Farmers Insurance is the latest home insurer to exit Florida’s market, calling the move a business decision “necessary to effectively manage risk exposure,” the company said in a statement to Fortune. Shortly thereafter, AAA announced that it would reduce its presence in Florida.
This week, the AAA announced that it had “made the difficult decision not to renew a very small percentage of higher-risk homeowners insurance in Florida,” the company’s statement to Fortune said — due to what it called a “challenging” insurance market. Unlike Farmers, which announced its decision earlier this month, AAA will continue to issue new home insurance policies in Florida, except for those it doesn’t want to renew.
Given that Farmers isn’t the first home insurer to stop providing coverage in Florida in the last year or so, things are looking tough for the real estate market, and particularly for its homeowners, who already pay the highest insurance premiums in the country at an average premium of $6,000 a year versus the US average of $1,700 a year, according to Mark Friedlander, director of corporate communications at Florida’s Insurance Information Institute. That’s 42% more than last year, Frielander added.
“In just the last 18 months, 15 companies have gone out of business in Florida, three have voluntarily withdrawn – most recently Farmers, and seven companies have been declared bankrupt,” Friedlander told Fortune just before the AAA’s decision was released.
The exodus, which the Insurance Information Institute calls a “man-made crisis,” it says is being driven by two key factors: abuse of the legal system and claims fraud.
“Florida’s property insurance industry has not reported positive financial results since 2016,” Friedlander said. “Last year alone, the industry posted an underwriting loss of $1.4 billion and a net profit loss of $900 billion. Underwriting losses have averaged more than $1 billion per year over the past three years. So it was a very paralyzed market for insurers. And it’s not a sustainable business model in this state. When you lose that much money year after year, it becomes a big challenge.”
Ken H. Johnson, a former real estate agent and current associate dean of graduate programs at Florida Atlantic University whose research focuses on real estate economics, pointed to insurance claims leading to litigation. Citing data from Florida’s Office of Insurance Regulation, Johnson told Fortune that 79% of homeownership lawsuits took place in Florida last year. It’s costly for insurance companies, and much of their payments go toward legal fees rather than the damage itself, he said. However, insurers are leaving the state, and those who stay seem to be steadily increasing their premiums to recoup their losses. And it doesn’t help that home prices in most Florida real estate markets rose over 50% between March 2020 and April 2023 (see map below), while mortgage rates are now around 7% after a brief era of historically low interest rates during the pandemic.
“The cost of owning a home is already way above what it should be,” Johnson said. “We’re paying really high homeownership prices, and at that.” [that] at really high interest rates approaching 7%. And on top of that we will add a very expensive home insurance. So I think affordability is going to be a dramatic issue for a few more years.”
Look at the Residual Gains Associated With Housing Boom During Pandemic chart
Florida’s consumer insurance advocate Tasha Carter, who was appointed by Florida CFO Jimmy Patronis, listed four factors behind what she says is a “catastrophic state” for the home insurance market. The first has to do with losses from recent hurricanes, as Hurricanes Irma, Michael and Ian (combined) caused nearly 3 million claims and resulted in estimated insured losses of about $46 billion. Add to this reinsurance rates, which have risen by an average of 52% over the last year, resulting in higher costs for policyholders in the form of higher premiums. In addition, there is an increase in litigation involving insurance companies, which also results in higher costs for policyholders. And the last factor is insurance fraud.
A statement from the AAA, which appears to be defending its decision, said: “The Florida insurance market has become challenging in recent years. Last year’s disastrous hurricane season contributed to an unprecedented rise in reinsurance rates, making it more expensive for insurance companies to operate. Previously, the market was already weighed down by rising claims costs due to inflation and excessive litigation.” Farmers, on the other hand, did not justify their decision beyond doing this to manage risk exposure.
It’s clear that multiple factors are at play, and they all result in homeowners having fewer options when it comes to insurance coverage.
“The home insurance market continues to shrink and become more constrained, with less capacity,” Carter told Fortune. “And that means consumers are finding it increasingly difficult to find home insurance.”
In such a postmortem period, Johnson, as Johnson put it, doesn’t quite know what to make of farmers leaving the state. More so, he’s curious about the company’s relationship with its reinsurers given that reinsurers’ capital has declined by 15% in 2022.
Farmers Insurance affiliates will continue to operate in the state, and the company says only 30% of policies will be affected by the decision to discontinue its Farmers-branded auto, home and roof insurance policies in Florida. Nevertheless, theoretically, the less competition there is between insurers, the more control they have over the market. How this will affect the individual costs is unclear. Friedlander seems to think more consumers will turn to Citizens Property Insurance, which he believes is a state-backed insurer of last resort, and end up receiving that coverage (especially if their business fails or leaves Florida, like Farmers Insurance). In that case, rates for citizens’ property insurance are lower than in the private market, about 40% lower, Friedlander said, which is a problem in itself given the speed at which it’s growing — but that’s another topic.
Jason Damm, assistant professor of professional finance practice at the University of Miami, owns an investment property in Miami that is backed by two separate houses (both of which he rents). In April he renewed his insurance and his premium increased by 25%. A month later, Damm said the insurance company had sent him a notice of withdrawal from the state. On June 30, his policy was canceled.
“I don’t have insurance on the house, which is pretty dangerous,” Damm said. “I’ve been looking, it’s very expensive, so I’m trying to decide what to do…it’s a huge problem. I mean, I don’t know what to do with it, whether to try to find a policy or just not get insurance.”
I don’t need to explain how risky it is not to have home insurance, especially in a place like Florida that’s prone to natural disasters, but people do it anyway. Carter recently spoke to a consumer who told her that she is considering self-insurance even though she doesn’t have the financial means to repair or rebuild her home in the event of a natural disaster. However, she feels she must do so in order to meet her other financial needs.
According to Carter, companies are also becoming more selective about the homes they insure. They look at the roof conditions and age of the roofs as well as the overall age of the houses. Consumers with roofs older than 10 to 15 years are having trouble finding insurance coverage, and in some cases are being asked to replace their roof to secure coverage, Carter said. Others limit the age of the homes they choose to insure, and some companies choose to insure only newly built homes and homes built within the last five years.
“Consumers are seeing their insurance premiums increase,” Carter said. “They are really shocked when they get their renewal notices. Unfortunately, what we are seeing is that the companies that are willing to stay in the state and buy home insurance come at a very, very high price that makes it very difficult for consumers to afford them.” [it].”
In Johnson’s view, premiums are likely to continue to rise until legislation that’s already in place comes into effect – and that’s not a quick and easy process, as this legislation isn’t retroactive. Still, this exodus of home insurance will only worsen affordability.
“It’s going to drive up costs, which will only prolong this affordability crisis that’s been developing in Florida,” Johnson said.