The insurance market in Florida is continuing to see turmoil and challenges, which will likely continue into 2023. Here are the primary drivers of what is causing the increase in insurance rates:
- The industry as a whole was battered with nearly $700 million net loss in 2021
- Over a two year period, industry losses were more than $676 million more than expected
- The amount spent per year by insurance companies on legal defense costs has more than doubled since 2016
- The cost of reinsurance increased 54% in 2020 and 28% on top of that in 2021. The 2022 is not out yet but is likely double digits again.
- 16 insurance companies have recently gone insolvent or stopped accepting new business, causing uncertainty in the market
- 27 insurance companies are being monitored by the Office of Insurance Regulation’s financial stability unit
What does all this mean?
#1. Yes the cost of insurance has gone up but insurance companies are still not making money. In order to stay afloat, they must pass along their costs to their policy holders which for now means rate increases. If insurance companies were pulling in massive profits I think we would all be having a fit but that's just not the case right now with most insurance companies.
#2 and #3. When losses are more than expected, including claims and legal expenses, it could mean losses that exceed their reserves. This will cause insurance companies to dip into their reinsurance, which essentially causes item #4. The increase in legal fees is concerning because those claims often fall under reinsurance threshholds, meaning insurance companies are paying them out of pocket. This further depletes reserves, which means they need to increase rates to increase reserves back to the legar requirements.
#4. Reinsurance is a big expense for insurance companies and when this cost increases, that increase is passed on to policy holders. Reinsurance companies are typically huge international organizations that are impacted by global hazards. In 2020 there were 22 billion-dollar weather events and the combined damages in 2021 was $145 billion, making 2021 the third costliest year in history for natural disasters. These reinsurance companies are very sophisticated and the risk of high value coastal markets like Florida is not lost on them. They will increase rates until they are confident they are confident they can meet all their short and long term obligations.
#5. Like banks, insurance companies don’t keep all the premiums they collect in cash. There are regulations regarding what percentage they are required to keep liquid, otherwise they put that money to use covering internal expenses, current claims, and investing. Insolvencies in the insurance market will surely cause more insurance companies to be cautious in their approach, which restricts options. When supply drops, prices will increase.
#6. Being monitored doesn’t mean they are at risk of imminent failure but it does mean we are still a long ways from hitting the bottom. There may be more insurance companies forced into restructuring or receivership. Like in #5, when there are fewer insurance companies willing to offer coverage it likely leads to higher prices for the ones that remain.
There are too many factors at play to put the blame on any one thing. There is still time to correct the damage that has been done to the financial health of the insurance marketplace in Florida, it will take time and patience but I believe we will get there.
Sources:
https://www.insurancejournal.com/news/southeast/2022/07/21/676876.htm#
https://www.bankrate.com/insurance/homeowners-insurance/natural-disaster-statistics/