How Florida’s home insurance market became so dysfunctional, so fast

Imagine saving for years to buy your dream house, only to have surging property insurance costs keep homeownership forever out of reach.

This is a common problem in Florida, where average insurance premiums cost homeowners an eye-watering US$6,000 a year. That's more than triple the national average and about three times what Floridians paid on average for insurance premiums in 2018.

What's more, several major insurance carriers have left the state over the past year, leaving residents with limited alternatives.

As a law professor who specializes in disaster preparedness and resilience, I think it's important to understand what's driving costs higher – not least because other states could soon face a similar predicament.

Three primary factors are driving the insurance challenge. First, natural disasters are becoming more common and costly. Second, the price of reinsurance is skyrocketing. And finally, Florida's litigation-friendly environment compounds the issue by making it easy for customers to sue their insurers.

Disasters, like sea levels, are on the rise

With its location on the beautiful-yet-hurricane-prone Gulf of Mexico, Florida has long been vulnerable to the elements. Natural disasters cost the state $5 billion to $10 billion every year, the federal government estimated in 2018, the last year for which data was available.

Yet that likely understates the case today, since disasters have only become bigger, more common and more expensive since then. For example, climate change has made oceans warmer, which research suggests fuels stronger, more intense hurricanes.

As a result, Florida has experienced billion-dollar disasters an average of four times annually over the past five years – up from about one each year in the 1980s.

This surge in disasters doesn't just put lives at risk; it also wreaks havoc with the insurance market, as carriers are inundated with claims from one catastrophe after another. This makes it harder for them to turn a profit or obtain reinsurance to protect their stakeholders.

Why reinsurance matters

Insurance companies, in essence, make money two ways. First, they pool risk among policyholders. Risk-pooling is the practice of taking similarly situated individuals or properties, grouping them together, and charging similar prices for insurance since they face the same risk.

Second, they reduce risk by acquiring reinsurance. Reinsurance acts as a safeguard for insurance companies – it's essentially insurance for the insurers. Reinsurers pledge to cover a specified portion or type of insurance claim – for instance, catastrophic hurricanes – which provides a layer of financial protection.

The new era of climate disasters has thrown a wrench into the process. Reinsurance companies, grappling with a surge in claims due to more frequent and severe disasters, have found themselves forced to raise their premiums for insurance carriers. Carriers, in turn, have passed the burden to policyholders.

To try to navigate these challenges, some companies have chosen to limit coverage for specific types of damage. For example, some insurance companies in Florida will no longer offer hurricane or flood coverage. And in extreme cases, insurance companies have withdrawn entirely from the state.

Understanding this complex relationship between insurers, reinsurers and policyholders is key to understanding the broader implications of the Florida insurance crisis. It underscores the urgent need for comprehensive solutions and collaborative efforts to address evolving challenges in the insurance ecosystem.

Learning from Florida … one way or another

Florida isn't taking all this sitting down. In December 2022, state lawmakers responded to growing property market instability by passing Senate Bill 2A, a package of insurance reforms.

One major part was a rule change designed to discourage policyholders from suing their insurers. Previously, Florida law let insured individuals recover attorney fees if they secured any amount through litigation against their insurer.

The idea is that making this change will discourage needless lawsuits. However, my research as an environmental justice professor shows that attempts to exclude attorneys from the negotiation process often lead to more expensive litigation and less access to justice.

The bill also restricts assignment of benefits, a mechanism that permits third-party entities like roofing companies to negotiate with insurance companies on behalf of Florida residents. While assignment of benefits increased advocacy, it was also linked to skyrocketing claims costs.

The balancing act between providing ample opportunities and containing costs has sparked debate among justice advocates. Florida's legislative response reflects an ongoing effort to strike an equilibrium, ensuring fairness and accessibility while addressing the challenges faced by both insurers and policyholders.

Florida's actions to address the property insurance crisis raise a critical question: Will the state serve as a blueprint for disaster-prone regions, or act as a cautionary tale? After all, states such as California and Louisiana have also seen insurance companies withdrawing from their markets. Will their legislatures draw inspiration from Florida's?

For now, it's too early to tell: The policies have only been in place since the latest round of hurricanes. But in the meantime, the rest of the U.S. will be watching – especially policymakers who care about resilience, and those who want to make sure vulnerable populations don't get the short end of the stick.

Latisha Nixon-Jones does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.