Flood insurance is largely provided by the federal government through FEMA, which has a significant war chest. But in Florida, the rest of the insurance industry may not be so lucky.
Florida’s famously low-lying subtropical peninsula is routinely battered by tropical storms that result in billions of dollars of financial losses that someone — individuals, businesses, insurance companies and governments — has to cover. That bill goes straight to insurance companies, the uninsured and often the federal government.
Hurricane Ian could incur up to $40 billion of insured losses in Florida, according to Fitch Ratings. Claims for wind and water damage — not to mention fallout from business interruptions amid power losses and evacuations — could mean massive losses and insolvencies for the state’s insurers.
Who’s insured by FEMA — and who’s still at risk
In the Gulf Coast counties hit by the storm, around 50 percent of homeowners had flood insurance, according to data from the Insurance Information Institute. But, Institute spokesman Mark Friedlander said, this is largely due to being required to buy it because the homes are in especially risky areas where federal mortgage programs require the purchase of flood insurance.
According to Milliman, an insurance consulting firm, 18.5 percent of the homes in Florida counties with an evacuation order carry FEMA flood insurance.
In Florida, according to data provided by the First Street Foundation, 19.5 percent of properties are in FEMA flood zones, while another 3.5 percent have similar risk. In Lee County, 152,000 are in FEMA flood zones, and almost 50,000 have similar risk. According to FEMA, Lee County has had 54 floods between 1996 and 2019, the same as Miami-Dade County.
The zones, where FEMA estimates there is a 1 percent or more chance of flooding per year, are likely not the only areas facing such risk, according to First Street. Its own analysis of flood risk in 2020 found that while almost 9 million properties were in FEMA’s flood areas, overall, about 15 million properties were exposed to similar risks of flooding. In central Florida, which has experienced extreme flooding due to rainfall, less than 5 percent of homes had insurance.
FEMA’s National Flood Insurance Program (NFIP) has $20.5 billion in outstanding debt to the Treasury and the ability to borrow almost $10 billion more, thanks to legislation passed following Hurricane Sandy (opposed by then-congressman Ron DeSantis, now Florida’s governor). The program has $18 billion available in premium income, reinsurance and borrowing ability to pay claims. Following the 2017 hurricane season, $16 billion of the NFIP’s debt was canceled, and FEMA then borrowed $6 billion in 2017.
This war chest means that FEMA will likely not have to go to Congress for more funding to pay out claims, R.J. Lehmann, a senior fellow at the International Center for Law and Economics, told Grid. “It is very unlikely Ian will pass $18 billion in claims, which would save NFIP from having to go to Congress,” Lehmann said.
But for the overall market, “the Florida insurance story is that our market was already collapsing,” Lehmann said.
The challenges for everyone besides FEMA
Florida’s unique combination of storm risk and coastal development has made it a difficult place to insure property.
Before Hurricane Ian, several major insurers had already left the state, leaving the market to specialty, Florida-only property insurers as well as a state-run insurer of last resort, Citizens Property Insurance Corp. The state’s insurance industry has also experienced a run of insolvencies before the storm, with six insurers going insolvent this year.
S&P Global Ratings estimated that Citizens can cover “roughly half” of losses that would be incurred by a 1-in-250-year storm event and over 80 percent of what a 1-in-100-year storm would incur. DeSantis has described Ian as a “basically a 500-year flood event.” Fitch estimated that Citizens has “liquidity to address initial claims or reimbursements,” although it may have to levy surcharges to its existing policyholders, and if that’s not sufficient, a surcharge on non-Citizens insurance lines throughout the state.
Citizens, so far, has estimated that it has almost $4 billion of exposure from the storm, although Florida State Sen. Jeff Brandes, a longtime advocate of reforming Florida’s insurance markets, has said this is likely an underestimate.
“With increasing hurricane risk, property insurers have left the Florida market, and remaining insurers have raised premiums or are not renewing policies as they expire,” Fitch said.
The state is a bad, expensive place for business for insurers, according to a report prepared by its insurance regulator. Some of this is the obvious — “significant underwriting losses due to recent catastrophe losses.” In fact, since 2016, Florida property insurers have been losing money on the basic math of premiums collected versus claims paid out, and since 2017, their overall net income has been negative.
And this means that Citizens has been gaining customers, recently crossing over 1 million policies. About half of its total policies are in three South Florida counties: Palm Beach, Broward and Miami-Dade.
Florida insurers also face a uniquely lawsuit-friendly legal system, which encourages suits against insurers. Florida has less than 10 percent of all homeowners’ claims but over 75 percent of all homeowners’ lawsuits against insurers.
Who covers what
There will also likely be fights between insurers about what they do and don’t have to cover. While floods are not covered by homeowner’s insurance, plenty of damage from hurricanes — whether from wind ripping off a roof, water damage from rain or sewage, or damage from debris — is.
“The wind carriers will say this is flood; the flood carriers will say this is wind,” said Gina Clausen Lauzier, an insurance lawyer at Berger Singerman in West Palm Beach. “There’s a gap in coverage between flood and wind. Some people may be without coverage.” But beyond any specific dispute between insurers and policyholders or the ability of any one insurance company to stay in business, Florida is a fundamentally risky place to build — and that means someone has to either pay for the risk or forgo building entirely.
“At some point, we will have to bite the bullet,” Lehmann said. “That exposure of Florida as a low-lying peninsula means you have to charge much more than people can afford, and you will need public policy that will involve buying people out and saying ‘You can’t live here anymore.’”
Thanks to Lillian Barkley for copy editing this article.