Q&A of the Day – Inflation’s Impact on Florida’s Property Insurance Crisis
Each day I feature a listener question sent by one of these methods.
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Today’s Entry: Brian, Jimmy Patronis was just on. He spoke about all of the things affecting insurance company's bottom lines. When he got to inflation and interest rates he spoke of the negative impact on these companies. However, nobody is talking about the returns these companies are receiving in their investment of premiums. I was under the impression they were forced to only invest in very conservative items. In the past they complained rates were so low that they were not making any money. With rates wickedly high now, what gives?!?! Can you address on the show?
Bottom Line: I received today’s note after Florida’s CFO, Jimmy Patronis, joined me on Tuesday to discuss the state of Florida’s property insurance market and what we can expect to happen from here. Litigation abuses and related assignment of benefits abuses of the past, have been reformed by the Florida Legislature and we’re beginning to see the previously passed reforms positively impact the market. As Patronis indicated, new litigation filed against property insurance companies is lower by 43% year-to-date. That’s a key sign that stability is in the process of being restored to Florida’s property insurance market. With that said, Patronis did cite inflation as another key issue insurance companies have been battling as well and that takes us to today’s question. How big of a factor has inflation been in Florida’s property insurance crisis and how are investments managed?
In directly addressing the listener’s question, about the mix of investments which should be benefitting from higher interest rates, here’s what that looks like based on the annual report from the National Association of Insurance Commissioners:
- Bonds: 62%
- Stocks: 13%
- Mortgages: 9%
- Fixed-Income securities: 7%
- Cash/Money Market: 5%
- All other investments: 4%
As the listener noted this is a conservative portfolio mix. However, here’s what’s important to note. Rising interest rates don’t automatically equal better results for lower risk assets. This CNBC headline from January says it all: 2022 was the worst-ever year for U.S. bonds. The total bond index dropped 13% last year. That’s the worst performance in 250 years where there’s available data. So no, the higher interest rates didn’t offset the impact of high inflation on the asset mix of insurance companies. But actually, as important as investment performance is for insurance companies, that wasn’t and isn’t the biggest issue inflation has played within Florida’s property insurance market. It’s the cost of repairs for claims.
As was noted by Citizens in a note put out over a year ago – Higher Building Material Costs, Inflation to Impact Premiums. According to the midpoint of Citizen’s guidance, the cost increase of material and labor costs for repairs made in 2022 was 17.5%. Last year the highest increase in premium costs for any property insurance company was 11%. The claims/repair process is where inflation has hit the industry the hardest – especially against the backdrop of the impact of Hurricanes Ian and Nicole in Florida last year.
If you’ve been involved in any home improvement projects or home renovations over the past couple of years, you’ve likely noticed that the related products and services inflated far higher than the overall rate of inflation – especially within Florida where demand has been the highest in the country when accounting for the impact of hurricanes.
The net effect of all of these issues – Florida's property insurance litigation issues, high claims and the impact of inflation led to a staggering loss of $26.9 billion for property insurance companies last year. Florida’s property insurance industry hasn’t posted a collective profit since 2017. It's been the perfect storm of issues for Florida’s property insurance market and high inflation works against it, just as it does for the rest of us. Property insurance companies perform similarly to us. They perform best when there’s not significant storm damage, there’s low inflation, they’re not being sued and there’s a steady economy.