Rhode Island senator says Florida’s insurance market looks to be ‘swirling the drain’ [South Florida Sun-Sentinel]

Florida’ property insurance market looks like it’s “swirling the drain,” a Democratic member of the United States Senate said Wednesday in a hearing on the growing insurance cost crisis facing the nation.

Sen. Sheldon Whitehouse of Rhode Island blasted Florida’s insurance industry in the opening statements of a two-hour Senate Budget Committee hearing that aired diverging views between Republicans, Democrats and witnesses they summoned about the cause of rapid insurance cost hikes.

Democrats asserted that premiums are rising because of more severe weather events caused by climate change. Republicans countered that the primary culprit is inflation caused by exorbitant federal spending by the Biden Administration.

Whitehouse — without noting recent improvements, including legislative reforms that have returned the industry to profitability and led to the entry of eight new insurers in the state — portrayed Florida’s insurance market as teetering on the brink of default.

Residents pay more than $6,000 on average for insurance, he said, more than three times the national average of $1,700.

A recent South Florida Sun Sentinel analysis of data provided to state insurance regulators by more than 60 state-regulated insurers that insure single-family homes showed that the average annual premium in the first quarter of 2024 had reached $3,511.

The cost increases have “put a strain on many Florida residents,” the senator said. “They install hurricane windows and doors, but premiums continue their upward march. They put off retirement, or skip vacations. For some … it is simply too much.”

The loss of more than a dozen insurance companies from Florida’s residential market between 2022 and 2023 resulted in growth of state-owned Citizens Property Insurance Corp.’s market share from 4% in 2019 to “as much as 17%” in 2023, Whitehouse said.

“If it has to pay out claims that exceed its reserves, Citizens can levy a surcharge on Florida policyholders across the state,” he said. “Good luck with that, particularly if the surcharge grows to hundreds or even thousands of dollars.”

Citizens, the state’s “insurer of last resort,” regularly invokes the possibility of state-mandated surcharges and assessments to dissuade Florida homeowners from seeking its policies.

Whitehouse said that “to depopulate its books, Citizens lets private insurers cherry-pick its least risky policies.” He added, “Those private insurers may have problems of their own.”

Whitehouse reiterated conclusions by three scholars in a research paper released in January that Florida homeowners are more likely than other Americans to be covered by “fragile” insurers who were given acceptable scores by the financial strength ratings agency Demotech.

The issue dates back to the years after Hurricane Andrew, when national insurers stopped writing policies in the state and were replaced by startup companies that were too small to be evaluated by traditional financial strength rating agencies like A.M. Best and S&P Global.

Florida’s insurance regulators convinced Ohio-based Demotech to rate the smaller companies, and its ratings were accepted by federally backed mortgage guarantors Fannie Mae and Freddie Mac, which finances a majority of mortgages in Florida and the U.S.

Demotech, the paper said, gives high ratings to insurers that would be rejected by A.M. Best and S&P Global. As a result, Fannie Mae and Freddie Mac underwrite more Florida home loans than they would if relying on A.M. Best or S&P to rate insurers, the paper stated.

That puts the federal budget at risk, Whitehouse asserted.

One of the paper’s authors, Harvard School of Business assistant professor Ishita Sen, appeared at the hearing. Florida insurers rated by Demotech control about 60% of Florida’s insurance market, she said.

“These insurers are low-quality across a range of operational and financial metrics,” she said.

If the insurers cannot pay claims and homeowners who are left with unrepaired homes default on loans, the mortgage guarantors will have to seek funding from federal taxpayers, she said.

Joe Petrelli, president of Demotech, responded by email on Wednesday by pointing out that the report’s authors admitted to creating an “A.M. Best rating replication model by mapping observable insurer characteristics to A.M. Best financial stability ratings.” They stated that using their model, they predicted “counterfactual” (or made up) A.M. Best ratings for Demotech insurers, Petrelli pointed out.

“A comparison of actual ratings to actual ratings indicates that the government-sponsored enterprises (including Fannie Mae and Freddie Mac) have been fine when using Demotech financial strength ratings,” Petrelli said.

“Why the authors utilized their counterfactual, fabricated A.M. Best ratings in their comparison and not actual A.M. Best ratings is baffling,” he said. “Why they fail to discuss this in testimony is unprofessional.”

Whitehouse has been criticizing Florida’s insurance industry since sending a letter in November to Gov. Ron DeSantis, Florida Insurance Commissioner Michael Yaworksky and Tim Cerio, president, CEO and executive director of Citizens, that demanded a long list of information and documents about the state’s plan to address increased underwriting losses from “climate-related extreme weather events.”

At that time, Whitehouse said his demands were justified by the risk that Florida would turn to the federal government for help after exhausting claims-paying abilities within the state following a costly hurricane.

Cerio responded with a letter stating that Florida has never requested federal assistance because of laws requiring that Florida insurance customers pay surcharges and assessments to cover any shortfall.

In March, Whitehouse sent another letter complaining that state officials did not respond to his demand for documents. Cerio issued another statement reiterating that Citizens will always be able to pay claims to its policyholders.

Whether that turns out to be true remains to be seen. The National Oceanic and Atmospheric Administration has predicted an 85% chance of an above-normal hurricane season this year, with 17 to 25 named storms and four to seven major hurricanes.

Another witness called by Whitehouse was Deborah Wood, a longtime former Broward County resident who said she and her husband decided to sell their home in Plantation in January 2023 after their insurance renewal bill exceeded $8,000.

The bulk of the hearing focused on causes and potential effects of rising insurance costs across not just Florida, but the entire country.

Sen. Chuck Grassley, the ranking Republican member of the committee, put the blame on what he called a refusal by Democrats to curb “reckless federal spending” that has caused inflation to increase by 20% since President Biden took office.

“It’s simply more costly to pay the bill for insurance claims,” he said.

Grassley called a witness, EJ Antoni, a research fellow at the conservative Heritage Foundation’s Grover Hermann Center for the Federal Budget, who said another factor was “widespread rioting caused by groups like BLM (Black Lives Matter) and Antifa in 2020 (that) caused $100 billion in damage — a massive financial loss for the insurance industry.”

Antoni did not cite a source for his $100 billion loss claim. In September 2020, Fox Business cited the Insurance Information Institute’s estimate that riots following the death of George Floyd in May of that year would be the costliest in insurance history, costing between $1 billion and $2 billion.

Antoni also blamed “general lawlessness in American cities over the last several years and the refusal of government authorities to protect private property” that he said “has resulted in more damages, more claims, and ultimately, higher premiums.”

But even Grassley acknowledged that insurance costs are increased by nonstop development along the nation’s coastlines, where homes are more susceptible to hurricane damage.

“There are more rich people living in areas affected by weather,” he said, “all the way from Newport, Rhode Island, down to Miami Beach, Florida.”

Ron Hurtibise covers business and consumer issues for the South Florida Sun Sentinel. He can be reached by phone at 954-356-4071, on Twitter @ronhurtibise or by email at [email protected].

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