Deterioration of property insurance market is a man-made catastrophe

On August 24, 1992, Hurricane Andrew slammed into South Florida as a monstrous Category 5 storm and brought near total destruction to many communities. A staggering 25,524 homes were destroyed and 101,241 others were damaged, leaving about 250,000 people homeless. At the time, it was the costliest natural disaster in the United States with an estimated $27.3 billion in insured losses. This tragedy forever changed the way that American communities prepare for natural disasters. Hurricane Andrew ushered in stronger building codes and more investment in resiliency — both of which have undoubtedly saved countless lives.

Now, 30 years later, we are seeing a new major catastrophe in Florida’s property insurance marketplace, except this one is man-made. Florida has not experienced a direct hit from a hurricane since 2018, but the state has seen seven insurers go insolvent in the last two years. To avoid similar solvency risk, 14 companies have stopped writing new policies, leaving hundreds of thousands of policyholders seeking coverage with limited options in the marketplace. To make matters worse, the average Florida homeowner’s insurance policy will soar to nearly $3,000 in 2022, roughly twice the U.S. annual average.

The blame for this man-made catastrophe goes to the vast abuse of Florida’s legal system and rampant fraudulent roof replacement schemes. According to the Florida Office of Insurance Regulation (OIR), Florida accounted for 79 percent of the nation’s homeowners insurance lawsuits over claims filed while making up only nine percent of the nation’s homeowners insurance claims. To illustrate the devastating financial impact of legal system abuse, it was recently reported that, according to OIR, $51 billion has been paid out by Florida insurers in the last ten years and 71 percent of the $51 billion went to attorneys’ fees and public adjusters while only eight percent went to claimants. While Florida’s governor and legislature implemented positive reforms during a special session earlier this year that are a step in the right direction, it will take time and additional reforms to stabilize Florida’s volatile property insurance market.

Unfortunately, the rapid decline of the property insurance market in Florida is not unique. Concerns about market strain and deterioration continue to grow in several states, particularly Louisiana and California, amid reports of diminishing availability and affordability of property insurance.

Unchecked plaintiff bar tactics, anti-consumer litigation financing, and more are driving up legal system costs and having a significant impact on the cost of insurance to American families. For example, nuclear verdicts — exceptionally high jury awards — have grown exponentially in the last few years. The National Law Journal’s Top 100 Verdicts increased 350 percent from $64 million in 2015 to $225 million in 2020. And it is not just the number of record verdicts, as one analysis showed that there were 30 percent more cases during this time frame that pierced the $100 million threshold than there were in 2015. In the end, the cost of legal system abuse and nuclear verdicts burdens every American family.

Fraud related to property insurance claims is another issue that costs policyholders. According to data from the Federal Bureau of Investigation, the cost of non-health related insurance fraud is estimated to be more than $40 billion per year, which can translate to an additional $400 to $700 annually in insurance premiums for the average U.S. family.

Insurers are also facing increasing challenges in managing risk due to government mandates and interference. Regulatory actions are exacerbating the effects of natural disasters by magnifying losses and prolonging market disruption. This is especially notable in California and Louisiana, where legislative environments have made it difficult and costly for insurance companies to operate and pay claims, and where regulatory environments restrict insurers’ ability to manage solvency risks through their overall exposure in high-risk areas.

To fix broken property insurance markets in states like Florida, California, and Louisiana, insurers urge state lawmakers and regulators to focus on addressing the underlying issues roiling markets and harming consumers, including implementing legal system reforms and anti-fraud measures, as well as promoting regulatory stability and disaster mitigation to help reduce future losses.

Insurers are an essential part of society as they provide the financial protection needed to help families, businesses, and communities recover and rebuild after a disaster. As natural disasters continue to increase in frequency and severity due to climate change, state leaders need to act on policies that will help create a healthy and sustainable insurance marketplace so that consumers can continue to protect the things that matter most to them. Because that’s what matters most to us.

David A. Sampson is president & CEO of the American Property Casualty Insurance Association.