Florida is no stranger to extreme weather events, a fact that those living in Sunshine State have always factored in when insuring their homes.
But as climate change exacerbates the frequency and severity of events like droughts, floods, tornadoes, and hurricanes in the U.S., the reality Floridians and insurers in the state are working with is quickly changing.
Florida, according to several experts, is becoming "uninsurable." And other states, starting from California, might follow suit in the near future.
Florida's Perfect Insurance Storm
Some 15 major insurers, including Farmers, have announced their intention to abandon Florida over the last year, with many citing the state's increased vulnerability to extreme weather events.
And the crisis unfolding in Florida has been a long time coming, Charles Nyce, department chair and a Dr. William T. Hold associate professor of risk management and insurance at Florida State University, told Newsweek.
"A lot of this started in the 1990s when Hurricane Andrew made landfall in southeast Florida. That was a real wakeup call to the insurance industry about the level of catastrophic exposure they had in the state," he said.
Hurricane Andrew caused somewhere between $16 and $20 billion in insured losses in 1992. Seven major storms between 2004 and 2005 caused between $35 billion in losses combined, representing another "wakeup call for insurers about how frequent storms can cause a lot of problems," Nyce said.
But it's not just climate change that has led to the current crisis in the Sunshine State. "Florida has a fraud problem," Nyce said. "It represents 7 percent of the U.S. homeowners' insurance market, yet Florida represents 75 percent of all litigation coming out of homeowners."
These two problems have existed for years, he added, but since 2016 the number of storms hitting Florida has increased.
"This is when the market started going into the crisis we're still in," Nyce said. "In 2022, we had six insurance companies go insolvent. While the state is making legislative efforts to solve Florida's insurance problem, Florida still has the hurricane problem.
"Insurance companies are private enterprises, they're in business to make money. For them to make decisions, it's all about risk and reward. And they decided that there was too much risk relative to the reward that they receive in Florida."
Uninsurable Homes
Insured losses in the U.S. have averaged a 6 percent annual rate of growth above the rate of inflation since 2000, according to data from Gallagher Re, a reinsurance broker.
The country averaged $23 billion in annual insured losses during the 1990s but has skyrocketed to an average of $70 billion per year.
Every major peril has shown consistent loss growth in the last two decades, according to the reinsurer. "The combination of climate change influence and exposure growth are both notable factors in the direct physical damage and broader societal impacts being experienced throughout all 50 states," a spokesperson for the company told Newsweek.
Climate change—which has been identified as a likely cause of the increase in the frequency of storms and hurricanes—means that the risk for homeowners and their insurers, especially those in areas prone to experience extreme weather events, is constantly growing, and it's difficult to estimate in the long term.
"Damage that's associated with extreme events is actually the hardest part of the risk to measure for insurers," Yanjun Liao, an economist and researcher at Resources for the Future, told Newsweek.
"If we continue to have more catastrophic events, what happens for the insurers is that they might not be completely clear about how to measure that risk," she continued.
"There are new modeling techniques and things like that that they can invest in, but then, on the other hand, in a catastrophic event there could be a lot of correlated losses for them, which means that a lot of the properties that they insure can simultaneously generate damage and insurance claims."
That is easier said than done. "In order to prepare for those events, they need to build up their capital reserves so that they can handle all these claims all at once," Liao said. "And that is financially very hard to do and it's very costly for them."
This is how states like Florida and California become almost uninsurable.
"Wildfires, hurricanes, sea-level rising—those kinds of risks are generally considered less insurable," Liao said. "In the current market, insurers might still have options and room to operate, but the increasing of catastrophic events is definitely a threat."
Insurers are already retreating from offering coverage in the areas most at risk of experiencing extreme weather events—with dire consequences for homeowners.
"For the potential homebuyers in those areas, if they want to get a mortgage, they need a homeowner's insurance. And if they cannot get one, they cannot get a mortgage," said Liao.
This, in turn, increases the difficulty for people to buy a house in Florida—already one of the most overvalued housing markets in the entire country—or they can get more expensive coverage provided by the state's FAIR Plan.
"A fraction of the homeowners, it seems like they might be going without any insurance," Liao added. "And that's very dangerous, because once the storm or the fire hits, if they don't have insurance, they're going to suffer really big losses."
In California, insurers cannot raise their rates above a certain threshold set by regulators—a move that protects homeowners, but also block insurers from matching premiums with the higher risk of damage. Insurers like State Farm and Allstate have announced earlier this year that they will stop offering new homeowner insurance policies in the state.
A Growing Problem: Who's Next?
"There's going to have to be a real fundamental shift in terms of how everybody within the financial markets is thinking, not just in the long term, but in the short term as well," Bowen said.
"We have to fundamentally change how we reprice, how we look at risk, and how we're investing from a mitigation and adaptation standpoint," he continued, saying that this might still not be enough for everyone to be able to afford new insurance premiums.
"It's a very complex problem and I don't think there's any easy solutions, unfortunately," said Nyce, adding that the issue could expand in time to other U.S. states.
"Arizona is affected by wildfires, but it's not as heavily populated as California, so that helps a little," he said. "Colorado and Oregon, they're also at wildfire risk. If you look at the middle part of the country, we see a lot more tornadoes happening, they don't touch down but they come with really bad thunderstorms and hail. These are big causes of loss."
According to Nyce, the insurance crisis could expand to the lower Southeast and the upper Midwest in future, "where insurance companies may decide to start pulling back as well."
As climate change unfolds, Nyce said, the areas most vulnerable to extreme weather events are likely to change. "Wildfire will spread out of California, storms will spread," he said. "Areas that were considered safe will no longer be safe, and areas which may have been considered risky before may start to become safer."
In Louisiana, said Bowen, a series of major storms over the last five years has already driven up the overall cost of insurance on the private side. In Oklahoma, "the cost of insurance has gone up a lot in the last decade because of this, the substantial increase in thunderstorm-related loss," Bowen said.
"We have already started to see that shift in some of these non-traditional prime-focused states like Florida or California. That shift is already happening," he added.
"It's truly a 50-state issue," Bowen concluded. "Obviously, there are going to be some states that are more imminently at risk than others, but the reality is that the influence of climate change is going to be very evident regardless of which state you live in."
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