A new report authored by Karen Clark, Co-founder and CEO of Karen Clark & Company (KCC), explores the concern among Florida homeowners of increasing insurance premiums, which in turn is driving demand for legislative actions to reduce costs.
On the back of hurricanes, other weather-related events, inflation, and excess litigation, insured losses have been on the rise in Florida, which has filtered down to consumers in the form of higher premiums.
Exploring the impact of inflation, KCC explains that homeowners premiums are based on the cost to repair or rebuild the home at a rate that reflects the chances of the home being damaged by a covered peril, such as a hurricane or tornado.
One of the issues is that construction costs increase every year, which causes an increase in homeowners’ premiums even if the actual insurance rates don’t rise.
In fact, according to KCC, the average cost of construction in Florida has increased nearly 40% since 2017, based on current cost indices.
Excess litigation is also a real challenge in Florida.
“Detailed studies conducted by KCC scientists and engineers across multiple storms and insurers indicate single family home insured losses in Florida have been significantly inflated over the past several years due to excess litigation. While some level of litigated claims is to be expected for every event, the percentage of litigated claims in Florida has been excessive relative to litigation activity in other states,” says the report.
As an example, KCC compares Hurricanes Irma and Michael to non-Florida storms, including Laura and Ida, and states that the percentage of litigated claims in Florida has been, on average, 10 times higher than the percentage in other states.
Another challenge in Florida is the supply and cost of reinsurance. As explained by KCC, the majority of Florida insurers are heavily dependent on reinsurance, and the cost of securing coverage is a significant part of their overall costs, which needs to be covered by premiums.
In recent times, reinsurers have restricted coverage in the state as a result of elevated losses, and where it is available, it comes at a higher price amid hardening market conditions.
“Actions of reinsurers will influence future Florida insurance premiums,” says KCC. “CEOs from the world’s leading reinsurers who gathered at this year’s Monte Carlo Rendez-Vous warned insurers in cat-prone areas that property reinsurance rates will not go down in 2024, and future increases should be expected. Reasons cited include increasing risk, reinsurer loss history, and heightened inflation.”
“The Florida legislature cannot control the hurricane and severe weather risk any more than it can control the ever-increasing costs of construction. These factors will continue to influence future homeowners premiums, and it is unlikely these costs will go down,” adds KCC.
Of course, recent legislation was introduced in the state in an effort to stabilise the market, and KCC states that premiums would be even higher for homeowners absent these reforms.
But climate change will be a challenge for the state in the future, given its unique coastal position and because the population is concentrated along the coast.
“The only ways to significantly mitigate these impacts are more stringent building codes, retrofitting existing properties, and land use planning,” says KCC.
