Q&A– Why Insurance Companies Are Entering Florida Ahead of Hurricane Season

Q&A – Why Are More Insurance Companies Entering Florida Ahead of Hurricane Season?

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Today’s Entry: Brian, I’ve had a question on my mind that maybe you have an answer for. If the upcoming hurricane season is supposed to be one of the worst ever why would so many property insurance companies want to enter Florida ahead of it? Also, why would many of the existing property insurance companies announce premium decreases for renewals? Don’t get me wrong, I’m glad to see it happen but it seems like an extreme case of one of these things not being like the other.  

Bottom Line: As the Governor’s Hurricane Conference kicks off at the Palm Beach County Convention Center this week you’ve raised an interesting point. You’re right, that with preseason hurricane forecasts all calling for a well above average hurricane season, with some suggesting that it could be “explosive”, it wouldn’t seem like an opportune time for property insurance companies to enter Florida’s market and also not an environment in which some of the existing providers would be well positioned for rate decreases – yet that’s exactly what we’re seeing.  

At last count the total number of property insurance companies that have either entered Florida’s property insurance market for the first time, or that have returned to it after having previously exited Florida, was 14 year-to-date. Additionally, at least three property insurance companies have announced policy rate decreases for holders upon renewal this year. As I’ve discussed this is evidence of Florida’s property insurance reforms of the prior two years starting to take hold which is good news going forward regardless of what does or doesn’t happen this hurricane season. But about that, why would these insurance companies want to do business in Florida this year and why would any consider cutting rates? 

The insurance business is naturally all about managing risk. The bet by insurance companies is that the premiums you pay up front, which they then invest and reap the benefits of, will exceed what they will have need to pay out to you in claims. Because of the nature of the business, there’s one macro environment event that’s provided a strong tail wind to the entire insurance sector across all types for companies that are well run. The continued rally in the financial markets highlighted by the stock market rally. With 20% plus average returns on investment over the past year for equity investors, most insurance companies of all types have been thriving with their investable assets. This is precisely the reason that Florida’s property insurers turned a profit last year for the first time in seven years. The industry actually still suffered net losses operating within the state largely due to the impact of Hurricane Idalia which brought about $3 billion of insured expenses to property insurers within the state. The profit was due to investment gains. So that’s one important factor independent of other considerations that are specific about the threat of the upcoming hurricane season.  

The next reason is the timing. It’s a protracted process for a property insurance company to gain acceptance within our state. The property insurance companies that were authorized to operate in Florida this year began the process by the middle of the year last year. None of them would have been aware of what this season’s hurricane forecast would have been at the time – not that it’s likely to have had an impact on a decision as significant as to whether to conduct business within a state or not. But then there’s the biggie. Litigation expense.  

Over the years when discussing Florida’s property insurance crisis prior to the reforms, much was made of numbers ranging from 71% to 79%. Preceding 2023 that’s the percentage of property insurance litigation Florida had as a percentage of the national total. One number that hasn’t been readily discussed is what the impact of the rampant property insurance litigation abuse meant to the industry. Yes, it was a prominent reason that Florida’s property insurance market posted losses for six consecutive years, and yes it was costing over a billion dollars every year.  

In 2022, the most recent year prior to any meaningful property insurance reforms having taken place, the total loss related to litigation expenses alone for Florida’s property insurers was $1.6 billion. How does that compare? The next closest state in the country was California with $400 million in litigation expense (with nearly three times the property insurance policies no less). So, what happened last year? The litigation expense loss for Florida’s property insurance market improved by greater than half to $739 million. As litigation filed from the era of abuse works its way out of the system that number will continue to come way down. At the point where it’s in line with the national average it will drop to about $125 million per year. That’s obviously huge money. How huge?  

The insured cost of 2022’s Hurricane Nicole was $1.6 billion. Effectively, Florida’s property insurance litigation crisis had become the equivalent of a category one hurricane striking the state of Florida every year...meaning that even if Florida wasn’t struck by a hurricane in a given year the property insurance industry still effectively was. Then, when you factor in how many hurricanes have hit Florida over the past several years – there's your crisis. So basically, heading into the hurricane season this year, Florida could be struck by at least one non-major hurricane, and the property insurance industry would be no worse off than it used to be in a season without any. That’s the rest of the calculation.