arizona, but I also have clients in Florida and many other states. Even before Ian, the Florida homeowner’s insurance market was a hot mess and now it will get worse. I believe it should serve as a warning to other states.
The last hurricane to hit Florida before Ian was in 2018 so you would think carriers would be profitable. Quite the opposite: many large carriers pulled out, premiums are three times the national average and six smaller carriers went bankrupt already in 2022!
Florida has hurricanes, but that’s not the main problem. They have this legal concept called “assignment of benefits” where a homeowner can have contractors sue insurance companies on their behalf. Typically this involves an old roof that the contractor claims needs to be completely replaced due to a covered weather event. Judgements have been favoring the plaintiff so legal firms take these cases on contingency with little risk to the contractor.
How big is this problem? An astounding 80% of all US homeowner’s insurance lawsuits are in Florida! In simple terms, Florida is using this legal concept to force insurance companies to pay for roofs when they get old rather than when they get damaged and as a result has destroyed the market for private insurance.
So the largest and fastest growing carrier in Florida now is Citizen’s Insurance which is a state-owned entity that offers insurance at below market pricing. Citizen’s is unlikely to have the required reserves and reinsurance to cover Ian which is sporting preliminary loss estimates around $50 billion. If they need more money to pay claims, they will first assess (institute temporary or ongoing premium increases) to other Citizen clients. If that’s not enough, they will assess all Florida insurance customers regardless of carrier. And if that’s not enough they will likely get a taxpayer bailout. So Florida has shuffled around the subsidies but failed to address the underlying issues in a meaningful way. And in a way it’s a tragedy because Ian has clearly shown Floridians need flood insurance but because standard form homeowners insurance is so expensive only 13% have this critical optional coverage.
So you’re probably thinking, if I don’t live in Florida, what does this have to do with me? It means your premiums could go up and your number of insurance options could go down.
State regulators are generally not going to approve a rate increase because of a carrier’s loss history in a different state. But they will approve rate increases to offset a carrier’s in-state expenses, because if they don’t the carrier will eventually give up and leave the state. Reinsurance companies (like umbrellas for insurance carriers) losing money in Florida can and will increase rates in other states.
And massive losses and rebuilding in Florida will drive carrier expense inflation. Unfortunately, insurance carriers are like “inflation-concentrated.” They deal with regular inflation, like the cost of their employees going up, but their claims cost are particularly susceptible to inflation. If a house burns down, they pay loss of use (rent) and rebuild (labor, materials, etc.). If a car is damaged, they pay loss of use (car rental) and repair (labor, car parts, computer chips, etc.). Note that all the parenthetical items in the previous two sentences have been in short supply. Ian’s pending rebuild effort will make that short supply even shorter.
Government Sponsored Homeowner’s Insurance
About 30 states have some sort of “FAIR” plan like the previously mentioned Citizen’s in Florida, or the FAIR plan in California for homes in wildfire zones. These plans were originally intended as “insurance of last resort” and have significant disadvantages compared to traditional homeowner’s insurance. Most do not cover liability or contents and all have restrictive limits and sublimits on exposures. Limits for dwelling on these policies is typically $500-$700k but higher in California.
In California and Florida the trend has been to gradually make the coverages on these policies more expansive. This is a move in the direction of socializing homeowner’s insurance not unlike subsidized or universal health care. While an argument can be made for health care as a human right, it’s yet to be seen if average homeowners in secure locations and potentially general taxpayers want to help fund the insurance cost for high-end homes on beaches and forested hideaways, along with trailer parks in Florida that now appear to be swamps.
What Can I Do?
Understand that the market for insurance has changed. Carriers are being squeezed because regulators control their pricing and losses plus inflation are driving their costs. They are responding by being more selective about who they extend insurance to. If you are in a risk area, are in the course of construction, have a claims history or appear to be a problem customer, there are not multiple carriers seeking your business. In fact, your existing carrier may be looking for a reason to non-renew. Don’t give them one.
Instead, “sweat the big stuff.” That means high deductibles, few small claims and the right protection against catastrophic loss. Actually, the best insurance outcome is to never have a claim. Insurance is designed to make you whole as close to your pre-claim status as possible. So even if you are made completely whole on a claim you are still going to have a life interruption and administrative hassle. And carriers put a little yellow flag next to every claimant for possible non-renewal. It might not seem fair to be treated like a statistic but that’s the world we live in.
I have two suggestions for avoiding unnecessary claims. First, get serious about potential water leaks in your house. Water damage is becoming an insurance claim epidemic. Old water heaters must be replaced. Get a plumber in to check on your toilet/washer/icemaker connections. Don’t leave your house for months with the water on. Trust me on this one, inside water claims are a mess and the carriers might label you as an irresponsible risk.
Second, get serious about distracted driving. Become the distracting driving cop for your family. Don’t text your loved ones when they might be driving and never tolerate texting when in the car. Studies have shown that even hands free phone use in the car has the driving performance impact equal to several cocktails. It’s ironic that over the last few decades the beneficial effect of high tech safety technology is offset by the distraction effect of high tech communication technology.
One final thought for you to take or leave. Some claims are inevitable and carriers have a specific process established to investigate so they can subrogate (look for other liable parties) and avoid fraud (which helps keeps rates down). My advice is to patiently let this process run its course. Some people choose to assume an adversarial, indignant type stance with their claims adjusters right away thinking they can scare them into action. In my 30 years in the insurance business I’ve never seen that work. If you cooperate in a business-like or even friendly manner you are more likely to get satisfaction for your claim and give yourself the best chance for post-claim renewal.
Let me know if you have thoughts to share. Meanwhile, stay safe and make it a great day!