Florida is holding another special legislative session this week to address the failed home insurance market. With FHCF wobbling, the future of many private insurers in the balance, and many residents being priced out of the market, the need for a solution has never been more pressing.
Currently, nearly every interest group involved is losing. Homeowners can’t find affordable coverage, the state is risking financial calamity, and insurers can’t make a profit. The only winners are the roofers and lawyers leeching off the system.
And yet, it is likely the can will again get kicked down the road. None of the rumored proposals (other than perhaps a serious reform of one way legal fees) are likely to make any difference.
The challenge is, instead of reforming the system to make it attractive to new entrants, Florida keeps attempting to accomplish the impossible. Namely, they want lower rates, lower reinsurance costs, to allow zombie insurers to live, and let the lawyers and roofers keep feeding off their parasitic host, the insurance industry.
These goals are clearly at odds with each other and thus unachievable. Furthermore, they are stupid goals. Floridians shouldn’t care what happens to lawyers, roofers, or barely solvent local insurers. They should care only about the cost of insurance and whether their provider will be around to pay if they have a claim.
Table: Who Florida Wants to Help vs. Who Florida Needs to Help
| Needs Help | Deserves Help | Likely To Get Help | Good Outcome? | |
| Homeowners | Yes | Yes | Unclear | Unclear |
| Zombie Insurers | Yes | No | Yes | No |
| National Insurers | Yes | Maybe | No | No |
| Lawyers/Roofers | No | No | Unlikely | Hopefully |
| Citizens/FHCF | Yes | No | Yes | No |
In light of the feckless approach of the politicians, I will offer some actual proposals that could potentially fix the system. Some are rational and obvious, but which the politicians likely lack the will to implement. Others are more attention grabbing and have their own flaws, but would at least improve upon the status quo.
What follows are my free ideas to fix the system. It will take a combination of them to make real progress. If you know anyone in Tallahassee, feel free to forward these along.
The Obvious Answers That Will Never Happen
1. Raise Insurance Rates
2. Remove the Cancer
3. Make Citizens Undesirable
4. Kill the Zombies
The Politically Unacceptable
5. Raise Taxes
The Crazy Enough To Work
6. Tax New Residents
7. Ban Auto Cherry Picking
The It’s Hard, But It Will Actually Work
8. Cat-Asset-Rophe Backed Securities
Raise Insurance Rates
Look, this isn’t that hard. Markets work. If you let the market set a fair price, there will be plenty of capacity.
Will that price be affordable to all? No, but you know, it’s not affordable for me to buy a penthouse apartment with a view of Central Park. I’m not asking anyone for a subsidy so I can get one.
Not to be cavalier about it, but part of the problem is residents of Florida want affordable housing, locked in low property taxes, no income taxes, AND cheap insurance. That may not be a realistic expectation, especially if you want to live near the beach.
Life is full of choices. If you can’t afford the insurance, maybe you should live in a different part of the state, or even a different state altogether.
Now, there are certainly lower income people who have lived in the same place a long time and insurance has risen well beyond any reasonable expectation. Those people can make a good argument for a subsidy. Heck, even ChatGPT could figure that idea out.
But if you moved to Florida in the last say ten or twenty years, you absolutely knew insurance was expensive and it’s part of the cost of living.
You should expect to pay a fair rate given the unique risks that come with living in Florida – natural and man made.
Remove the Cancer
Speaking of those unique risks, it’s not just that Florida has the highest expected cost from natural disaster in the country. It also has the highest cost from fraud.
The combination of roofers and lawyers getting homeowners free roofs at the expense of insurance companies is a big part of why rates need to be so high. If you live in Florida and want lower rates, tell your representative to stop the free roof racket.
Amazingly, there is discussion of finally removing one way lawyer’s fees. This would be an important reform if it happens. Even if it does, more needs to be done to prevent roofers from getting rich off the backs of homeowners.
Roofs that meet current codes are designed to last 30 to 50 years. You don’t get a new one every time there are a few loose shingles. If that’s what you want, then your insurance bill is going to be unaffordable.
Fix the fraud and rates won’t need to be raised nearly as much.
Make Citizens Undesirable
So the first two ideas get talked about a lot. This next one is just as obvious, but is hardly ever discussed.
Citizens should be the market of LAST resort, not first. If I lived in Florida, I would do everything I could to get a Citizens policy.
Why? I know the state of Florida will find a way to pay me after a claim. That’s the most important thing. Beyond that, my annual rate increases are capped and I can’t be non-renewed. Why wouldn’t I want that?
In reality, I should fear going to Citizens. It should charge me the highest rate and offer bare bones coverage.
This would protect the state from taking unbearable risk, as they are today, and it would awaken homeowners to demand better private solutions…which would require the legal reforms mentioned above.
Letting Citizens be a convenient solution for homeowners is a giant obstacle to true reform because, hey, why should I care if my neighbor gets a free roof? I’ve got a Citizens policy that takes care of me, so I’m all set.
If the state wants to subsidize homeowners, it is better off doing so by providing cheap risk mitigation and creating penalties for building in high risk areas.
Kill the Zombies
A lot of attention at the special session will likely be about how to keep local carriers and the FHCF from failing. This is putting a band-aid on a severed limb. It’s too late.
Florida has run a two decade experiment in letting thinly capitalized insurers assume most of the state’s risk. It hasn’t worked and has created giant risk to the financial position of the state due to the subsidies offered by FHCF and Citizens.
It’s time to put an end to the experiment and figure out how to make the market attractive to well capitalized insurers who don’t have the risk of disappearing every summer.
The legislature likely doesn’t understand the risk that many of the private Florida insurers will be unable to buy reinsurance at economic terms next year. The combination of higher prices and greater retentions will mean carriers will struggle to keep their Demotech rating.
Letting the state provide cheap funding to prop up the existing actors is not a solution. It only delays the collapse of the system until the next storm. If Florida wants a real crisis, wait until it raises $10B of FHCF debt, there is another hurricane, and it has to default on the debt plus assume a ton of business through Citizens.
Bailing out the local insurers with artificially cheap reinsurance may help the CEOs of those companies keep employment, but it is unlikely to help homeowners. The risk of a customer going unpaid after a large claim is meaningful. Let’s see how runoff works out for United and some of the others who didn’t make it through this year.
Making sure all homeowners have insurance from a provider that can pay all its claims after a large hurricane should be the top priority. The only way to really be sure of this is to attract large balance sheets to the state, which obviously requires significant reform.
Otherwise, the slow motion train wreck will continue until Citizens has 50% or more of the market.
Raise Taxes
I know, this is Florida, that will never happen, right? But when general revenues are being used to pay for hurricane claims, what do you call that? Residents are paying taxes to cover people’s home insurance claims.
If too much general revenue needs to go to pay off roofers, then taxes eventually will go up (or other services get cut).
The truth is, if you live in Florida, you should think of home insurance as an offset to your low taxes. There is no free lunch. You pay no income tax and you barely pay property tax. The trade off is you pay higher insurance premiums. This shouldn’t be surprising or upsetting.
For those who don’t live in Florida, you likely know there is no income tax. What you probably don’t know is property taxes are artificially low. In addition to broad exemptions, assessment increases are capped at 3% annually.
In many parts of Florida, housing prices have doubled in the last five years. So let’s say you bought a $500K house five years ago. You were probably assessed at $400K and paying about $4,000 in tax.
Today, the house is worth $1M, but the assessed value is suppressed at $465K, so you’re paying like $4,650 in tax instead of $10K (which would still be low vs. a similar house up north).
So yeah, you’re insurance costs $5,000 more than in New York but your property taxes are much, much less.
This is all a long way of saying repeal the Homestead Exemption and use some of the increased funding to subsidize home insurance in a way the state can afford.
Tax New Residents
Since repealing the Homestead is likely political suicide, I have a more practical solution: tax all the people moving in.
Let’s be honest, all these people coming in are trying to free ride the system. It’s the Tragedy of the Commons.
They want to leave behind their high taxes and skim off the Homestead Exemption and the zero income taxes while adding more risk to the insurance system.
Clearly, based on property price appreciation, these people are willing to pay a lot of money to reside in Florida. Why not make them pay a little more?
In return for increasing the TIV (total insured value) of Florida hurricane risk, they should pay a special stamp tax when they move in. How about 1% of the property value gets put aside in a special fund to support Citizens? That seems more than fair for the added risk they are creating for the state.
You want to know how many New Yorkers will refuse to move to Florida for a one time 1% cost? Maybe three. This is an absolute no brainer.
At least 100,000 people move to Florida each year (more in recent years). At a $500K average price, a 1% tax raises $500M/yr.
Make the new residents pay a “migration” tax. It’s simple, it won’t upset people who are already residents, and it will raise a lot of money. You’re welcome, Florida!
Ban Auto Cherry Picking
OK, this one is going to be controversial. To be clear, I’m not advocating for it, but in a world of bad choices, this may be a less bad choice than letting Citizens have 50% market share.
Those with long memories will recall about 20 years ago, there were trial balloons about forcing the large carriers to write more homes.
This went nowhere, but given what has gone on since, it may be worth another look. State Farm, Allstate, and Progressive each have double digit market share in Florida auto with a combined share of nearly 50%.
Their combined share of the home market is about 13% (less than Citizens!). Should these carriers be permitted to rake in auto profits while not being a good neighbor for homeowners?
Clearly, suggesting every auto policy should be offered a home quote isn’t feasible, but there are alternatives. For example, if you don’t offer a home quote, you may not be permitted to raise the auto rate. Or maybe your home market share needs to be at least 1/2 of your auto market share?
But something should be done to encourage these companies to write more home if they want the juicy auto. As long as they can write the home at a 100 CR, I doubt anyone would give up their auto book. They make way too much money on the cars.
Is this fair? No. Is it legal? I’m sure there would be a fight, but it would certainly be easy to make up excuses to deny auto rate hikes. Would it bring more capacity to the market? Yes.
Obviously, the best way to do it would be to tie legal reforms to this proposal. At the end of the day, the biggest challenge is bringing new capacity to the market and that means finding a way to get the national auto writers to commit to writing more home as well.
Trading legal reform and approving meaningful rate hikes for a commitment to grow their market share feels like a sensible compromise.
Cat-Asset-Rophe Backed Securities
One way to make the prior suggestion more palatable is to add another carrot for the large carriers. The most stable source of capital is public security markets. If there were a way to securitize Florida wind risk in bond markets, this would alleviate a lot of issues.
Of course, this requires sufficient pricing to entice credit investors. The good news though is that bond markets require lower returns than reinsurers.
Before I get to the details, what’s the carrot for the large insurers? They can administer the policies that go into the pool, similar to the Write Your Own Flood program or the Federal Crop program.
Imagine if the state said any national carrier who writes a policy for their own balance sheet also gets to write one to place in to the securitization pool. Now, you get to maintain your large auto book, write a decent amount of home at breakeven, but then earn some fees on the policies you administer.
It wouldn’t be a high return business by any means, but it creates some incentive to participate, especially if the alternative is getting bullied into writing homes to keep your auto book profitable.
Of course, the challenge is making these policies profitable enough for security markets. This isn’t as hard as you may think with some financial engineering.
First, as mentioned, credit market return hurdles are lower than reinsurance. Second, we are allowing pricing to rise to improve returns. Third, you structure it like an asset backed security with tranches.
Bond investors would buy the higher rated tranches and the state would retain the “mezzanine” tranche. While this does leave risk with the state, it would likely be far lower than the risk they have today from the FHCF or an overgrown Citizens.
Before someone mentions trapped capital risk, sure, it’s possible, but it’s not that different than mortgage investors who face extension risk when prepays drop. The value of a tranched structure is the higher rated structures get their capital released first.
I could write a whole separate blog on the mechanics of this, but it results in more stable funding markets, cheaper cost of risk transfer, greater availability of coverage for homeowners, the shrinking of Citizens, and, in the long run, lower prices because capital markets will bring more discipline to pricing and threaten to walk if the government lets the lawyers go crazy again.
The Future of Florida
So I laid out a lot of options and, the truth is, the government will probably choose none of the above because they have no real interest in solving the problem.
But if you asked me for my preferred solution, I would combine the above as follows:
1. Fix the fraud to lower claims and thus the required cost of insurance.
2. Raise prices enough to entice the national carriers to believe they can write at a 100 CR.
3. Create the risk transfer capital markets product to make the state less dependent on reinsurance and less exposed through Citizens.
4. Implement the 1% migration tax to help fund the transition to the new market structure and, eventually, to help cover losses in the mezzanine tranche.
This isn’t likely all achievable by June 1, 2023. Realistically, you could plan for this to be available by 1/1/24. There would have to be plans made to prop the market up to get through the next twelve months.
As a side note, a pro market reform like this, if executed well, might be a feather in a certain Presidential candidate’s hat. There would be execution risk to consider, but if that can be managed, the state will look a lot more able to weather future storms than it is today.