The Insurance Industry Is the Harbinger of South Florida’s Climate Change Risks
“If there’s a direct-hit Category 5 storm that hits Miami, you’re going to see 20 insurance companies go bankrupt. ... It’s become a big problem.”
South Florida’s increasing flood and storm risks are pushing its insurance market to a breaking point, according to industry experts, who say that what happens next will influence the decisions real estate and business leaders make for years to come.
“It’s all happening now,” said Joseph Gendelman, president and CEO of Bruce Gendelman Insurance Services, which is based in West Palm Beach and provides risk assessment insurance services. Gendelman has watched as a torrent of insurance companies have left or pulled back from Florida in recent months. He describes the situation as “a mess” and “on the verge of a crisis,” noting that for the first time in his 20-year career, he’s coming across clients and prospects that he simply can’t get insurance for.
He said that’s because insurers operating in South Florida are increasingly put off by low scores in two areas. The first area is base flood elevation, which the Federal Emergency Management Agency (FEMA) defines as “the elevation of surface water resulting from a flood that has a 1 percent chance of equaling or exceeding that level in any given year.” The second area is wind mitigation reports, which relate to structural aspects of a property, such as whether it has hurricane shutters and impact windows, or how old its roof is and whether it’s properly strapped to the house.
Older homes that are below base flood elevation are in a precarious position. “It used to be that you have an older house on the water and you want hurricane coverage, it’s going to be very expensive but you can get it. Now you’re not going to be able to get it,” Gendelman said. “What that does, if you’re going to go buy that house, maybe you have a mortgage, well, you can’t get the mortgage without insurance, so that will affect the real estate price.”
Worse than that is what could happen if South Florida is hit with anything like Hurricane Andrew, according to Gendelman. The Category 5 storm in 1992 damaged more than 50,000 homes and resulted in dramatic building code reform. It was also the last time South Florida really faced the brunt of a major hurricane.
“If there’s a direct-hit Category 5 storm that hits Miami, you’re going to see 20 insurance companies go bankrupt and are not going to be able to pay claims. It’s become a big problem,” Gendelman said.
Unprecedented wildfires in California have only exacerbated the general sense of alarm among insurers, many of which are now in receivership after going insolvent. In fact, some industry experts suspect South Florida could eventually go the way of California, where whole towns are now uninsurable because of fire risks.
It also hasn’t helped that unprecedented migration and increased building costs have pushed South Florida property values up even further, increasing the replacement costs of structures.
Florida Governor Ron DeSantis has passed new laws this year aimed at lowering costs for policyholders and reducing litigation expenses for insurers, but it remains to be seen what the effects of those laws will be.
A ‘Billion-Dollar-Plus Event’
It’s a situation that Erik Salna is all too familiar with, as his homeowner’s insurance policy was canceled last year. Salna is also a meteorologist and associate director of education and outreach for the Extreme Events Institute and the International Hurricane Center at Florida International University in Miami.
The only company willing to insure his Miramar home was Citizens Property Insurance Corp., which is backed by the state and has been taking on tens of thousands of new policies every month as other insurers have increasingly canceled policies or gone insolvent.
That’s raised some concerns over whether Citizens will be able to provide payouts if a major weather incident affects a vast number of Floridians.
“If we get a major hit, any hurricane that hits Florida now is a billion-dollar-plus event. We can’t help it. Look at all the exposure,” Salna said. “So, is Citizens going to be able to pay for it? Is there enough revenue? It’s a big issue.”
While major insurers such as Chubb or AIG have billions of dollars to fall back on, Gendelman said, many others don’t have big enough balance sheets. He said that means it’s important to seek insurance that’s A-rated by AM Best, an independent credit rating system for insurance companies. Florida rating firm Demotech, on the other hand, has warned that it could soon downgrade the ratings of at least 17 Florida property insurers.
“If your house today were to burn down, they’d have a few million dollars to rebuild it, no problem. But if there’s mass devastation and they have hundreds of millions of dollars in losses, they can’t sustain that,” Gendelman. “It could be almost worthless to have a policy that’s not A-rated.”
One major issue is that the reinsurance market is hesitant to touch Florida, thanks to its reputation for being litigious and its propensity to be impacted by catastrophic weather events. That’s according to insurance litigator Gina Clausen Lozier of Berger Singerman in Miami, whose 15-year career has involved representing both policyholders and insurers.
Lozier, who is also studying for a master’s degree in insurance risk management, said it’s important to research and prepare for what would happen if your carrier were to go insolvent. The Florida Insurance Guaranty Association, or FIGA, will back up claims for Florida-based carriers, for instance, and Citizens has also agreed to act as a reinsurer in some cases.
”The reinsurance market is less likely to want to come into a state that’s going to be exposed to numerous events, and, obviously, we understand climate change is causing our storms, or causing more intense storms, and Florida is sticking out in the middle of the ocean and is prone to getting hit,” Lozier said. “It’s going to be interesting to see where things go in the next three years, whether we’re really going to have a domestic market outside Citizens or whether all the carriers within the state are going to be from the surplus.”
Hurricane Capital of the U.S.
At FIU, Salna works with the Wall of Wind, a research facility that can simulate Category 5 hurricane winds and serve as a stress test for structures. Salna’s team also conducts private industry testing and educates the next generation of wind engineers on designing resilient structures. And with eight other universities, FIU is planning a new facility featuring winds up to 200 miles per hour and water that can mimic the effects of storm surge and erosion.
The reason for this, Salna explained, is that Florida is already on the front line when it comes to hurricanes, and the effects of climate change are likely to result in “bigger, wetter, stronger, and slower” storms, which are more likely to catch people off guard by rapidly intensifying.
That’s because as carbon emissions increase the planet’s temperature, oceans will become warmer and more moisture will form in the air, both of which are key ingredients for a hurricane.
Despite this, Florida is the third most populous state in the U.S. and is seeing unprecedented levels of migration. “People keep moving to Florida,” Salna said. ”We know why. It’s paradise. It’s the climate; it’s the weather; it’s the beaches. But they are moving and still moving to the hurricane capital of the United States.”
What’s more, the state’s less exposed, inland areas are generally the least desirable.
“Everyone wants to live near the beach. The majority of the population lives within 30 miles of the coast,” Salna said. “Hurricanes have come to Florida for a century. Now there’s people and buildings in harm’s way. … We’re overpopulated. So for emergency management, their huge challenge is moving people safely and timely.”
Salna said he believes educating the public on this could harness their purchasing power to encourage the real estate industry to build and market their projects differently because, “if the marketplace demanded it, then they would have to do it.”
“What’s typical is homeowners will look for the amenities, and that is granite countertops, walk-in closets, new appliances,” Salna said. “That’s great and that’s fine, and that’s part of shopping for a home. But from my perspective: How old is the home? What are the materials that it’s made out of? How old is the roof? Does it have shutters? How old is the garage door? It’s looking at those aspects of the home and finding a realtor that will understand it and get it, and understand that shopping list can include both.”
The good news is that Florida’s building codes have come a long way since Hurricane Andrew. But the bad news is that many properties were built before then, and insurers are wary of those structures.
Homeowners and business owners should therefore ensure older properties are retrofitted to be as resilient as possible, according to Salna, who said some insurers offer discounts in exchange.
“Yes, some of these things will cost money and that’s a reality. Everyone’s budgets are different,” Salna said. “But if you split it up into maybe a five-year mitigation plan—one year do a few windows, the next year do your garage door, or whatever it might be—then after five years, you may have now retrofitted and strengthened your home ready for the next storm.”
Related: South Florida Sea Level Rise in Pictures. Which Communities Are Projected to Flood?
Flooding Is ‘the Big Risk’
Insurance companies are looking at maps that forecast how rising sea levels will submerge some areas of South Florida, and though it’s hard to tell exactly what the situation will be in 10, 50, or 100 years, Gendelman said, ”at some point they think it’s going to happen.”
“So they’re reducing their risk and their exposures, and trying to write business in other states and other places where there’s lower risk,” Gendelman said. “To me, the big risk is flood. Rising water from the ocean or the ground that can’t handle it. That, to me, is what’s going to be the destruction, and flood is excluded from homeowner’s policies.”
To be covered in the event of a flood, Florida homeowners typically have to buy a separate flood policy from the federal government. But those policies offer only $250,000 coverage for homes and $100,000 for their contents. More than that would require excess flood coverage through private carriers.
Though many areas don’t require flood insurance, experts recommend getting it anyway. “Think of a slow-moving hurricane dropping 30 inches of rain slowly from south to north. That’s a tremendous amount of water, and it gives you, at least, peace of mind if it’s not required and you still get it,” Salna said.
Lozier said businesses should research their flood zones, find out whether their community participates in any programs through FEMA, and understand what local authorities are doing to mitigate flood risk. Getting involved could also result in premium savings for businesses.
“What FEMA is trying to do, as far as the flooding and what we anticipate of sea-level rise and everything, is to have more of a community effort, I think, by encouraging these different programs and maybe having individuals and business owners talk to the authorities,” Lozier said. “You get more done as a group than as an individual.”
Ensuring buildings are correctly valued on their insurance policy will also be key, she said.
If there’s one industry that’s best able to cope with the effects of climate change in South Florida, it’s the insurance industry. That’s according to Jeff Bartel, who’s managing director of Hamptons Group, a private capital, real estate and strategic advisory company in Coral Gables.
“They can see, long-term, the flood data, the flood zone criteria, and they’re going to make their decisions long term on this,” Bartel said. “However, what that will mean is that the insurer, the policyholder, may see unanticipated spikes in their insurance.”
When insurance premiums rise, Bartel said that will drive changes in behavior, especially as businesses reconsider where they want to be located.
In the long run, insurance could become harder and harder to obtain, according to Bartel, who said the banking industry is already taking note of the issue.
”What we’re going to see is adverse effects on the ability to get long-term mortgages from institutions who are not able to predict what will happen in 30 years if that property is not able to be used for its intended purposes,” Bartel said. “So we’re going to see a pivot with institutions, particularly banks, on where they will provide long-term mortgages and where they won’t.”
From: Daily Business Review