Florida Insurance Market is Collapsing

Not that this has any sort of major implications for the broad global economy at the moment, but if you live in FL, boy do I feel for you. Gather round and hear what yet unheard disasters the US could face in 2022.

Unsurprisingly, not many care as insurance markets tend to operate relatively separate from the broad financial system at least in a correlation sense. Property insurance is one of the most important but little discussed or even thought about pieces of our economy. Everyone buys it, nobody wants to, that is until they need it and then they wish they had more.

Lucky for us, FL just so happens to be probably the most natural catastrophe exposed place in the world. It’s literally a massive peninsula jetting out into the part of the ocean that has the right conditions to brew up some nasty storms on a consistent basis. Awesome. We decided to make this one of our most populous and economically powerful states. Even better.

Given the high risk for hurricane damage, FL property insurance is stupidly expensive compared to the rest of the country. Not only is it expensive though, it’s also hard to get. You can’t just call up your local State Farm guy and get the best coverage at low rates when you live on the coast. Many large carriers won’t write risk in parts of FL and for good reason, they like their money.

For this reason, their insurance market is made up by a lot more smaller carriers. They are extremely high risk companies. They make piss loads of money when they are in good times and go bankrupt left and right in the bad.

Well here we are. Litigation, catastrophes and the changing economic/rate environment have left many of these firms royally fucked. And right before wind season too, it doesn’t get much better. For a couple of years now, these carriers have been getting sued out their ass by policy rights holders (many 3rd party contractors) and it is costing everyone. Some estimates I have seen put litigation costs at causing nearly a 40% increase in prices for everyone on their insurance, that is insane.

I mentioned these smaller high risk forms a lot of people have to buy from earlier. Well unsurprisingly, many are levered up to the tits in floating rate debt as well. whether we want to admit it or not the fast easy monetary policy of the 21st century so far led us here. So as rates are rising and insurers are under more pressure than ever from litigation expenses, we are seeing policy holders surplus (equity) drain out of the market faster than we can blink.

Well what happens when that’s sweet sweet surplus starts disappearing? Bad things. Insurers rely more heavily on ratings than probably any other industry out there. You are buying the companies promise when taking out a policy, and their ratings are a reflection of the quality of that promise. Your mortgage requires a certain rating for an insurance carrier to write the policy for your home. When the carrier’s rating drops below that level, it means they largely will not be able to write property insurance any more. What happens when they can’t underwrite? No premium. No premium = no cash flow = default and bankruptcy.

We are seeing the beginnings of what could spiral into complete disaster play out FL right now, yet nobody wants to talk about it. There have been a massive number of bankruptcies in the state insurance markets as this exact scenario plays out time and time again. Not to mention larger carriers non-renewing over 50k policies in the state leaving the property owners with nowhere else to turn but Citizens.

Citizens is sort of the insurer of last resort. The coverage is shit and it costs a lot of money but at least it’s something. Well as more an more people turn to Citizens for their insurance needs, Citizens slowly starts becoming underinsured.

Citizens has to buy reinsurance to protect itself as well. Unfortunately reinsurance capacity for Florida is also drying up. The same situation, ridiculously expensive at best and at worst unavailable. A lot of that reinsurance capacity comes from institutions like big asset managers hedge funds etc at the end of the day. So as those money managers want to be more risk off given the increased likelihood of redemptions and negative performance in the markets, they reduce their allocations to reinsurance risks as well.

If Citizens becomes too under insured and a disaster hits Florida over the summer, you will see many people not able to be compensated for their losses, businesses will close, people will lose vast sums of money, mortgages will default, bad things will happen. While this would be sort of the perfect storm, and is unlikely, the risk is certainly very high. High enough for the FL government to call for a special legislative session in fact. If they are paying enough attention to consider this an emergency, I’d think you should also.

I’m hopeful that nothing will happen and this will just be some schizo rant based so far out of reality by the fall, but we have seen crazier things happen over the last 3ish years. Stay alert my friends! We don’t know what the future holds.