The number one reason Florida insurance companies fail isn’t just hurricane risk: it’s fraud and lawsuits.

Men walk past destroyed homes and debris as they survey damage to other properties, two days after Hurricane Ian hit Fort Myers Beach on September 30. Photo: Rebecca Blackwell/AP

The widespread damage from Hurricane Ian is another disaster for Florida’s already fragile insurance industry. Even though home insurance rates in Florida are nearly triple the national average, insurers have been losing money. Six have failed since January 2022. Today, Ian’s insured losses are estimated at over $40 billion.

Hurricane risk may seem like the obvious problem, but there is a more insidious driver in this financial wreckage.

What makes it so difficult for Florida insurers to survive?

Florida insurance rates have nearly doubled in the past five years, but insurance companies continue to lose money for three main reasons.

One is the growing hurricane risk. Hurricanes Matthew (2016), Irma (2017) and Michael (2018) were all destructive. But much of Florida’s hurricane damage is caused by water, which is covered by the national flood insurance program, rather than private property insurance.

Another reason is that reinsurance prices are rising – it is insurance for insurance companies to help when claims increase.

But the most important reason is the “benefit allocation” problem, involving contractors after a storm. It’s partly fraud and partly taking advantage of loose regulations and court rulings that have plagued insurance companies.

It usually goes something like this: Contractors knock on doors and say they can get the homeowner a new roof. The cost of a new roof is maybe $20,000 to $30,000. So the contractor inspects the roof. Often there is not really much damage. The contractor undertakes to take care of everything if the owner assigns his insurance benefit. Contractors can then claim whatever they want from the insurance company without needing the owner’s consent.

If the insurance company determines that the damage was not actually covered, the contractor takes legal action.

Thus, insurance companies are stuck either fighting the lawsuit or settling. Either way, it’s expensive.

Other lawsuits may involve homeowners who do not have flood insurance. Only about 14% of Florida homeowners pay for flood insurance, which is primarily available through the federal flood insurance program. Some without flood insurance will file damage claims with their property insurance company, arguing that the wind caused the problem.

Chart: The Conversation/Insurance Information Institute

How big of a problem are these lawsuits?

Overall, the numbers are quite striking.

About 9% of landlord property claims nationwide are filed in Florida, but 79% of property claim related lawsuits are filed there.

Legal costs in 2019 were over $3 billion for insurance companies just fighting these lawsuits, and all of that will be passed on to homeowners with higher costs.

Insurance companies suffered an underwriting loss of over $1 billion in 2020 and again in 2021. Even with such a premium increase, they are still losing money in Florida because of it. And that’s part of the reason why so many companies decide to leave.

Allocation of benefits is probably more prevalent in Florida than in most other states because there is more opportunity for all roof damage caused by hurricanes. State regulation is also relatively weak. This can eventually be fixed by lawmakers, but it takes time and groups are lobbying against change. It took a long time to pass a law stipulating that attorney fees should be capped.

What is the situation with insurers?

We’ve seen a dozen companies either declared insolvent or gone since the start of 2020. At least six have given up this year alone.

Thirty others are on the Florida Office of Insurance Regulation’s watch list. About 17 of them are likely to be or have been downgraded from an A rating, meaning they are no longer considered financially sound.

Rating downgrades have consequences for the real estate market. To get a loan from federal mortgage lenders Freddie Mac and Fannie Mae, you must have insurance. But if an insurance company is downgraded below A, Freddie Mac and Fannie Mae won’t accept it. Florida created a $2 billion reinsurance fund in May 2022 that can help small insurance companies in situations like this. If they are downgraded, reinsurance can act as a co-signer of the loan so that the mortgage lenders accept it.

But it is a very fragile market.

Ian could be one of the costliest hurricanes in Florida history. I’ve seen estimates of $40 billion to $60 billion in losses. I wouldn’t be surprised if some of these companies on the watch list leave after this storm. This will put more pressure on Citizens Property Insurance, the state’s insurer of last resort.

Based on a regulatory chart from the Florida Office of Insurance.
Graphic: Shahid S. Hamid

Some headlines suggest that Florida’s insurer of last resort is also in trouble. Is it really at risk, and what would it mean for residents?

Citizens are not faced with collapse per se. The problem with Citizens is that its policy numbers usually swell after a crisis because, as other insurers fail, their policies pass to Citizens. He sells those policies to smaller companies, and then another crisis occurs and his policy count grows again.

Three years ago, Citizens had half a million fonts. Now he has double that. All of these insurance companies that have left in the last two years, their policies have been migrated to citizens.

Ian will be expensive, but Citizens is full of cash at the moment as he’s had plenty of bounty increases and built up his reserves.

Citizens also have many safety nets.

He owns the Florida Hurricane Catastrophe Fund, established in the 1990s after Hurricane Andrew. It’s like reinsurance, but it’s tax-exempt, which allows reserves to be built up more quickly. Once a trigger is hit, citizens can go to the disaster fund and get reimbursed.

More importantly, if Citizens runs out of money, it has the power to surtax everyone’s policies — not just its own policies, but insurance policies all over Florida. It may also impose surcharges on certain other types of insurance, such as life insurance and automobile insurance. After Hurricane Wilma in 2005, citizens imposed a 1% surcharge on all homeowner policies.

These surcharges can bail out citizens to some extent. But if the payouts amount to tens of billions of dollars in losses, he will likely also benefit from a state bailout.

So I’m not as worried about the citizens. Homeowners will need help though, especially if they are uninsured. I expect Congress to approve special funding, as it has done in the past for hurricanes like Katrina and Sandy, to provide financial relief to residents and communities.

Shahid S. Hamid is a professor of finance at Florida International University.

Kristan F. Talley