When Hurricane Ian hit Florida last week, it left astonishing physical devastation in its wake. Entire neighborhoods disappeared under water, towns were torn apart by 150-mile-per-hour winds, and thousands of people lost their homes overnight.
Although the storm has since dissipated, it will bring even more unrest to the Sunshine State in the months to come – but that damage will be financial rather than physical. Rating agencies and real estate companies estimated the damage from the storm between 30 and 60 billion dollarsmaking it one of the largest insured losses in U.S. history.
Wind damage is covered by standard homeowners insurance, and payouts necessitated by Hurricane Ian’s extensive wreckage are likely to hasten the collapse of the state’s homeowners insurance industry , bankrupting private businesses and forcing thousands more Floridians to participate in a state-run program with a dubious long duration. – term outlook. The process offers a first glimpse of how natural disasters fueled by climate change threaten to upend regional economies.
Home insurance costs are about to skyrocket for all Floridians — not just those who live in the places most vulnerable to major storms. The state will be forced to impose new taxes and penalties as it tries to keep the market afloat. New burdens will fall largely on low- and middle-income homeowners. For many working-class Floridians, homeownership can become unaffordable as a result.
“We already have a housing affordability crisis, and now we’re adding this new pressure,” said Zac Taylor, a professor at Delft University of Technology who studied climate risk in Florida and grew up in the city of Tampa. “Insurance is potentially the thing that destabilizes homeownership – ironically, because it’s the thing that’s supposed to protect [homeownership] and make it possible.
While nationwide home insurance costs an average of about $1,500 a year, Floridians are already paying almost three times more. The state insurance market has been struggling since Hurricane Andrew made landfall south of Miami in 1992 and damaged more than 150,000 buildings. After Andrew, large private insurers like Travelers and Allstate frozen their business in the state rather than risk having to pay for future disasters. This has led to the creation of a public option called Citizens, which operates as an “insurer of last resort” for people who cannot find private coverage. The state also subsidized small “specialty” insurers which would only offer homeowners coverage in Florida, taking market share away from national companies.
But that local market has begun to falter in recent years, even in the absence of major hurricanes. One reason is that Florida has become a hotbed for sham lawsuit for roof repair. Shady contractors approach a homeowner and offer her a free new roof, then file a claim with her insurer on her behalf, even though her roof suffered no insurable damage. Then the contractors litigate the claim until the insurer settles. This has become quite costly for state insurers: Florida accounted for 8% of all US home insurance claims in 2019, but more than 75% of all insurance disputes.
At the same time, it has become much more expensive for insurance companies to purchase their have Insurance. Companies buy this so-called “reinsurance” to ensure they have enough money to make large payouts after major disasters, but the big global companies that sell reinsurance have gotten reluctant to offer it in Florida, considering that the state has built millions more homes in areas vulnerable to natural disasters even as climate change increases their risk. Reinsurance companies raised their prices to reflect this, and many local insurers struggled to track costs.
High litigation and reinsurance costs had already driven six local insurers out of business so far this year, even before Hurricane Ian. In the summer, a rating firm called Demotech threatened with downgrading several other specialty insurers, saying they weren’t stable enough to weather a big storm. This downgrade would have rendered them worthless in the eyes of major lenders and effectively taken them off the market. This caused a flurry of concern from state lawmakers, one of whom said the market was on the verge of “collapse”.
Hurricane Ian is likely to accelerate this collapse by bankrupting at least a few more home insurance companies. If Ian’s damage is near the estimated $30 billion to $50 billion, it would be particularly catastrophic for Florida’s already struggling specialty insurers. Companies that survive will have to pay even more for reinsurance, forcing them to raise prices even further.
“I predict the price of insurance will go up in Florida, or, certainly, insurers will be looking for price increases,” Alice Hill, climate change and insurance expert at the Council on Foreign Relations, told Grist. “It’s proving risky, especially with climate change, to see these storms intensify more quickly… Home insurance is written on an annual basis, so if something big happens, there’s a change next year.”
Further bankruptcies and price hikes in the private market would drive thousands more Floridians to Citizens, the public insurance provider the state established after Hurricane Andrew. The number of Floridians enrolled in Citizens has already grown over the past decade as other private insurers have collapsed, and this year the program exceeded one million insured for the first time, having doubled in size in two years. It controls about 15% of the insurance market – and more than double in particularly vulnerable places like Miami.
“You’re going to see a big increase in the number of policies going to citizens, and you could see a significant chunk of the private market disappear,” said Charles Nyce, a risk management professor at Florida State University and an expert on the insurance market. state insurance. “And the more citizens take from the market, the more the state is in danger.”
That’s because the state is on the hook to help citizens pay claims after big storms. Citizens currently have about $13 billion at their disposal, and early estimates suggest Ian’s claims will only cost the program about $4 billion, so he is not in immediate financial danger. But the program will grow in size over the next few years as it absorbs all the people who lose their private market coverage after Ian, and its growing roster will make it more vulnerable to the next big storm. If another Ian arrives, Citizens could run out of money.
This would force the Citizens to do what is called a Evaluationor one “hurricane tax” in local jargon. When the program encounters financial hardship, it may impose a surcharge on anyone in Florida who purchases any type of property insurance, from home insurance to auto insurance to business insurance. This surtax acts as a kind of tax subsidy for people living in vulnerable areas: everyone in Florida is stepping up to make sure the state can help storm victims rebuild.
“That’s my biggest concern,” Nyce said. “Let’s say you’re a working single mom in Orlando living in an apartment, but you need to own a car. Now you’re paying a premium on your car insurance to subsidize someone who lives on the beach.
Given that Hurricane Ian is unlikely to stem the tide of newcomers to Florida — and since the only insurance option for those newcomers will be citizens — Nyce said such assessments could become much more common in the over the years. In the past, they’ve never topped around 1.5% of annual insurance bills, but future storms could push that number up.
Citizens can also issue bonds to fund payments, Nyce said. But because it would issue those bonds against the state’s credit rating, it could reduce the state’s ability to borrow money, again driving higher costs down the road. And the more the state spends tax revenue to support citizens, the less it has to fund other essential services like education and transportation.
The result is that Hurricane Ian could make life in Florida much more expensive for anyone who owns a home or a car. Decades of rapid development and a new era of supercharged storms have created an unbearable burden of risk for the private insurance market. Now, following Ian, the state’s 21 million people will increasingly take on that risk, and their wallets will see the first effects.
For an example of how these costs could impact vulnerable Floridians, Taylor pointed to the community of Miami Gardens, a majority-black community in the Miami metroplex that is one of the last places in the area where homes are affordable.
“How is this community supposed to reduce its risk? ” they said. “How are the owners going to handle this? We’re talking potentially the equivalent of several monthly mortgage payments…and that’s not going to go away [back] low. Fewer and fewer people will be able to afford their homes.