Milton shows Florida needs unpopular insurance reform

COMMENTARY

Hurricane Milton is the latest sign that Florida lawmakers need to do much more to shore up the rickety property insurance market and keep the state viable for homeowners. Recent reforms have focused on the low-hanging fruit of policy action, but climate change will require that policymakers take bolder and politically unpopular steps.

The good news is that private insurers entered this hurricane season on a much-improved footing.

That's thanks in part to higher premiums pushed through to consumers in recent years; reforms to stem a wave of excess and often frivolous litigation against them; and a brief stretch of less-than-terrible weather. "They are in a strong financial position to act as financial first responders to Hurricane Milton," Mark Friedlander, spokesman for the Insurance Information Institute, an industry group, told me Wednesday.

As the state takes stock of the human toll from Milton in the coming days, many residents can take some solace from knowing their insurers can help them put their lives back together.

What's clear, however, is that part of the improvement has been a simple function of meteorological luck.

And luck isn't an effective long-term strategy to keep the residential property insurance business afloat.

As my Bloomberg Opinion colleague Mark Gongloff has written, climate change is making storms more powerful as they pass over hot ocean waters. At the time of writing, it was far from clear what the damage from Milton would be. But there's little doubt that the odds are moving against us year after year.

So what else should policymakers do?

First, the state should move more forcefully to shrink government-backed Citizens Property Insurance Corp., the so-called insurer of last resort. Far from a last resort, Citizens has become the leading insurance company in Florida, with an 18.5% market share and hundreds of thousands of policies in the area of the state most exposed to the latest storm.

The state-backed entity is now so large that it stands in the way of a healthy and effective insurance marketplace. It issues policies at below the actuarially appropriate rates, thus curbing private insurers' ability to properly price risk.

It also introduces moral hazard by allowing homeowners to assume too much risk, potentially putting more people in harm's way than there otherwise would be.

If it doesn't have enough money to cover insured losses in a catastrophe, Citizens has the right under Florida law to hit all of its customers with an unplanned assessment to help cover the difference. If needed, it can also issue such an assessment to all Floridians with insurance policies. According to a July press release, it would take losses exceeding $14.4 billion to come to that, a once-in-74-year hurricane.

That's an insult-to-injury outcome that Floridians desperately need to avoid after a disaster.

Second, local authorities should expand incentives for carrying flood insurance. While the sustainability of the National Flood Insurance Program faces its own questions, the fact remains that flood insurance effectively underwritten by the federal government is available relatively inexpensively to most Floridians, and yet the majority of them don't have it. Fewer than 1-in-5 have flood insurance policies, and the rates of uptake are far lower in inland population centers. As Hurricane Helene showed in North Carolina, extreme flooding can happen anywhere, and the risk is becoming greater with the changing climate.

Under the most recent reforms, most residential policyholders with Citizens will soon be required to hold flood insurance, typically provided through the NFIP. That's a step in the right direction. But state and local governments need to explore bold new options to improve on the 1-in-5 coverage ratio, including bundling it with real estate taxes. People are always welcome to opt-out and self-insure, but the default should be to assume that flood coverage is needed in most of Florida. If he makes it a priority, Republican Governor Ron DeSantis has the sway in his party to get such changes approved.

As a resident myself, I'm not a Florida real estate doomer. Better risk-pricing models, stronger building standards and sheer human ingenuity will all help the Sunshine State in the years ahead. But there's no question that there's a price to be paid for living here in the age of climate change. If policymakers want to keep the insurance industry around for the long haul, they'll have to embrace that reality, as unpopular as it may be in the short run.

Jonathan Levin is a columnist focused on US markets and economics. Previously, he worked as a Bloomberg journalist in the US, Brazil and Mexico. He is a CFA charterholder. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Opinions expressed by columnists do not necessarily reflect the views of Vermont News & Media.