I wanted to write some initial thoughts based on what we know at the moment. Obviously, this is a fluid situation and predictions can change between now and landfall.
I am going to assume for this post that Milton is a strong 3 hitting near Tampa, going through Orlando as a high 1 or low 2 and continuing on as a 1 or tropical storm into Daytona Beach.
Risks to Tampa
The most important thing to understand is the angle this storm is approaching from (west to east vs. normal south to north) is the absolute worst case scenario for Tampa Bay.
Back 20+ years ago, I spent a lot of time researching underrated hurricane risks. Number 3 on my list was New Orleans. That one happened pretty soon thereafter as the industry learned they didn’t properly understand the geological challenges around the city.
Number 2 on the list was New York City, particularly something coming through Battery Park and flooding downtown Manhattan. We got that a few years later with Sandy (though it was far from a worst case).
At the top of the list was Tampa and, specifically, a storm that came at it from the west. This was considered so unlikely that it was often ignored by people, but it is in the historical catalog (1848).
What’s so bad about a storm coming from the west? Zoom in on a map of Tampa Bay.
See how a storm heading E-NE would push all that water diagonally up the Bay and it would get trapped with nowhere to go?
Well, where it goes is into downtown Tampa. A cat 5 could put downtown Tampa up to 30 feet under water!
This won’t be that bad, but it could certainly be half that. That would be enough to probably create commercial losses as big, or even bigger, than the residential claims.
The Rest of Florida
If the path heads just south of Tampa, there is still a big loss likely in Sarasota. Population growth there has been significant over the last decade.
A Sarasota landfall would be costlier than the Port Charlotte area we saw in Charley and Ian.
But there’s one other major issue with Milton – inland damage.
It is a very fast moving storm, much like Andrew. It will likely still be a hurricane when it exits the east cost for the Atlantic.
So the Orlando area is looking at significant losses, likely worse than Charley. Even the east coast will have meaningful damage.
A Tampa landfall draws a pretty straight line to Orlando and then Daytona Beach. A Sarasota landfall gets you just south of Orlando and through Cape Canaveral (with some pretty unique exposures!) in the east.
Comparable Storms
Some thoughts on analogs from prior storms to Milton. In a lot of ways, Milton is the mirror image of Andrew. It’s a small, fast moving storm heading due east vs. due west.
It won’t be as strong a storm at landfall as Andrew, but it’s not that far off.
I’ve seen Charley brought up because of the path through the west coast of Florida and crossing Orlando. However, a landing in the Tampa or Sarasota area is a lot worse than Port Charlotte.
Ian was more analogous to Charley and it was a ~$50B loss. Milton will likely be worse.
Katrina also was an unexpected 5 in the ocean that fell to a 3 by landfall but still produced historic storm surge.
In many ways, Milton reminds me of Rita. For one, it is about to match Rita’s peak power.
More importantly, Rita was a similar close call where it looked like a bull’s eye for Houston but ended up just missing. Substitute Tampa for Houston and we are looking at a similar situation where the margin of error between really bad and an all time disaster is incredibly small.
Loss Potential
I am doing this from memory of the catalog and estimating for inflation growth, so consider these guesstimates, but a direct hit on Tampa with a secondary big hit on Orlando could approach (and even exceed) $100B.
Said differently, this could be the worst insured loss in industry history.
If it’s only a partial hit on Tampa or if it goes to Sarasota or south instead, that feels like the upper end of $25-50B, especially if Orlando gets hit.
For this to be under $25B, it likely needs to move further south back to that Port Charlotte area and, even then, under $25B feels very optimistic.
Aggregation
One of the big stories of Milton will be the aggregation risk. Many of the Florida home insurers manage their risk by peak exposure to sections of the state.
For example, one company may be heavy Tampa but light Miami while another is big in Miami and light on the west coast. This reduces the cost of reinsurance as there is less exposure to multiple events over the season.
The problem with that approach is it assumes only one part of the state can get hit at a time.
If you are overweight Tampa and buy your reinsurance for that, you may feel emboldened to take on growth in non-peaks like Orlando or Daytona because they won’t get hit by the same storm that hits Tampa.
Now, you might think 2004 taught insurers the risks inherent in that approach, but I suspect the lesson has been forgotten over time. Certainly, few anticipated a storm with genesis in the western Gulf that traveled east like this.
Thus, an insurer’s loss may come in well above what they planned for and bust out the top of their reinsurance tower which would likely be a death knell. At best, they use up more of their tower than expected which is bad news for their reinsurers.
Will There Be Failures?
If we get to $50B, then absolutely. At $25B, maybe. Loyal readers will guess what I am most worried about.
FHCF
As I have written previously, a $30B storm is likely the end of the Florida Hurricane Catastrophe Fund (FHCF). Their own documents show they blow through all their claims paying resources at $40+B industry ($25B homeowner’s) loss which means they can’t pay off their debt.
While, in theory, they could raise new debt and issue assessments to continue on next year, I have shown this is an unsustainable situation. More importantly, who wants to buy the debt of a bankrupt institution with no ability to pay it back?
Florida Home Insurers
A lot of the Florida only insurers have made large bets on the west coast in recent years. I expect some of these will get exposed.
Then, add on the higher than expected aggregation losses as Milton hits the rest of the state and some of them will turn in the keys.
Even for those who can survive this year, they will not be able to function next year without cheap reinsurance from the FHCF.
Collateralized Insurance
ILS and cat bonds will likely get hit hard from this event. They are all overweight Florida because the high rate on line works well with the collateralized model.
A number of Florida only names have issued their own cat bonds and I suspect those will get hit hard.
Also worth a reminder that losses here will tie up collateral which will reduce capacity for next year.
Reinsurers
The traditional reinsurers will take some big hits as well, though my hunch is nobody needs to raise defensive capital at a $50B event. If we approach $100B, that math would likely change.
The bigger issue for them will be what happens to their clients and what that means for next year.
Citizens
I suspect Citizens will be OK but they would likely need to turn to assessments. They have benefited from some of the increased depop activity this year reducing their risk.
That said, they would be wounded and have difficulty taking on new business next year.
The House of Cards Collapses
There is a good chance Milton is the final blow to a broken system. The game of kick the can since Andrew and the 2004 storms will finally come to an end.
FHCF won’t make it. Citizens won’t have the capital to take new customers. National players don’t want to enter.
Something dramatic needs to change to bring capacity to the market.
I suspect it will be something along the lines of compelling non-homeowners insurers to backstop Citizens, either through reinsurance or by agreeing to take out policies.
I’m not saying I support that as policy, but there are few other options I can see.
More of the market needs to go to E&S but there are a dearth of E&S home insurers in Florida. Even if legislation entices more of them, residents will balk at the price of it.
In the long run, the only way to fix the market is to let carriers charge a fair price so that national carriers will return.
2025 Implications
Yes, reinsurance pricing will go up but I don’t think as much as people would guess. We are already in the vicinity of all time highs so, if it goes up too much, large clients will choose to retain more.
In Florida, many of the cedants will be gone after a $50+B event. If more of the business ends up in a state solution, that entity is less likely to buy reinsurance than private companies.
I think the bigger issue is going to be the public policy ramifications. As we approach next June and homeowners can’t find insurance, it becomes a crisis that could well bring in the Federal government, at least on a temporary basis.
The truth is nationalizing the risk of Florida homeowners creates a whole new set of problems and is not a good solution, but it could happen.
The industry needs to start working on this problem ASAP and come up with a better solution for the people of Florida that it can also convincingly sell to the politicians. Otherwise, the demise of the current system could lead to something even worse.
Finally, if you are reading this and live near Tampa, take this one seriously. This is your Andrew. You need to evacuate.
Well written Ian! You know me, I am not a big fan of pro sports, but this is as thorny of a problem as I’ve seen in my 35+ year career.
Ian, would you comment on the possibility of implementing either additional legislative reforms or ‘allowable’ underwriting or policy language changes which might reduce a Florida carriers risk exposure – and thus lower premiums?
It’s possible. I mean they could raise wind deductibles further or add exclusions but that just increases financial risk to the homeowner which doesn’t solve the public policy problem, right?
You end up like the people in Asheville who get wiped out and told flood is not covered. We need to figure out how to cover more damage, not less (at an actuarially adequate price, of course).
And surely the end of nfip?
It seems to me charging a small surcharge to all policyholders across the country to cover hurricane or other natural disasters everywhere is better than carriers leaving the state entirely, I have lived in a northern state my whole life but would be willing to pay $25 or $50 a year more as a disaster fund. I would consider it a donation to help the people who suffer so immensely with these natural disasters.
Bravo Ian! Spot on as usual. I was at an industry event in NYC yesterday and fell to chatting with a long-time industry analyst working at the OFR. He has been investigating potential “fixes” for the homeowners insurance issue nationally (clearly the federal government is interested in the topic). He conceded that the easiest solution, but probably not the most equitable one, is to socialize these losses through a federal reinsurance mechanism (channeling sufficient funds through FEMA is not workable). But I imagine most people won’t be as charitable as Kevin Goldade and so we will continue to bumble from one affordability crisis to another.
I’m living in the Tampa area and this morning I am sheltering 5 guests who live in evacuation zones. As two of them are in their late 90’s, I’m sure happy Milton seems to be heading to Sarasota.
Two thoughts about the capital impact of Milton. First, Lloyds (and, I think, Karen Clarke) have a Tampa hit as one the solvency tests (and/or “gates”). At a time like this high capital standards seem a very good idea.
Second, I’m hoping that Florida builds on the Citizens experience rather than trashing it after a single bad year. I’d endorse either of two forms.
a) The state could drop the “of last resort” requirement and all new risks are charged full cost for expected loss divided by a target loss ratio (80%?).
b) In the same way that some states are monopolistic for WC, perhaps Florida has mandatory HO cover purchased through the state fund. That fund also arranges the mandatory NFIP coverage. You get to a more accurate cost sharing across the state and stop pretending the private carriers don’t rely on the government backstop.
A compelling and insightful read! This blog sheds light on the challenges Florida’s insurance market faces post-Hurricane Milton, offering a thoughtful analysis of what’s next.