How hurricanes like Idalia can impact home insurance rates even if you're not impacted

Florida homeowners have been bracing themselves since Hurricane Idalia made landfall Wednesday morning in areas even outside of those directly impacted, fearing the implications the storm could have on their insurance policies at a time when rates are already soaring.

But early analysis from multinational investment bank UBS and reinsurance firm BMS estimate that insured losses could end up being only a fraction of the cost many feared when Idalia briefly intensified to a Category 4 storm before making landfall as a Category 3 storm near Keaton Beach, a sparsely populated area nestled in Florida’s Big Bend area.

UBS released its estimates early Thursday showing that insured losses could average about $9.36 billion, with a 50% chance of losses over $4.05 billion and a 10% chance of losses of $25.6 billion.

Estimates from BMS were more optimistic, coming in between $3-5 billion, saying that the insurance industry “dodged a bullet” in comparison to what damages could have been.

Hurricane Idalia damage: Hurricane Idalia damage photos, flooding, aftermath in Florida, Georgia and the Carolinas

“In reality, the insurance industry dodged a bullet as Idalia tracked over relatively rural areas with low population density,” an analysis posted on the BMS website said.

The good news was quickly overshadowed by a harsher reality, according to BMS, which said Idalia showed the potential far-reaching effects of future storms.

“The tidal flooding all the way down to Bradenton, Florida reveals that the impacts from named storms can be far-reaching beyond the destructive center of the storm and the cone of uncertainty,” the analysis said. “This should be a warning call for what will happen when a major hurricane strikes the Tampa Bay area,” said BMS.

Hurricane Idalia was the first storm of the 2023 Atlantic hurricane season to hit Florida and there are nearly three months before it wraps up on Nov. 30.

Determining exactly how Hurricane Idalia and other major hazards can impact homeowners insurance rates is a murky, complicated process that involves not only calculating geographical risks associated with those hazards but also reinsurance costs insurers need to offset their own risks and litigation costs stemming from fraudulent claims, which the Insurance Information Institute (Triple-I) says is the primary cause of skyrocketing home insurance premiums in Florida.

For Florida homeowners, those issues are only compounded by the dwindling number of insurers in the private market, causing many to flock to Citizens Insurance, which wasn’t prepared for the sudden influx of new policies.

Citizens is a state-backed insurer that was created in 2002 as a last-resort option for homeowners who couldn’t get comparable coverage in the private market. Many homeowners have found short relief from rising premiums through Citizens’ cheaper rates without realizing the implications that arise if Citizens can’t pay out its claims — levying assessments on both Citizens policyholders and non-policyholders.

Wondering how Hurricane Idalia — or any major hazard — could affect your home insurance rates? Keep reading.

How do hurricanes impact Florida home insurance rates?

Calculating home insurance rates — and insurance rates in general — involves very complicated algorithms that would put most people to sleep, so here are the quick highlights.

Payouts from natural disasters is the first factor many consider and one of the first things people point out when wondering why their insurance rate increased despite no history of claims. What many people don’t realize is that insurance is very much a socialized system where policyholders are grouped into shared risk pools.

So while a homeowner’s claims history will impact their premium and even their insurability with some private insurers, claims filed within their community can also cause rate increases.

Hurricane Idalia aftermath: Damage from Hurricane Idalia stretches across states: Maps show the storm's aftermath

Reinsurance is another cost factor related to those shared risk pools. Insurance companies purchase reinsurance to offset their risk of financial loss to yet another type of insurance company. In essence, reinsurance is just insurance for insurance companies. And while the concept may seem strange, it’s a necessary precaution insurance companies take so they can remain solvent and profitable.

Insurance companies are subject to reinsurance rates in the same way homeowners are and when those rates increase, they’re passed down to policyholders. In worst-case scenarios, companies aren’t able to acquire enough reinsurance to cover their risks, which can lead to insolvency.

Reinsurance renewals in Florida saw 30%-50% increases, according to reports from Aon and Gallagher Re. Non-Florida risks were up 10%-20%. Policyholders will feel the impact of those increases when they open up their renewal letters.

The report does have a silver lining, however. Those rising costs mean there’s enough supply to clear renewals, cutting the chances that homeowners are met with non-renewal notices.

More claims means more litigation — the hidden source of Florida’s rising insurance rates

An increase in major hurricanes is often lauded as the main culprit behind Florida’s rising insurance rates but an increase in insurance fraud and frivolous litigation plays a bigger role, according to Triple-I.

In October 2022, the Insurance Information Institute (Triple-I) published data showing that Florida leads the nation in homeowners’ insurance-related litigation, making up 79% of the lawsuits across the U.S. while accounting for just 9% of the total claims.

In the brief, Triple-I states that fraudulent roof-replacement schemes and too much litigation, coupled with generous attorney-fee mechanisms, resulted in huge net underwriting losses for Florida’s homeowners’ insurers.

Triple-I and other insurance companies have pointed to a 2017 state Supreme Court decision as the driving force behind an increase in attorneys’ fees. They say the decision now allows courts to award attorneys with much higher hourly billing rates. Previously, attorneys’ fees were limited to no more than 25% of any judgment against a sovereign.

Between 2017 and 2021, data from the Florida Office of Insurance Regulation showed that $51 billion was paid out by Florida insurers over 10 years. About 71% of that total went to attorney’s fees and public adjusters while only 8% went to claimants.

What happens when Citizens Insurance can’t pay out claims? Everyone chips in

Many homeowners were able to swap home insurance coverage to Citizens due to the substantial price difference compared to similar coverage in the private market. Part of meeting Citizens’ eligibility requirements includes showing that premiums from Florida-authorized insurance companies are 20% higher than Citizens for comparable coverage.

State regulators approved a series of proposals by private insurers to assume Citizens policies in part to offset the financial risk of Florida getting hit by a major hurricane. Should payouts from policyholder claims dry up Citizens’ funds, state law requires that the company levy assessments from policyholders and non-policyholders until the deficit is paid.

Those assessments can be substantial, according to Citizens’ website, which states that policyholder assessments could be up to 45% of their premium due to the Citizens Policyholder Surcharge, quickly erasing any savings policyholders enjoyed.

Assessments work in three tiers with Citizens Policyholder Surcharge being the first. If a deficit remains after the full amount of the Citizens Policyholder Surcharge is levied, a Regular Assessment of 2% is then added to assessable policies in the private market, which includes homeowners policies, auto, specialty and surplus lines policies.

The Emergency Assessment is the last tier, which is charged if any deficit remains after the Regular Assessment. Emergency Assessments can be up to 10% per account per year for each of Citizens’ three accounts, and it can be levied on both Citizens and non-Citizens policyholders for as many years as necessary until the deficit is resolved.

This article originally appeared on Pensacola News Journal: How hurricanes like Idalia can impact Florida home insurance rates