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

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Cleanup in the aftermath of Hurricane Ian on October 5, 2022 in Fort Myers Beach, Florida. (Callaghan O’Hare/The New York Times)

The scale of damage from Hurricane Ian threatens to destabilize Florida’s insurance and real estate markets, with devastated residents filing record numbers of claims for home damage or destruction .

Catastrophe modeling firm RMS estimates that Ian’s private insurance losses are expected to reach $67 billion, excluding flood insurance. This is in line with other predictions, with Ian approaching 2005’s Hurricane Katrina, the deadliest disaster in U.S. history, after hitting Florida two weeks ago.

That’s about double the insured losses from Hurricane Andrew in 1992 in today’s dollars. Hurricane Andrew was the most expensive hurricane ever to hit Florida, bankrupting some underwriters and forcing others to flee the state.

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Data reveals Ian is part of a trend: Climate change is making hurricanes and other disasters more devastating, pushing home insurance costs out of reach for many In states such as Louisiana and California, increasing storms, floods and wildfires have forced insurers to exit these markets.

Zach Taylor, a professor at the Delft University of Technology in the Netherlands, has focused on the impact of climate change on insurance, saying, “Building in high-risk areas indefinitely and hoping to be insured at an affordable rate. I can’t,” he said. Who grew up in real estate and Florida.

Ian’s aftermath shows that climate change is increasingly eroding the economic foundations of modern American life.Without insurance, banks wouldn’t issue mortgages. Without a mortgage, most prospective homeowners can’t afford to buy a home. With fewer buyers, home prices will fall and new development will slow down or even come to a halt.

“To have a mortgage market, you need a private insurance market,” says Taylor. “Will working-class and middle-class homeownership survive in Florida long-term?”

A vulnerable market even before the storm

For generations, the Florida coast has been defined by beach homes. It was the Florida insurance market that underpinned it, and in some ways as carefully crafted as the coastal subdivisions that Ian destroyed.

and equally fragile.

After Hurricane Andrew destroyed tens of thousands of homes near Miami in 1992, the state tightened its building codes and created a series of semipublic agencies to do what the private market never did. rice field. A price that homeowners are willing to pay.

These semi-public agencies include Citizen, a state mandate company aimed at covering homeowners who cannot find private insurance. Citizens is funded from insurance premiums, but if it needs more money to pay a claim, it adds a surcharge to a homeowner’s private insurance bill in the state.

Since Andrew, most large national insurance companies have either abolished Florida or created few insurance policies. Instead, a network of small insurance companies has emerged. But it’s not just their size that sets them apart from the rest.

In most insurance markets, companies typically try to maintain sufficient cash reserves to pay all or most of the claims they expect to face in a given year. In Florida, the model is different. Insurance companies avoid building up huge surpluses, which allows them to keep their premiums lower than usual.

Rather than relying primarily on their own excess cash, Florida insurance companies rely heavily on so-called reinsurers when storms strike. Many reinsurers are based in Europe, Bermuda or the Caribbean and sell insurance to insurers. If they face charges that exceed their cash reserves.

The problem with this arrangement is that reinsurers such as Lloyd’s of London, Munich Re and Swiss Re renegotiate with Florida insurers every year. And if you decide the risk is too high, you can raise the interest rate as much as you like. Or you can simply walk away.

“To get reasonable premiums for consumers, we have to keep reinsurers happy,” said Joseph Petrelli, president of Demotech, a firm that assesses the financial health of many Florida insurers. Told.

“Lots of broken pieces”

Reinsurer dissatisfaction has been on the rise in Florida recently.

One common complaint is how easy it is for policyholders to sue Florida insurance companies. Florida accounted for just 7% of all U.S. homeowner claims last year, according to data released by the Florida Department of Insurance Regulatory Affairs in July, but homeowner insurers accounted for 76% of the lawsuits against

Another is the continuation of housing construction in coastal areas. 2011, the government at the time. Republican Rick Scott shut down government agencies that restricted housing construction in vulnerable areas, saying it was hampering growth. Coastal construction surge: 2010 to 2020 In addition, the population of Lee County, which was hit particularly hard by Hurricane Ian, increased by almost a quarter.

“These issues have been around for years,” said Keith Wolff, president of US property and casualty insurance at Swiss Re. He said Hurricane Ian would “frankly test this system with a lot of broken parts.”

Even before Ian went on strike, reinsurers had begun offering less coverage than state insurers wanted. Citizens, a government-mandated insurance plan, could only buy half the reinsurance it wanted at the price it was willing to pay, said spokesman Michael Pelletier. Also, the coverage available is costly, with some reinsurers raising rates by as much as 50%.

Rising interest rates for reinsurers are putting Florida insurers in greater financial trouble. The state’s property insurance company has lost money every year since his 2017, according to state data. Last year when no hurricane made landfall in Florida, state insurance companies lost her more than $600 million.

In recent years, Garrett Butler, an insurance agent in Miami, has been finding it increasingly difficult to find coverage for his client’s homeowners. Those who owned modest homes had to pay more than $20,000 a year even if they could find insurance.

Hurricane Ian “will make things worse,” he said.

Insurance is still available through Citizen, but coverage is limited to $1 million in Miami and the Florida Keys and $700,000 elsewhere in the state. That’s less than the value of many homes in those areas.

John Rawlins, former Citizens chief risk officer, said Florida’s insurance market could be more susceptible to shocks than the aftermath of Hurricane Andrew due to its heavy reliance on reinsurance. .

“It’s going to be very difficult to get the new policy,” he said. “I’m not very cautious, but I’m very cautious.”

no easy options

Experts say it’s difficult to predict the ultimate impact of the storm on Florida’s insurance and housing markets.

Rollins said states could raise the cap on civic policies. But Citizens is already on its way to becoming the state’s largest insurer. Growing it even faster would conflict with Florida’s long-standing goal of keeping subscriber numbers low so that the plan remains an insurer of last resort.

Another option is to expand the Florida Hurricane Disaster Fund, a state reinsurance program created after Hurricane Andrew. The fund, which supplements reinsurance purchased by insurers in the private market, can pay out up to $17 billion annually. However, some experts said the funds could be used up by Ian.

Officials can give the foundation permission to provide more money. But raising that money means charging fees to insurance customers statewide. This is unwelcome in a state notorious for hating taxes.

The office of Governor Ron DeSantis did not respond to a request for comment. A spokesperson for Florida Insurance Commissioner David Altmeyer said in an email that the agency is “to protect consumers. We are closely and consistently monitoring our financial condition and operating results.”

uncertain future

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

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

Homeownership can become the property of the super-rich who can buy homes without a mortgage and pay for their rebuilding without insurance. Keyes said the market could shift to rental properties where trusts and other well-financed companies own the buildings.

At the moment, reinsurer executives in London, Munich, Zurich and elsewhere are in power, and reinsurer decisions in the coming months will determine what happens along the Florida coast.

Debbe Wibberg is a realtor in Cape San Blas, a long, narrow peninsula just south of Mexico Beach in the Florida Panhandle. She recently sought a new insurance policy for her own home, a small townhouse not far from the water’s edge, and is currently paying about $3,000 a year for her coverage.

Wibberg said her new insurance company won’t cover homes over 20 years old. And some companies have stricter rules. For example, he refuses to cover his beach house with a piled timber foundation that is more than 10 years old.

Wiberg said the setback was even more pronounced for people buying second homes and vacation rentals, who make up the bulk of her clientele. Some are, and this is starting to affect housing prices, she said.

What will happen to the local housing market if prospective homebuyers start having more trouble finding insurance?

Wiberg did not hesitate. “We don’t have it,” she said.

© 2022 New York Times Company

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