Why Ian May Push Florida Real Estate Out of Reach For All but the Super Rich

The scale of the destruction from Hurricane Ian threatens to destabilize Florida’s insurance and real estate markets, as devastated residents file a record number of claims for damaged or destroyed homes.

Privately insured losses from Ian are expected to reach $67 billion, not including flood insurance, according to an estimate by RMS, a catastrophe modeling firm. That is in line with other forecasts and puts Ian, which slammed into Florida two weeks ago, close to 2005’s Hurricane Katrina, the most expensive disaster in United States history.

And it’s about twice the toll, in current dollars, of insured losses from Hurricane Andrew in 1992, which had been the most expensive storm ever to hit Florida and bankrupted some underwriters while causing others to flee the state.

Data now makes it clear that Ian is part of trend: Climate change is making hurricanes and other disasters more destructive and pushing up the cost of home insurance until it’s out of reach for many people. More violent storms, flooding and wildfires in states like Louisiana and California are causing insurers to pull back from those markets.

“You can’t just build in high-risk areas indefinitely, and expect it to be insurable at an affordable rate,” said Zac J. Taylor, a professor at Delft University of Technology in the Netherlands who focuses on the impact of climate change on insurance and real estate, and who grew up in Florida.

Ian’s aftermath shows how climate change is increasingly eroding the financial underpinnings of modern American life. Without insurance, banks won’t issue a mortgage; without a mortgage, most prospective homeowners can’t buy a home. With fewer buyers, home prices fall, and new development can slow or even come to a stop.

“You need a private insurance market to have a mortgage market,” Dr. Taylor said. “Will working- and middle-class homeownership remain viable in Florida in the long term?”

For generations, the Florida coast has been defined by homes on the beach. That was supported by Florida’s insurance market, which, in a way, was as carefully manufactured as the coastal subdivisions that Ian destroyed.

And just as fragile.

After Hurricane Andrew smashed tens of thousands of homes near Miami in 1992, the state strengthened building codes and set up a series of quasi-public entities to do what the private market wouldn’t: insure Florida homes against wind damage from future hurricanes, at a price that homeowners were willing to pay.

(In Florida, like the rest of the country, flood insurance is sold separately from homeowner’s insurance; the vast majority of flood coverage is sold or underwritten by the federal government.)

Those quasi-public entities include Citizens, a state-mandated company meant to cover homeowners who can’t find private insurance. Citizens is funded by premiums but if it needs more money to pay out claims, it adds a surcharge to the private insurance bills of homeowners around the state.

Since Andrew, most large national insurance companies either dropped Florida or write few policies. In their place emerged a network of smaller insurance companies. But their small size isn’t the only thing that sets those companies apart from other insurers.

In most insurance markets, companies typically try to maintain cash reserves big enough to pay out all or most of the claims they expect to face in a given year. In Florida, the model is different: insurers avoid building up large surpluses, which lets them keep rates lower than they would otherwise be.

Instead of relying primarily on their own surpluses, when a storm hits, Florida insurers depend heavily on what are called reinsurers: Companies, many of which are based in Europe or the Caribbean, whose business is selling insurance to insurance companies, in the event they face claims that exceed their cash reserves.

The problem with that arrangement is that reinsurers, which include Lloyd’s of London, Munich Re and Swiss Re, renegotiate with Florida insurers every year. And if they decide risks are too high, they can raise their rates as much as they like — or simply walk away.

“You’ve got to keep reinsurers happy if you want to have reasonable rates for consumers,” said Joseph L. Petrelli, president of Demotech, Inc., a company that rates the financial health of many Florida insurance carriers.

Lately, Florida has been making reinsurers increasingly unhappy.

One common complaint is the ease with which policyholders can sue insurance companies in Florida. Last year, while Florida accounted for just 7 percent of all homeowners’ claims in the United States., it saw 76 percent of all homeowners’ lawsuits against insurers, according to data released in July from the Florida Office of Insurance Regulation.

Another is continued home construction in coastal areas. In 2011, then-Governor Rick Scott, a Republican, closed the state agency that had limited home building in vulnerable areas, calling it an impediment to growth. Coastal construction jumped: Between 2010 and 2020, the population of Lee County, hit especially hard by Hurricane Ian, grew by almost one-quarter.

“These problems have been brewing for years,” said Keith Wolfe, president of U.S. property and casualty for Swiss Re. He said Hurricane Ian would “test this system that frankly has a lot of broken pieces to it.”

Even before Ian struck, reinsurers started offering less coverage than the state’s insurance companies wanted. Citizens, the government-mandated insurance plan, was only able to buy half as much reinsurance as it wanted at a price it was willing to pay, according to Michael Peltier, a spokesman. And the available coverage came at a high cost, with some reinsurers raising prices by as much as 50 percent.

Rising rates from reinsurers have been pushing Florida’s insurers into deeper financial distress. As a group, the state’s property insurers have lost money every year since 2017, according to state data. Last year, the state’s insurers lost more than $600 million — in a year when no hurricanes made landfall in Florida.

In recent years, Garrett Butler, an insurance agent in Miami, has been having increasing difficulty finding homeowners’ coverage for his clients. People with modest homes were having to pay $20,000 a year or more — if they could find insurance at all.

Hurricane Ian, he said, “is going to make it worse.”

While insurance will still be available through Citizens, that coverage is capped at $1 million in Miami and the Florida Keys, and $700,000 elsewhere in the state. That’s less than the value of many of the homes in those areas.

The heavy reliance on reinsurance could make Florida’s insurance market even more susceptible to shock than in the aftermath of Hurricane Andrew, said John Rollins, who worked as the chief risk officer for Citizens.

“You’re going to have a really hard time getting a new policy,” he said. “I’m not an alarmist, but I am very alarmed.”

The storm’s ultimate impact on Florida’s insurance and housing market is hard to predict, experts say, because nobody can say how state policymakers will react.

The state could increase the caps on Citizens policies, Mr. Rollins said. But Citizens is already on track to become the state’s largest insurance company; causing it to grow even faster would contradict Florida’s long-stated goal of keeping enrollment low, so that the plan remains an insurer of last resort.

Another option is for the state to expand the Florida Hurricane Catastrophe Fund, a state reinsurance program that was also created after Hurricane Andrew. The fund, which supplements the reinsurance that insurers buy on the private market, can pay out a maximum of $17 billion in any given year. But some experts said that the fund could be exhausted by Ian.

Officials could give the fund permission to make more money available. But raising that money would mean levying a fee on insurance customers across the state — something unwelcome in a state famously averse to taxes.

The office of Governor Ron DeSantis didn’t respond to a request for comment. A spokeswoman for David Altmaier, Florida’s insurance commissioner, said in an email that

the office “closely and consistently monitors the financial condition and operational results of insurers to protect consumers.”

Whatever happens to Florida’s insurance market, experts say the siren song of Florida’s coastal towns will continue, their sunshine and azure waters indifferent to the worries of bankers and insurance actuaries. People will still want to live there. The question is how they’ll pay for it.

A post-insurance housing market in Florida could take many forms, said Benjamin Keys, an economist and real estate professor at the University of Pennsylvania’s Wharton School, who has studied the effects of climate change on Florida real estate.

Homeownership could become the preserve of the ultra wealthy, who can afford to buy homes without a mortgage and pay to rebuild without insurance. Or the market could shift toward rental properties, with buildings owned by trusts or other deep-pocketed companies, Dr. Keys said.

For now, the power rests with reinsurance executives in places like London, Munich and Zurich, whose decisions over the next few months will determine what happens along Florida’s coast.

Debbe Wibberg is a real estate agent in Cape San Blas, a slender peninsula just south of Mexico Beach on the Florida panhandle. She recently sought a new insurance policy for her own home, a small townhouse not far from the water, and now pays almost $3,000 a year for coverage.

Her new insurer won’t cover homes that are more than 20 years old, Ms. Wibberg said. And some companies have even stricter rules — for example, refusing to cover beach houses with wood piling foundations more than a decade old.

The pullback has been even more pronounced for people buying second homes or vacation rental properties, who make up most of her clientele, Ms. Wibberg said. Some of those clients are seeing premiums jump by 50 percent or more, which she said is beginning to hurt home prices.

If prospective home buyers start to have an even harder time finding insurance, what would happen to the local housing market?

Ms. Wibberg didn’t hesitate. “We won’t have one,” she said.

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