The Florida Homeowner’s Insurance Dilemma

I am sure that if you live in Florida, especially a place with an HOA, you know all about the fee increases that seem everywhere not to mention your homeowner’s insurance.  I bet you have also heard about the insurance crisis and the companies leaving Florida.  So, this week I attended a Realtor Expo in Port St. Lucie to see if I could learn anything about what is going on.  I spoke to several insurance providers and quickly learned that June and reinsurance is top of mind for them.  So, what is reinsurance and why is June particularly important?  Here is what I learned.

Reinsurance is a process in which an insurance company transfers a portion of its risks to another insurance company, known as a reinsurer. The reinsurer agrees to bear a portion of the original insurer’s risk in exchange for a portion of the premiums paid by the original insurer’s policyholders. So, what does that mean?

Let’s say an insurance company has 1000 homeowner’s policies in Key West at an average coverage amount of $500K for a total of $500 million in risk.  Let’s also say that the company has $400 million in current premiums.  That leaves the company with an exposure short fall of $100 million and therefore they must either sell that risk off to another company, reduce risk, or increase premium revenue.

My next question was how the insurance companies got so far off balance between premium revenue and exposure.  The answer was not as surprising as I had hoped.  According to several sources, the problem stems from a 2017 Florida Supreme Court ruling that allowed attorneys to bill 2.5 time their normal hourly rate on insurance claim lawsuits garnering them nearly 75% of all monies collected from an insurance claim lawsuit.  With that calculation, risk is automatically nearly doubled requiring insurance companies to sell that extra risk to a reinsurer.

The process of reinsurance typically begins with an insurance company assessing its own risks and determining how much risk it is willing to bear. If the insurance company determines that it is carrying too much risk, it will seek out a reinsurer to share some of that risk. The insurance company and the reinsurer will then negotiate the terms of the reinsurance contract, including the amount of risk to be transferred, the premiums to be paid by the original insurer, and the terms and conditions of the reinsurance agreement.

Here is the rub, if neither party can come to an agreement the insurance company has to either raise their premiums to cover projected losses which is based on the previous years or cancel policies until they reach an acceptable risk level.  In our case, both 2021 and 2022 saw nearly $1 billion in claims which is a whole lot of risk to cover.  But there is hope. The Florida legislature is taking steps to address the crisis.  To learn more click on the Florida Legislature link on my links page.