Insurer’s Retreat in Florida Signals Crisis With No Easy Fix

Insurance companies have fallen into mystery. How can you stay profitable in a world where costly catastrophe risks are on the rise, yet high premiums are weighing on policyholders and angering state regulators? Uka

That question was at the heart of Farmers Insurance’s decision this week to stop renewing almost a third of its policies in Florida. It became the latest insurer to exit the state as the insurance industry grapples with rising liability costs. It’s tied to floods, hurricanes, wildfires, and other climate-related disasters.

Farmers, one of the largest home insurers in the U.S., declined to say exactly what led to the decision. Have payment costs been too high in recent years? record breaking Are multi-billion dollar disasters happening in the same way that reinsurers that sell insurance to insurers are getting more expensive? Too many lawsuits from policyholders? Or are farmers playing a game of chicken with state regulators, hoping to pull out now so they can charge customers more in the future?

“Lots of insurers in Florida have been on the brink of exit for years because they’ve lost so much money,” said Daniel Schwartz, an insurance professor at the University of Minnesota Law School. .

Most states require insurance companies to act like power companies. If you want to increase the rates you charge your customers, you must apply for regulatory approval from your state government.

Insurers’ struggle to raise rates may be one reason they’re pulling back in places like Florida and California. There, climate change is driving up claims costs (what insurers call “losses”). If companies find it difficult to raise rates, as they did in certain areas, the best business decision is to pull out.

State Farm, the country’s largest insurer, announced in May that it would stop selling homeowners’ insurance in California. Allstate last month announced it would stop selling new home and commercial insurance in the state, citing worsening weather and rising construction costs. Farmers themselves also announced this month that they would limit new homeowners insurance policies in California, citing risks from rising inflation and worsening climate disasters.

Under Florida law, regulators can refuse to raise rates or force insurers to refund customers if the interest rates that insurers are charging or trying to charge are “too high.” can. That means they can generate returns that regulators deem “disproportionately high relative to the risks involved.” ” Floridians already pay more Higher than the national average for homeowners insurance. Premiums for a $250,000 home in Florida averaged $1,981 this year, compared with a national average of $1,428.

Some experts like Schwartz say state regulators have too much control over insurers’ pricing, and the cost of paying claims continues to rise after devastating and frequent storms. Nonetheless, they argue that premiums are kept artificially low.

Other experts say what is needed is not less regulation, but more regulation, specifically operating out of the sight of consumers and selling insurance to home and auto insurers. to improve the management of the so-called reinsurance companies, which help them manage risk. These companies have raised their prices significantly in recent years. State regulators have less power over reinsurers, giving them more freedom to set premiums.

Industry lobbyists say neither, arguing that insurers are cutting back on some of their operations to reduce the number of claims-related lawsuits from policyholders.

“This operational decision was necessary to effectively manage our exposure to risk,” Farmers spokesman Trevor Chapman said in an email.

Chapman added that Farmers isn’t exiting the state entirely, just ending home insurance, auto insurance and umbrella insurance sold under the Farmers brand. Any damages incurred to the policyholder’s property before the end of the annual policy will continue to be covered. The company sells insurance under several other brands and will continue to do so.

A spokeswoman for the insurance regulator said the written notice the company sent to regulators on Wednesday was marked as “trade secret.”

Mr. Schwartz said Florida politicians and regulators must have seen this happening.

Smaller companies are disappearing in Florida’s insurance industry as well.In the past two years, eight small insurers went bankrupt in a state. A spate of exits and bankruptcies has left many homeowners with few options other than nonprofits. State-backed carriers.

Property and casualty insurers as a whole have not made a profit as a result of their underwriting operations or overall business activity in Florida since 2016, according to industry lobbying group the Insurance Information Institute. Cumulative underwriting losses in the insurance industry have exceeded $1 billion over the past three years. Last year, state insurers’ cumulative net loss totaled $900 million, according to the Institute.

“While some states, such as Louisiana, have had very bad financial years in the aftermath of record-breaking hurricanes in 2020 and 2021, since their last profitable year in 2016, Florida has had as many property and casualty insurers. No state reported sustained losses,” said Mark Friedlander. A spokesperson for the Institute, which represents consumer insurance companies.

“The problem is that between those who live in Florida and those who live in California and, frankly, the American public, there is denial about the dangers we face,” Schwartz said. rice field.

his was suggested Solution: Allow insurance companies to charge as much as they like for insurance in disaster-prone areas. Ultimately, people will stop building homes and businesses that are highly likely to be destroyed by natural disasters. “It will actually result in stronger infrastructure and better adaptation to climate change.”

Bernie Birnbaum, an insurance expert and executive director of the Center for Economic Justice, a non-profit that works for equal access to economic opportunity, has been asking how homeowners are responding to climate change risks. Mr. Schwartz’s idea of ​​letting market forces sway him is unlikely to materialize, he said.

“It’s like saying, ‘I don’t care if my house burns down as long as I can keep paying more and more each year, because I always have to pay more,'” Birnbaum said. “It’s insane.”

Insurers in Florida and other states with higher catastrophe threats, such as California, said Birnbaum said reinsurers seeking help in managing risk charged high premiums and no one was regulating them. It is said that he is struggling for

Reinsurers offer insurers a guarantee that they will find cash to pay for something big, such as a massive hurricane hitting southwestern Florida. Although the reinsurance market is large, Volatileprices skyrocket rapidly at a time when insurers are largely unprepared to deal with price increases.

Birnbaum, who sits on a committee that advises the Treasury Department on insurance matters, said reinsurers, like consumer insurers, should be more regulated over premiums. He also argued that the federal government should create a nationwide reinsurance backstop similar to the terrorism insurance program, allowing the government to step in and cover catastrophic losses if they reach a certain amount. shall be guaranteed.

The American Reinsurance Association, a leading trade group representing dozens of reinsurers operating in the United States, did not respond to a request for comment on the industry’s role or discussion of tougher regulation.

Florida reinsurance costs are up 40 to 70 percent this year compared to last year, according to the Insurance Information Institute. But Friedlander, a spokesman for the group, said reinsurance premiums in Florida were higher than in other stormy states because of insurer losses in the lawsuit.

“The man-made factor that caused the property and casualty insurance crisis in Florida was abuse of the legal system and claims fraud, not catastrophic losses,” Friedlander said. In Florida, insurance companies find it too easy for people to sue them, he said. Over the past few years, more than 100,000 lawsuits have been filed against insurers in Florida each year, he added.

Insurers have asked for more protection from lawsuits, and Florida legislators recently got this done. Starting in 2021, state legislatures have passed five bills that make it harder for policyholders to sue insurers. The new law will change how policyholders obtain coverage for legal costs and prohibit shifting liability for claims to third parties such as construction companies that policyholders contest for payment.

“These are the first steps towards a stable market environment, but due to the perilous conditions facing Florida consumers and insurers for many years, it may be years before we see any improvement,” Friedlander said. ‘ said.

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