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In recent weeks, pressure has mounted on lawmakers to do something – anything, really – about the rapidly deteriorating home insurance market in Florida. Homeowners across the state are getting policy cancellation notices in droves, forcing them to hunt desperately for any company that will ensure the house where they live. An easy solution to this growing problem, though, remains elusive.

But the first step toward solving a problem, as the saying goes, is to admit you have one.

On that front, Florida leaders, from Gov. Ron DeSantis to Senate President Wilton Simpson and House Speaker Chris Sprowls, have at least acknowledged that Florida has a crisis on its hands. It’s a crisis that has been hard to miss: six property and casualty insurance companies have become insolvent since 2017, and six others have taken drastic steps to reduce their exposure in Florida, with some pulling out of the state completely, others canceling their riskier Florida policies, while the rest have simply refused to take on new Florida customers.

Why are Florida insurers in such dire straights?

Big storms cause big problems

A combination of factors is to blame, starting with the simple and unavoidable fact that Florida is a gigantic peninsula jutting out into the warm, hurricane-friendly waters of the mid-Atlantic Ocean and Gulf of Mexico.

The state has gotten clobbered with its fair share of extremely devastating hurricanes since 2016: Hurricane Hermine trashed the state’s capital city and surrounding communities in 2016, followed almost immediately by Hurricane Matthew. And although Matthew technically missed landfall, it nevertheless brushed violently along the entire length of Florida’s east coast, close enough to cause significant damage to homes and businesses along 250miles of some of Florida’s most expensive beachfront property.

The very next year, Hurricane Irma slammed into the Florida Keys and then took the absolute worst possible path, straight up the center of the state, engulfing vast swaths of residential areas in heavy rains and wind. To this day, it remains the most expensive storm in the history of the state, causing billions of dollars in wind and flood damage, and devastated citrus crops and other industries.

Then, in 2018, Hurricane Michael tried to wipe Mexico Beach off the map. The Category 5 storm tore a path of destruction 100-miles wide by 80-miles long through the heart of the state’s panhandle.

Hurricanes weren’t the extent of the damage, either. There are the tropical storms which bring heavy rain and damaging winds that other states experience far less frequently.

Those damages add up. A billion here, a billion there. Pretty soon we’re talking about real money.

The math doesn’t add up for Florida insurers

On average, insurance companies across the nation pay out an average of $100.70 on every $100 of premiums they take in. While that may sound like a financial loser for the insurance company, they actually make a profit because they invest those premiums before paying them out. Typically, insurance investments make about 7 percent, which is how the companies are able to stay in business and provide homeowners protection from catastrophic damage.

But compared to the rest of the country, Florida is a significant outlier. According to R Street Institute, in 2016-2019, the Florida homeowners insurance market reported a combined ratio of 117.5 percent. This means that for every hundred dollars of premium received, insurers paid $117.50 in losses and expenses. Florida insurers actually outperformed other insurers on the investment side, making about 9 percent, but that still means they ended up losing almost 9 percent overall for every homeowner they insured.

Soaring premiums haven’t kept pace with insurance company losses, and homeowners simply can’t afford much more. No wonder insurance companies are saying they’ve had enough of doing business in the Sunshine State.

The Citizens Insurance: a ticking time bomb

With so many insurers packing up and leaving customers in the lurch, homeowners are increasingly turning to the state’s so-called insurer of last resort: Citizens Insurance, which is subsidized by the state. In late March, Citizens President and CEO Barry Gilway reported that his company would likely have more than one million policies by the end of 2022, and Citizens is adding policies at a clip of 5,500 per week.

A single storm similar to Irma, that takes out a broad swath of residential areas, could cause a financial catastrophe for Florida. In order to manage that much exposure, Citizens is considering a massive 11 percent hike in premiums, but property owners in some areas of the state, like South Florida, would likely pay substantially higher rates than elsewhere.

The rate hikes could lead to their own financial problems for homeowners who simply can’t afford to pay their mortgage and a significant increase in insurance costs. With rising interest rates, Florida’s home market could cool off quick.

Litigation exacerbates the problem

With so many storms, a high number of insurance claims are bound to be filed. And inevitably, more claims means more litigation. But Florida remains an outlier there, too. According to National Association of Insurance Commissioners (NAIC) data mined by the Florida Office of Insurance Regulation, while Florida homeowners insurance claims accounted for just over 8% of all homeowners claims opened by U.S. insurers in 2019, homeowners insurance lawsuits in Florida accounted for more than 76% of all litigation against insurers nationwide.

Simply put, that’s insane, and it’s unsustainable.  Something’s got to give.

Fraud and abuse

From sinkholes fears to fake roof damage, to allegedly leaky pipes, there seems to be no shortage of ways bad actors can take advantage of the insurance system to make false or exaggerated claims to bilk policies and drive up costs for insurers and homeowners alike.

Nationally, experts estimate that more than $80 billion in fraudulent insurance payments are made annually. Given Florida’s outsized role in the insurance market, there’s little doubt that a good chunk of that number can be traced back here.

Among the most common fraud schemes: claims for wind damaged roofs after a hurricane, when only normal wear and tear is present. Last month, Florida CFO Jimmy Patronis announced the arrest of two men who were charged with nine counts of fraud in connection with this type of scheme.

Lawmakers have attempted to address the fraud issue in recent years but more can still be done.

Bottom Line

Lawmakers will need to consider a broad range of actions that seek to reduce litigation, cut costs, install stiffer penalties for fraudulent claims, bolster the resources for fraud investigation claims, and revamp Citizens Insurance so that Florida taxpayers are not on the hook after the next major storm.

Florida Gov. Ron DeSantis said Monday that he will call a special session of the legislature to address rising property insurance rates in the state.

The Republican governor said the special legislative session will occur in May and focus mainly on the “reform of the property insurance market" but could address other topics. He said he would sign a proclamation this week containing meeting dates and additional details.

DeSantis said the goal on property insurance would be to “bring some sanity and stabilize and have a functioning market.”

The announcement comes amid growing consensus among lawmakers to address spiking rates and other problems in the state's property insurance market. Attempts to pass legislation around property insurance failed during the regular legislative session in the GOP-controlled statehouse earlier this year.

“After months of public outcry, newspaper headlines, and Democrats raising the alarm all session long, the Governor has finally addressed the growing homeowner’s insurance crisis," said Sen. Jeff Brandes, a Republican who has been pushing for a special session on property insurance.

Joseph Petrelli, president of Demotech, a company that rates the financial stability of insurers, said one prime factor driving up Florida’s homeowner rates is state court rulings that have made it highly profitable for lawyers to sue insurance companies even if the amount won is relatively small.

Petrelli added that Florida's premiums are also driven up by its rules governing roof replacement, with the state requiring that any roof incurring damage of 25% or more in a storm or other event must be fully replaced.

But Amy Boggs, a St. Petersburg attorney who chairs the Florida Justice Association's property insurance committee, disputed Petrelli's contentions. She said one problem is that the insurance companies are claiming they aren't profitable, but their financial records are not made public so it is impossible to test the veracity of their claims. She said the Legislature passed a law last year limiting attorney fees, so that is no longer an issue.

For roofs, she said, if insurance companies are not going to have to fully cover older roofs, they should be required to tell consumers how much they are covering and how much that will decrease the premium.

She said the only reason the number of lawsuits in Florida is high is that insurance companies often try to stiff their customers out of tens of thousands of dollars. She said in one recent case she handled involving a home destroyed in Hurricane Irma, the property insurer tried to pay about $2,000, saying the damage was caused by flooding that its policy didn't cover. She said arbitrators disagreed and ordered the company to pay $233,000.

“No one is suing over a couple thousand dollars,” Boggs said.

If the Florida homeowners’ insurance market were in a medical exam, the diagnosis would find the patient in dangerously poor condition. The patient’s vital signs—its financial results—are troubling. What is more, there are multiple co-morbidities. The welter of symptoms collectively reveal the patient to be one step away from the emergency room. Consider seven signs of sickness below:

1. Red Ink. Insurers operating in Florida overwhelmingly report unprofitable results. Insurance companies collectively lost $1.5 billion of their Florida business in 2021, a year in which no hurricanes struck the peninsula.

In 2016-2019, the Florida homeowners insurance market reported a combined ratio of 117.5 percent. This means that for every hundred dollars of premium received, insurers paid $117.50 in losses and expenses. This compares to the overall insurance industry reporting a combined ratio of 100.7 percent. The industry’s investment income ratio—investment income divided by net premium—of 7.9 percent renders the results of the overall industry profitable, with a seven-point profit margin. The investment income is not, however, sufficient to pull Florida homeowners business into the black, as figuring in investment income resulted in an operating margin of 109.6 percent, which means Florida homeowners insurers on average lose $9.60 for every hundred dollars of premium revenue.

2. Administration of Last Rites. Several Florida insurers have become insolvent in recent months and years. The common denominator in these companies’ corporate obituaries is claims costs far outpacing premium growth. The most recent casualties include Gulfstream, Avatar and Johns.

3. Be a quitter. Several property insurers are realizing that continuing in the Florida market is throwing good money after bad, and are strategically withdrawing from the state. The most recent such announcement, in March, was from Lexington Insurance Company, part of the American International Group family. What makes Lexington’s departure troubling is that Lexington is an excess and surplus (E&S) lines insurer. E&S companies concentrate on high-risk business no standard insurer will touch. Whereas standard insurers run out of burning buildings (figuratively), E&S carriers run into burning buildings. Because they are willing to insure business others won’t, regulators allow E&S insurers the freedom to charge premiums and issue insurance contracts as they see fit, without having to abide by the guardrails established by state-based insurance regulators overseeing standard lines insurer rates and forms.

4. Limit your losses. Insurers continuing to operate in the Sunshine State are taking defensive tactical measures, cancelling policies, restricting coverage and raising rates (see table below).

5. Those who fight and run away live to fight another day. The growth and profitability strategy for insurers with a Florida footprint is to increase their business outside of the state while shrinking their Florida portfolio. For example, Heritage insurance, 86 percent of whose 2021 business was in Florida, reported in its Q4 2021 earnings call that it had a 10.9 percent decrease in Florida personal lines policies and a 10.7 percent increase in personal lines outside of Florida.

6. The Swelling of Citizens. Citizens Property Insurance Company (Citizens), the state-run “insurer of last resort” is becoming the “insurer of first resort” as private market insurers refrain from offering coverage to customers who cannot find insurance elsewhere. In late March, Citizens President and CEO Barry Gilway projected his company could have more than one million policies by the end of 2022. Citizens is adding approximately 5,500 new policies per week. At the end of March 2022, Citizens had 801,341 policies, up from 570,000 one year ago.

7. Litigation Gone Wild. In a recent Citizens report, Gilway also noted a “disturbing trend” in year-to-date litigation through June of 2021—the number of lawsuits against insurers, excluding Citizens, increased 51 percent year-over-year to 50,951 versus 33,800 in the first six months of 2020. The longer-term picture is disturbing—the same report reveals that the rise in Florida homeowners’-related lawsuits more than tripled from 27,416 in 2013 to 85,007 in 2020.

Litigation, Litigation, Litigation

Unlike several Louisiana insurers that succumbed to losses from Hurricane Ida in 2021, Florida insurance failures and pullouts were not driven by natural catastrophe losses. The cause of the Florida woes is excessive litigation.

Although excessive litigation is the proximate cause of Florida’s property insurance issues, it’s not appropriate to blame the lawyers. Lawyers litigate—that’s their job. The problem has arisen from the unintended consequences of a cluster of laws and state Supreme Court decisions that created loopholes enabling contractors, lawyers and homeowners to inflate the number and the value of claims payments. A comprehensive report by Guy Fraker on the dire condition of the Florida insurance concurs with this assessment, finding that “everybody’s just leveraging the rules of the game.”

The Florida Office of Insurance Regulation 2020 annual report presents the striking statistic that “in 2019 Florida accounted for 76.45% of all homeowners’ suits opened against insurance companies in the U.S. despite only accounting for 8.16% of all homeowners’ claims opened by insurance companies in the U.S.”

The Cure

Reform of the broken Florida homeowners insurance market requires resolve in the state legislature to pass a sweeping set of reforms. In the legislative session ending March 2022, the only significant bill to be presented was SB 1728, which was temporarily postponed, and ultimately failed due to never being reconsidered in the final days of the 60-day regular session. This bill takes aim at unscrupulous roof contractors, but it is medicine too thin for a patient seriously ill that may go on life support if this year’s hurricane season is rough.

Just as operating on a patient suffering from multiple diseases is complex, solving the Florida insurance issues is no easy undertaking. We suggest the following legislative initiatives be introduced:

• Slay the roof replacement monster. Roofs should be valued on an actual cash, rather than replacement cost basis. A homeowners’ insurance policy is not a maintenance agreement. The natural wearing out of a roof is not a covered cause of loss.

SB 76, approved in the 2021 legislative session, took aim at unscrupulous roofing contractor solicitation practices, including contractors making promises for “free roofs” when any damage is the result of roof age rather than wind damage. A federal court blocked that portion of the bill, alleging that roof contractor solicitations are a form of protected free commercial speech.

SB 1728, as introduced in the 2022 legislative session, would allow contractor solicitation and advertising provided the contractor present a statement to the homeowner clarifying that the homeowner is responsible for paying the deductible. The statement also stipulates that it is a felony for the contractor to waive the deductible or file a claim with false information. It would also introduce a roof-only deductible for new policies.

• Direct high-hazard properties to E&S market. Properties exposed to high hazards because of location or because their construction is not stormproof should not be artificially subsidized by the broader market. In California, which has its own homeowners insurance issues from wildfires, the volume of E&S homeowner premium has tripled since 2018.
• Eliminate one-way-attorney fees. Assignee plaintiffs in the form of service providers repairing insured damage account for approximately one third of lawsuits filed against insurers. There is a high degree of concentration in just a few plaintiff attorney firms.
• Introduce lodestar fee. A lodestar fee is an attorney’s fee calculated by multiplying a reasonable number of hours spent on a case by a reasonable rate. A bill (SB 1910) was introduced to achieve this reform in 2022, but it died in the Banking and Insurance committee.
• Reform Citizens. Citizens should have rates reflective of the inherent risk of a property. Citizens’ rate increases are artificially capped at a maximum of 11 percent increases. In the private market there is no such cap on rate filings, which present the actuarial justification for requested rate change to the state regulator.

Without a special session focusing on addressing the pressing Florida property insurance problems, it appears likely that the situation will only get worse. June 1 is the date for renewal of reinsurance treaties protecting Florida insurers. Expectations are for reinsurance rate increases, which will be passed on to homeowners, pushing Florida homeowners insurance premium levels to yet higher nosebleed levels. June 1 is also the official start of the Atlantic hurricane season. If there is a silver lining to this cloud, it is that additional pain may spur legislators to take action and support needed reforms, and to do so with dispatch.