The Florida House Insurance and Banking Subcommittee is holding a “Panel Discussion on Homeowner’s Property Insurance Cost Drivers.” I will participate as a panelist. I am writing this post hoping a few of the Committee members or their staff may have the opportunity to read it during this legislative session.
The job of a legislator is not easy when it comes to insurance. Most constituents want inexpensive insurance that will pay for everything in the event of a disaster. Everybody would love that Utopia, which does not exist in the most hurricane-prone state of the Union. The insurance industry is not much of a help for legislators because it has a legion of well-heeled lobbyists who together conspire and develop an agenda that promotes their most current concerns, which in the long term have led to the Florida insurance crisis the current legislature is trying to fix.
Florida policyholders have no lobbyists. Nobody reads their insurance policy until a catastrophe happens, and then when they try to read it, most do not understand it. Policyholders hope for coverage, but first hope that nothing will happen to them so that a claim will have to be made. Most policyholders buy insurance on price considerations, not fully understanding how costly cheap insurance is when a loss happens. Many Florida policyholders have no faith in the current insurance product because the policies they purchase cost a lot, have very high deductibles, have insurance gaps of coverage, contain limitations on the amounts paid, and when insurance companies delay or deny claims, there is little they can do to effectively combat or hold the insurer accountable for those actions.
Most Florida legislators are people wanting to make life better for all Floridians. Few are insurance experts who have spent tens of thousands of hours studying and participating in the property insurance field. Most legislators do not know the history of property insurance nor have the time to learn. Simple answers to complex questions are often provided by insurance lobbyists who know that the current batch of legislators will come and go because of term limits.
Where can legislators and staff go for information not provided by the insurance industry’s professional lobbyists about Homeowners Insurance? I would suggest an article by Jay Feinman, Improving the Market for Homeowners Insurance. 1 The author of that article also wrote a book, Delay, Deny, Defend, which was made more famous as a result of the horrific killing of the United HealthCare CEO. Feinman discussed the pervasive frustration Americans feel toward insurance companies, driven by claims of unjust practices, including delays, denials, and complicated claim procedures, in a recent article, Americans’ Rage at Insurers Goes Beyond Health Coverage – The Author of ‘Delay, Deny, Defend’ Points to 3 Reforms that Could Help. 2 Reading these two articles will go a long way to understanding systemic insurance issues that cause constituents to be very frustrated. Feinman suggests several legislative and regulatory remedies that Florida should adopt.
The simple formula for determining the basic economic cost driver for all insurance is “frequency x severity.” Last summer, and long before anybody thought of this panel discussion, I noted the following in What Is Up With Insurance Premiums Other Than They Are Going Up:
When these CEOs asked me why their costs for property insurance rates were going up, I told them this:
The rates are going up for a number of reasons which are largely out of your control. If you look at the basic economics and how insurance companies price their product, you will find that the amount of losses, which is referred to as ‘frequency,’ is rising. The average amount paid per loss is also rising, which is known as ‘severity.’ When the frequency and severity rise at the same time, we have the current situation, which makes insurers raise rates to remain profitable.
The frequency of losses is increasing largely because we are having more storms and natural disasters, which are obviously caused by climate change. Your businesses are located in growing population areas where these disasters occur. This has increased the total number of losses which have to be paid.
Further, the cost of repairs and rebuilding have risen above the already high rates of inflation. Some of the rebuilding costs soar when we have mass disasters because the demand for builders and materials far exceeds the normal capacity. Simple inflation of construction costs is causing premiums to rise. You cannot control inflation construction costs, but those contribute to higher premiums.
Most of this is fairly simple economics as to the cause of rising insurance prices. Just like your business, insurance companies have to make money, and when frequency times severity do not equal profits, the charge for insurance will go up. The complex and often costly issue is what to do about it.
One warning to all current legislators is found in a Pulitzer-winning article I noted 15 years ago in Breaking News Story: Florida Insurers Hide Profits While Claiming Losses to Get Rates Raised. This still goes on, as noted in How Florida Insurers Make Millions on The Side.
Still, I believe in the insurance product. I agree with the insurance industry that we have a societal obligation to help reduce the frequency and severity of loss. This is not a new concept but one that has been understood for well over two hundred years when it comes to the affordability of homeowners insurance, as I recently stated in The Community Necessity to Make Structures More Insurable and Resilient to Loss:
The point of this post is that property insurance should always be considered a social product. Property insurance for structures has historically required communities to make the insured structures insurable. In the 19th century, as cities grew and fires became a significant risk to urban areas, city governments and communities implemented several measures to ensure that insurance companies found them insurable for writing fire insurance. These measures aimed to reduce fire risk and improve firefighting capabilities, thereby making urban properties more attractive to insurers.
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The insurance product is no longer limited to fire insurance as it was in the 19th century. Commissioner Yaworsky’s comments and views reflect that Florida’s insurance community may have to take significant steps to reduce the risk of loss from windstorms and hurricanes. This will be fought by those selling asphalt roofs and homeowners having to replace those lower-priced components of a home. But his question raises the question: What are we willing to do as a community to take action to make our structures more resilient and more insurable? There is no free lunch when it comes to the cost of property ownership. If one cannot afford the insurance, can one really afford the cost of the structure in the first place? What can we do to lower the long-term and overall cost of real property ownership?
I look forward to this afternoon’s discussion. These issues are important. Good future public policy can only be achieved with a complete understanding of the issues and how we historically got to our current state of the homeowners market. I applaud our legislative leaders for having this public forum for discussion.
Thought For The Day
“The consumer must be protected against unsafe products, against misleading information, and against the deceitful practices of a few businessmen”
—Theodore Roosevelt
1 Jay M. Feinman, Improving the Market for Homeowners Insurance, 30 Conn. Ins. L.J. Vol. 169 (2024).
2 Jay Feinman, Americans’ Rage at Insurers Goes Beyond Health Coverage – The Author of ‘Delay, Deny, Defend’ Points to 3 Reforms that Could Help, The Conversation (Jan. 6, 2025).
