Homeowners insurance is a necessary product for nearly all property owners, especially those who live in higher-risk areas, such as coastal Florida. This coverage helps homeowners to protect one of their biggest investments against any number of disasters, natural or human-made.
Due to changes that were announced this past May, many Florida homeowners will find the purchase process for home insurance to be much more expensive and difficult than before. Mortgage originators who do business in the Sunshine State will want to know what’s happening so they can explain the situation to clients while understanding how it could affect loan closings.
Policy changes
In May, three home insurance companies — Gulfstream Property and Casualty Insurance Co., Southern Fidelity Insurance Co., and Universal Insurance Co. of North America — received approval from the Florida insurance commissioner to drop or refuse to renew home insurance coverage for some 53,000 policies in the upcoming year. At the same time, the Florida Legislature passed and Gov. Ron DeSantis signed into law a bill targeting other changes to homeowners insurance policies.
According to the Florida Office of Insurance Regulation, Gulfstream is allowed to cancel 20,311 existing policies, Universal is allowed to cancel 13,294 policies, and Southern Fidelity can let about 19,600 policies expire with no option for renewal. These moves may affect up to 2.94% of the state’s home insurance policyholders, as this figure represents the combined market share of these companies.
Previously, Florida law required home insurance companies to notify their policyholders of cancellation or nonrenewal at least 120 days before the change goes into effect. Under the new law, however, many existing policies are scheduled to be canceled long before their expiration date, with providers needing to give homeowners as few as 45 days’ notice.
Litigation concerns
So, why would Florida allow such an unprecedented change that has the potential to deeply impact existing homeowners and new homebuyers alike? It seems that the move is an effort to save flailing insurance carriers from continued losses and slow the rapid rise of policy premiums.
One of Florida’s biggest problems involves litigation against insurance carriers. In 2019, for instance, Florida accounted for a mere 8% of all U.S. homeowners insurance claims. At the same time, however, the Sunshine State also accounted for more than 76% of the lawsuits filed against the nation’s home insurance companies.
This disparity, combined with other factors, has contributed to a large portion of the losses felt by Florida insurance carriers. In 2020 alone, 56 of Florida’s home insurance carriers posted a combined loss of nearly $1.6 billion. And that was in a rare year where not a single hurricane made landfall.
Recent storms, however, have taken their toll on residents and insurance carriers alike. In 2017, Hurricane Irma resulted in more than $20 billion in estimated insured damages across the state, while Hurricane Michael in 2018 resulted in $9 billion-plus in estimated insurance losses.
How does this tie in? The three companies specifically named in the new Florida bill have one major thing in common: Each of them had an average loss ratio — representing the amount they lost on settlements compared to the amount they took in from premiums — of nearly 94%.
These factors have given insurers plenty of incentive to begin divesting themselves from the Florida home insurance market. For the more than 53,000 policyholders in the state who will be immediately affected by this bill, this bowing out will have a drastic impact.
While Florida’s real estate market boom is unlikely to die off as a direct result of the new legislation, it may impact the number of incoming residents, new homebuyers and even mortgage refinances.
Rising premiums
Even if their policies aren’t canceled or dropped, Florida residents can collectively expect home insurance premiums to continue rising. This applies no matter which provider is writing the policy.
Since 2016, the cost of homeowners insurance coverage across all providers in Florida has risen by more than 32%. In 2020 alone, the cost of coverage among all companies increased by 11.7% from the prior year. Florida ranks relatively high among all states for the cost of homeowners insurance premiums. At $1,727, Florida’s average annual premiums are 20% higher than the U.S. average of $1,445 per year.
Ideally, the new bill will aid in limiting losses for many of these carriers. In turn, residents may eventually see premiums begin to decrease. How long this will take, however, and how high the premiums will climb before then, is anyone’s guess.
Hurricane danger
As mentioned, Florida state law normally requires carriers to notify policyholders no less than 120 days before an existing policy is to be canceled or not renewed. Under the recent changes, however, Gulfstream, Universal and Southern Fidelity were permitted to shorten this period to as few as 45 days.
Property owners with home insurance from one of these groups should check with a representative immediately. Since hurricane season runs from June through November, they will want to remain prepared with adequate home-owners insurance coverage.
It’s no surprise that many Florida homeowners are concerned about unexpectedly finding themselves without adequate insurance coverage. This is especially true now that the 2021 hurricane season has started, since insurance carriers are typically unwilling to issue new policies when the formation of a storm is expected within 48 hours.
No hurricanes made landfall in Florida last year, but this doesn’t mean that 2021 will be as fortunate. Additionally, homeowners may find that standard insurance coverage is not enough. Flood insurance is a wise addition for adequately protecting a property, but many of these policies include a 30-day waiting period.
Housing fallout
Many real estate professionals expect that this new bill, combined with existing insurance trends, will have dramatic and cascading effects on the housing market in Florida. The state’s home insurance rates have increased by one-third in the past five years — significantly higher than the 11% increase for the U.S. as a whole — without any signs of slowing.
Further limiting the number of carriers and the available policy options to homeowners in the state as a result of the recent legislation will likely mean even higher rates as time goes on. This is sure to impact the number of new mortgages and refinances in the years to come.
As homeowners in many areas are now forced to unexpectedly shop for insurance coverage from a limited carrier pool — and often at substantially higher rates than before — this could work to scare off many would-be homebuyers and new Florida residents. It also may prevent homeowners from refinancing as the process could involve their home appraising for a higher value and, in turn, increasing their homeowners insurance rates even further.
Potential aftermath
Mortgage originators and their clients should plan to watch the changes in Florida closely over the next few months and years. While Florida’s real estate market boom is unlikely to die off as a direct result of the new legislation, it may impact the number of incoming residents, new homebuyers and even mortgage refinances.
Consumers should expect higher premiums. Florida has seen homeowners insurance premiums rise consistently year over year, a trend that has shown no signs of slowing. Now, with more than 53,000 policyholders being unexpectedly dropped or not renewed, the market as a whole will likely feel the effects.
Whether clients are looking to close on a new home or finalize a refinance, the new roadblocks in finding affordable homeowners insurance with adequate coverage could potentially delay the closing process. In an active seller’s market, this delay could prove especially detrimental to buyers.
Prospective buyers and existing homeowners in higher-risk areas may feel the effects more than others. Those looking to buy homeowners insurance coverage in areas that are prone to storm damage may have even fewer options for insurance providers. Florida’s vulnerability to hurricanes, flooding and other storm damage has resulted in many carriers leaving the state altogether or limiting the areas in which they are willing to provide coverage. The new bill has the potential to impact more than the 53,000 homeowners whose policies are being dropped.
Even if homeowners have trouble finding an affordable insurance policy in their area, they won’t be left entirely high and dry. Affected homeowners may be forced to turn to the state’s “last resort” insurance option, the Citizens Property Insurance Corp. Although coverage from Citizens is fairly basic — and is only offered to homeowners who cannot find a policy at all or those offered policies more than 15% above the market rate — it may be the only option for some people.
Normally, carriers are required by law to provide clients with new premiums, notices of nonrenewal and cancellation notices well in advance. Although the new Florida law only reduces these time periods for three companies, it would be wise for homeowners to begin shopping around for coverage before they find themselves in a frantic situation. ●
