Florida homeowners pay highest property insurance premiums because state still owns #1 position for disasters
Guest Blog by James Lynch, FCAS MAAA
Chief Actuary and VP of Data and Information Services
Here’s a question we get every year: Why does Florida have the most expensive homeowners insurance in the nation? The answer is easy: It is the riskiest state to write homeowners insurance.
The average Florida homeowners policy cost $2,115 in 2013, according to a report released last week by the National Association of Insurance Commissioners. That’s highest in the land. Texas is No. 2 ($1,837), and Louisiana is No. 3 ($1,822). We have a ranking of the states at the Insurance Information Institute web site.
Florida’s premium rose about 1.5 percent from a year earlier. The increase is easy to explain. The cost of insuring a home is, of course, affected by the cost of repairing that home when it is damaged, and that rises just about every year, thanks to inflation. But how did the price get so high in the first place? The answer lies partly in the past and partly in the future.
People who complain how high rates are often point to the past decade—10 hurricane-free years that have been very profitable for the industry. And it is true; when there are no hurricanes, Florida is a profitable place to insure homes. But in Florida, ignoring catastrophes when you sell insurance is like ignoring the humidity when you get dressed. It is foolish.
Insurers look much farther into the past. From 1985 to 2014 Florida had $68 billion in insured catastrophe losses, adjusted for inflation, 30 percent more than the No. 2 state, Texas. That is 13.6 percent of all catastrophe losses countrywide over that period. The state has about 5 percent of all homeowners policies, according to the NAIC. So the state has suffered more than twice its share of catastrophe losses. Rates will reflect that. Of course insurance covers smaller storms, too, as well as sinkholes and water claims and lightning strikes.
There are signs that, if anything, Florida’s insurance has been “cheap”. Over the same 30 years, the state has had an average return on net worth of -13 percent on homeowners insurance, according to NAIC data. So even with the last decade of profits, the industry has still lost money over the long haul. But that’s the past. Insurers also think about the future.
A quick internet search tells me that Florida insurers protect more than $3.7 trillion in coastal property and that in any given year there is a 1% chance of a $250 billion hurricane in Florida. To put that $250 billion in perspective – it is four times as much as the federal government pays Floridians every year in Social Security benefits. (See Table 5.J1 here.)
So every year the industry has to collectively make sure that it has $250 billion cash ready. It also knows that one day it will pay out every cent and perhaps more. What happened in the past and what will one day happen agree that Florida is a risky place to write homeowners insurance, and premiums reflect that. Or as my Floridian friends like to remind me, it’s the price to pay for living in paradise.