Despite the fact that the Florida legislation finally passed a couple of bills to deal with the ever-increasing cost of homeowners insurance, it seems unlikely that premiums will start to fall anytime soon according to a report put out by Karen Clark & Company (KCC), a risk modelling firm.
The recent report, titled “Managing Expectations: Why Florida Homeowners Insurance Premiums Are Not Likely to Go Down,” claims that rates will stay expensive in Florida due to rising inflation rates, reinsurance costs as well as the effects of climate change.
“Premiums go up when claims and expected losses go up,” the report stated. It also highlighted that the Florida legislature has very little influences over most of these risk factors with litigation being the only factor they can impact.
Florida has been hit by two hurricanes with maximum wind speeds of 150 mph in the last five years. According to the report, “Recent hurricane activity is adding observational support to the findings of the most recent report from the IPCC. This report includes the scientific consensus that hurricane severity is increasing due to global warming. Scientific studies and recent data point to an increase in the proportion of major hurricanes— Category 3, 4, and 5—and more intense storms overall. These trends are projected to continue even in the IPCC best-case scenarios, increasing the risk to Florida homeowners and the losses to Florida insurers,” the report continues.
Another contributing factor to rate increases is the fact that construction costs have soared in Florida, and well as the rest of the country. Inflation combined with rising construction costs push up insurers risk exposure.
“Even if insurance rates don’t increase, homeowners premiums will increase due to the rising costs of construction,” the KCC report predicts. “Recent material and labor shortages have caused double digit annual increases in the cost of repairing or replacing a Florida home, and those increases have contributed significantly to the cost of homeowners insurance. Based on current cost indices, the average cost of construction in Florida has increased nearly 40 percent since 2017.”
As has been an issue for years, litigation is also a major driver of higher insurance costs in the state. It also makes the cost of reinsurance more expensive, costs which are passed on to policyholders.
The KCC reports says, “While some level of litigated claims is to be expected for every event, the percentage of litigated claims in Florida has been excessive relative to litigation activity in other states.”
The report points out just how bad the litigation issue is in the Sunshine State, “Comparing Hurricanes Irma and Michael to non-Florida storms, including Laura and Ida, the percentage of litigated claims in Florida has been, on average, 10 times higher than the percentage in other states. There is not as much difference in the relative size of claims—while there is a wide range, on average, litigated claims are about seven times more costly than non-litigated claims.”
KCC does expect the litigation situation in Florida to improve as the recently passed legislation take hold. “KCC’s most recently approved hurricane model includes an explicit factor of 15 percent to account for excess litigation. This factor is much lower than what is indicated by the data from Irma and Michael because it is assumed that recent legislative reforms will significantly reduce excess litigation,” the risk modeller said.
Reinsurance costs continue to plague the Florida homeowners market. The report points out, “Over the past couple of years, reinsurers have been restricting coverage and drastically increasing their prices. Reinsurers base their prices on their own risk appetites and what the market will bear and not on the models. Anyone under the misconception that reinsurers base pricing on the models, need only witness the recent 50 to 100 percent price increases that were clearly not indicated by the models.”
The high cost of reinsurance doesn’t seem like it will be going away anytime soon. The KCC report says that reinsurance CEOs are warning that reinsurance rates will not decline 2024 and could be headed up again.
Unfortunately, not a lot of good news in the KCC report for Florida residents. KCC concludes, “Due to Florida’s unique coastal position and because the population is concentrated along the coast, Florida will be disproportionately impacted by climate change and sea level rise. The only ways to significantly mitigate these impacts are more stringent building codes, retrofitting existing properties, and land use planning.”
How do I lower my Florida home insurance rate?
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