This piece by Jim Stratton and Scott Powers of the Orlando Sentinel is one of the best newspaper stories I have read in a long time on Florida’s homeowners insurance problems. The origin of these problems is stated concisely in these two paragraphs from the story:
Just how bad have the past few years been? Of the 10 most expensive disasters in U.S. history, six were hurricanes that struck Florida in 2004 and 2005.
‘Florida,’ said state Insurance Commissioner Kevin McCarty, ‘is unique in its concentration of catastrophic risk.’
The manifestation of this unique concentration of higher risk is that insurers are raising rates for homeowners insurance to reflect it. Naturally, people who see their premiums doubled or tripled are upset, but the reporters did an excellent job of telling the stories of individual homeowners without losing focus on explaining the overall picture of how insurance works. About the only assertion in the story I would challenge is this one:
In short, a basic tenet of American homeownership — the idea that you should be able to sink most of your wealth into a house and insure it against loss at an affordable price — is suddenly drifting out of reach for more and more Floridians.
This tenet — that you should be able to get cheap insurance despite whatever risks are presented by you — might more accurately be described as an expectation in certain homeowners insurance markets fueled by faulty insurance company models of the risk presented from catastrophes, and by competition based on risk assumptions flowing from the faulty models. Now that insurers have been repeatedly slapped across the face by multi-billion-dollar losses driven by hurricane force winds, keeping rates low despite rapidly rising property values and continued construction in the riskiest areas would makes no economic sense, because it would lose insurance companies money and involve massive subsidies that would merely make the problem worse by encouraging more construction in risky areas.
You also may be interested in this story, on Florida’s governor placing a 90-day freeze on insurance premium rate hikes, which strikes me as more of an odd gesture than a solution, kind of like when, in 1933, William "Wild Bill" Langer, the governor of my home state, NoDak, tried to raise prices for farmers by declaring a moratorium on the shipment of wheat. (He also sent out National Guard troops to stop federal authorities from carrying out farm foreclosures). Stories about Wild Bill’s embargo always point out that the price of wheat rose 23 cents following it. Whether a cause and effect can be proved, I’m not sure, but how long do you think the price stayed up after the embargo ended and all that NoDak wheat flooded the market?