Cyndee Haydon is all too familiar with the insurance woes Floridians face today. As a homeowner in a flood zone and a real estate agent with Future Home Realty in Clearwater, Fla., Haydon says skyrocketing costs and uncertainty have her on edge.
“My homeowners and flood insurance is $13,000 a year. And then there’s property taxes. Even if I paid my house off completely, I’d have to earn $20,000 to $25,000 just to pay for those things,” she says.
Haydon, ABR, SRS, who chairs the insurance committee for Florida REALTORS®, hears from clients and industry professionals alike the myriad complaints about the cost of insuring homes. “If we’re talking about affordability, then insurance should be at the top of the conversation,” she says.
Steven Moreira, CCIM, CIPS, of Longwood, Fla., is managing broker and director of special projects for RealSource Properties, a private REIT that owns 6,000 apartments in 12 states. “I know a broker who lost six deals that were under contract last year because of the insurance,” he says. On purchases in Florida last year, Moreira saw insurance costs jump from $300 to $1,000 per unit for an inland property and from $500 to $1,500 per unit for a coastal property.
For homebuyers facing sticker shock on their own premiums, Haydon says, “the question becomes, how much can a homeowner absorb and still maintain a home?”
Insurance disrupted one transaction for Anthony Friedman. Friedman, a team leader at Northrop Realty in Ellicott City, Md., between Baltimore and Washington, D.C., had clients who wanted to retire to Florida. “We had been in touch for two years about selling their home in Maryland. When they went to Florida to [look at homes], we tried to encourage them to speak with a real estate agent down there,” Friedman said during a November RISMedia webinar on insurance.
The clients opted not to get in touch with a Florida agent right away, though. When they decided to make an offer, they were shocked by the insurance costs.
“They realized that buying a house in Florida was substantially more expensive because of insurance,” Friedman says. “They couldn’t get insurance at all on some properties. This delayed their plans and the sale of their home here in Maryland.”
Not just in Florida but across the country, insurance has gone from a transaction detail to a primary burden in the real estate industry. Blame it on a host of factors, including increasingly destructive weather events, fraud, and the high cost of reinsurance. Florida REALTORS® successfully supported legislation in late 2022 that is expected to ease the burden there, but the situation for property owners remains difficult.
Florida: Ground Zero for Volatility
Volatility and high premiums aren’t anything new to Floridians. During the 2004 hurricane season, five named storms—Bonnie, Charlie, Frances, Ivan and Jeanne—brought billions of dollars in damage to the state, all in a six-week period.
The Florida Department of Health called it “one of the most active, destructive and costly hurricane seasons of the past century.” It resulted in many insurers exiting the state, leaving Citizens Property Insurance Corp., the state-sponsored insurer, as one of the few options homeowners had. With the market crash of 2008, private insurers continued to steer clear of Florida, and Citizens’ share of the market grew.
As the real estate market stabilized, however, private insurers started trickling back to the state. By 2015, competition was strong, bringing down premiums, says Lindsey O’Donnell, director of business development at Florida Best Quote, an insurance brokerage that operates out of Tampa Bay, Fla.
“That lasted quite a few years until fraud became an issue,” she says. “Many people think that the high insurance premiums are a case of greed on the part of the insurance companies, but that’s not the case.” Fraud and reinsurance, O’Donnell says, cause much of today’s volatility and surge in pricing.
Fraud Contributes to Insurance Losses
In April 2022, Florida Gov. Ron DeSantis called a special session of the Florida legislature to address the issue of insurance fraud. In a proclamation to the legislature, DeSantis’ office stated that “according to the Office of Insurance Regulation, Florida accounted for 79% of the nation’s homeowners insurance lawsuits over claims filed while making up only 9% of the nation’s homeowners insurance claims.”
Insurance companies reported $1 billion in underwriting losses in Florida in each of the last two years, much of it due to lawsuits that resulted when homeowners transferred their rights through the “Assignment of Benefits” form, O’Donnell says.
She says a few “lawyers and contractors realized they could work together and make money by door-knocking, asking homeowners if they wanted a new roof and then passing along this piece of paper called the Assignment of Benefits form, which would transfer the full rights of the policy from the policy holder to the contractor.”
Once the rights were transferred, the attorneys would file a lawsuit against the insurance company, which would pay the contractor for the roof, and the attorney could charge up to three times their standard rate for the case against the insurer. In many cases, O’Donnell says, attorneys were paid hundreds of thousands of dollars in fees, and the contractors were making a full return on the roofing jobs.
Reinsurance: The Silent Stakeholder
To assume risk and remain solvent, insurance companies require their own insurance—known as reinsurance—to write policies. The Center for Insurance Policy and Research describes reinsurance as a contract in which “the insurance company —the cedent—transfers risk to the reinsurance company, and the latter assumes all or part of one or more insurance policies issued by the cedent.”
Reinsurers have increased rates in recent years “in response to the COVID-19 pandemic, war, inflation and climate change–fueled natural catastrophes,” according to a September 2023 Reuters report. The rising cost of reinsurance is passed directly to the consumer, and depending on the risk, the dollars can add up quickly.
O’Donnell says, “An average of 30% to 40% of the premiums charged to consumers goes straight to reinsurance. The insurance company isn’t seeing any of that money.”
A Countrywide Issue
Florida might be the epicenter of the insurance issue, but real estate practitioners know it isn’t the only state dealing with cost spikes and shortages.
Policygenius, a one-stop-shop platform where consumers can compare insurance rates and coverage from many carriers, says renewal premiums nationwide increased by an average of 35% between May 2022 and May 2023. The biggest average increases were seen in Florida (68%), New Mexico (47%), Colorado (46%), Idaho (46%) and Texas (46%). Homeowners saw no average increase in only three states—North Dakota, Wyoming and Alaska.
In some states, lawmakers have capped annual rate increases for insurance companies, and while that may seem like a win for consumers, the constraint leaves insurers’ hands tied, says Eric Gallion, senior director of strategic partnerships and business development at VIU, another consumer-facing, one-stop shop for comparing and purchasing insurance.
In California, for example, legislators capped private insurance premium increases at 7% per year. As a result, many insurance companies have opted to leave the state. In the summer of 2023, giants State Farm and Allstate made national news when they stopped writing new policies in California, citing wildfire risks and increased construction costs. In a message to its members, the California Association of REALTORS® said it was in talks with both the insurance industry and regulators to push for solutions, including allowing insurance companies to have rates that better reflect their reinsurance costs and allowing insurance companies to use forward-looking risk models. “Current law only allows companies to look back when setting rates,” the CAR message said.
To some extent, Californians are experiencing now what Floridians faced after the 2004 hurricane season. As a result of increased wildfire risk, California’s state-sponsored insurance program, the FAIR Plan, is often the only option for new policies. The FAIR Plan continues to absorb more of the risk in the state as private companies pull out.
“When things are as constrained as they are, insurance companies pull back,” Gallion said during the recent RISMedia webinar. “Insurance companies need to be able to raise rates. So many of them aren’t writing in a lot of places because the risk isn’t worth it. Change and weather events are not going away.”
“Forty percent of California is in a high fire-risk zone,” says Kim DiBenedetto, a real estate agent with Tim Allen Properties in California’s Pebble Beach and Carmel areas. “Whenever you purchase in a high fire zone, it’s hard to get anything other than the state-run plan.”
Another issue posing complications for Californians is the state’s required replacement cost insurance. The FAIR Plan replacement cost covers only fire risk and is capped at $3 million, DiBenedetto says. “So clients end up getting a wrap-around policy that covers other incidentals.” In Pebble Beach, where the average listing price was $4 million as of October 2023 and many homes sell for far more than that, the cap on replacement cost leaves buyers at a difficult crossroads.
“Owners ends up self-insuring for the rest of the cost, especially in these coastal areas where homes are worth upward of $10 million,” DiBenedetto says.
In Colorado, another fire-prone state that also sees flooding and hailstorms during the rainy seasons, John Gillam, C2EX, an instructor and broker with Exit Realty Home & Ranch in Colorado and New Mexico, says that the Hayman fire of 2002, which burned 100,000 acres of land in one month, is still affecting insurance costs today.
“Twenty-one years later, that fire is still causing issues like flooding because of the lack of landscape to block the waters during rainy season,” Gillam says, “and insurance absolutely takes that into account when writing policies.”
During the drought and rainy seasons in Colorado, he says, companies put moratoriums on issuing new policies if there are active environmental issues like a fire in the area, which can be detrimental to a real estate deal. “In 2002,” Gillam recalls, “we had several months where there were no transactions because insurance companies were not issuing policies.”
A Nod to the Positive
As the country watches Florida’s market hardships related to insurance, it’s important to note that recent legislative changes there are starting to spur change.
“Yes, Florida is the largest hurricane risk in the world, and litigation has cost insurance companies dearly, but state lawmakers passed historic legislation in December 2022, and the trend lines are positive,” says Trey Goldman, legislative counsel at Florida REALTORS®.
To rein in litigation and reduce fraudulent claims, Florida’s Sen. Bill 2022-D targets the Assignment of Benefits transfers and one-way attorney fees that can mount to huge sums. Curbing both is a priority for stabilizing rates and attracting private insurers, Goldman says.
Insurance companies can model for storms, but they can’t model for litigation. Nearly a year after SB 2022-D was passed, Goldman says, four metrics are trending positive:
- Insurer investment capital is on the rise, meaning private insurance companies are making their way back to Florida, which will increase competition and hopefully lower premiums in the future.
- “Depopulation” of Citizens Property Insurance Corp. is starting. The state-run program was always meant to be the insurer of last resort. But as a result of the fluctuating private insurer options; recent insurer insolvencies; large storms, including Hurricane Ian in 2022, which caused $112 billion in damage; and fraud, Citizens Property went from assuming 4% of the market share in 2019 to 15% in 2022, becoming the largest insurer in the state. Depopulation, or the transfer of risk from Citizens to private insurers, is needed to help stabilize the market, and it is happening as private insurers reenter the state.
- Reinsurance capacity has increased. Insurance companies can’t assume risk if reinsurance companies don’t see the viability. For the past few years, reinsurers saw no reason to take on policies in Florida. “Now, reinsurance demand is being met. It isn’t cheap, but we have it, and they are providing capacity going forward,” Goldman says.
- Lawsuits against Citizens are down. Goldman cites a 20%decrease from the time Sen. Bill 2022-D.
While metrics are trending in the right direction, the landscape is still difficult for real estate pros and their clients. “Our members and their customers do not see [the positive effects] at a street-address level today,” Goldman says. “However, there is data showing that what the legislature did is having impact.”