Florida home insurance bailout comes up short

(Bloomberg Opinion) — Florida’s Republican-controlled legislature has finally taken meaningful steps toward addressing the state’s runaway property insurance crisis. Unfortunately, it waited until the market was on the brink of collapse when good options were impossible to come by. Going forward, the legislature must prioritize forward-looking solutions to forestall future crises before they begin.

The Sunshine State, of course, is where expensive real estate bumps up against ever-intensifying hurricanes, the looming threat of rising seas and the most notoriously litigious insurance market in the country. It’s also a market full of smaller regional insurers with business models that rely on access to reinsurance, effectively insurance for insurers. The rising cost of those policies has been at least one cause of the latest turbulence.

The popular knock on the legislation is that it amounts to a bailout of the insurance industry that won’t immediately address homeowners’ surging premiums. That’s accurate, but more than keeping a lid on premiums, Florida lawmakers needed to make sure that residents retained access to insurance at all.

The legislation would create a $1 billion state-backed reinsurance fund that primary insurers can turn to for coverage. It also addresses companies’ runaway litigation costs by taking away an advantage that homeowners’ had enjoyed against insurers in court. Finally, it took steps to reduce the number of homeowners covered by a state-backed insurer of last resort, which offers below-market premiums that the industry contends hurt its ability to charge fair prices.

The reinsurance fund is, of course, the quintessential short-term fix to tide the market over until, hopefully, the other measures start to pay dividends. It’s clearly not sustainable to imagine a world in which the state is left holding the bag for private insurers’ catastrophic risk.

The change to the litigation outlook may have a more enduring impact, but it comes at a cost. Advocates for the insurance industry have long contended that the problem with Florida is the long tail of claims and lawsuits that has followed every natural disaster. Governor DeSantis claims that the state accounts for more than three-quarters of the nation’s property insurance lawsuits even though it has less than a 10th of the claims.

Part of the issue, as the argument goes, is that the state’s laws made it so attractive to sue. Until now, the law has dictated that defendants (insurers) had to pay the attorney’s fees for prevailing plaintiffs (ostensibly homeowners) — the so-called one-way attorney fee statute. The threat of massive attorneys’ fees incentivized companies to just settle claims, and in recent years, it has devolved into something of a racket. In the most egregious cases, contractors would encourage homeowners to file claims under false pretenses and then help bring the claims to opportunistic lawyers. (Most claims probably fall into more of a gray area and aren’t so obviously fraudulent, but the extreme versions are what you often hear from Republican lawmakers.) There’s little doubt that the lawsuits pushed up insurers’ costs.

Eliminating one-way attorney fees

To address the matter, the new legislation does away with the one-way attorney fee benefit, a politically difficult move that takes away a benefit to homeowners that — for all its abuse — also helped many people. But the situation had become so dire that it was a necessary step to preserve access to the market.

The final change of note aims to ease the burden of the crisis on Citizens Property Insurance Corp., the state insurer of last resort. It may also push private insurance premiums higher, all else being equal.

Moving policies off Citizens’ book

Homeowners can get a Citizens policy at an implicitly subsidized rate as long as private premiums are at least 20% more expensive, which is increasingly the case.

Once they get there, homeowners tend to stick with Citizens, pushing the Citizens portfolio above a million homes this year, including some of the riskiest properties that simply can’t get insured anywhere else. That may be putting an artificial cap on market prices, too, preventing insurers from charging what they deem to be a reasonable price for the risk. Under the new legislation, homeowners will be forced to leave Citizens once they can again find private-sector policies within 20% of the price of those issued by Citizens.

These reforms were largely necessary to address a crisis unfolding in real time, but they have come far too late and address only part of the problem. This back-against-the-wall situation arrived after years of both parties kicking the can down the road on an issue that’s only going to get more challenging as sea levels rise.

On balance, the measures could control the litigation costs and allow companies to charge what they view as a legitimate premium. Ultimately, companies will always be happy to write new business if they think they can estimate their exposure and charge a reasonable price for their risk. The reforms to the litigation outlook and the insurer of last resort will help them do just that.

But the underlying risks themselves — intensifying hurricanes, rising seas and climate change more broadly — aren’t going away, and Florida remains woefully unprepared to deal with the costs. Development continues apace in some of the most obviously perilous coastal and barrier island communities. Insurers will surely be pleased that they can better balance risk and return going forward, and homeowners should be pleased that they won’t completely lose access to insurance. But how long they’ll be able to afford the cost is another question, and the Florida legislature has failed to address that fundamental problem of having costly real estate facing a looming storm.

Opinions expressed here are the author’s own.

Related:

• Citizens Insurance could spend $100 million on lawsuits in 2022
• Forbes: Best U.S. home insurers for 2023
• The biggest factors impacting home insurance heading into 2023

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