Is Going Without Insurance a New Trend?

Floods and droughts, wildfires, and hurricanes. Oh my! 

As the number and intensity of natural disasters skyrocket, some insurance companies are choosing to move out of incident-prone areas or flat-out not renewing policies after a disaster leaving homeowners with little choice but to pay insane premiums from companies still willing to write policies in their state or simplify go without an insurance policy. 

For example, in California alone, there have been between $20-$50 billion in damages combined due to natural disasters in the last four years. In Florida, there have been between $100-$200 billion in damages from severe storms and hurricanes; this includes hurricane Ian, which was the third-costliest storm in U.S. history. 

This retreat of well-known insurance companies is one reason Florida and California homeowners are seeing eye-watering increases in their premiums. This is raising fresh questions about the soaring cost of living in these states and whether staying there is sustainable for its residents long-term. 

According to a joint report by Yahoo! and NBC, in California, the average annual home insurance premium is $1,300 today—up 16% from 2019 levels, according to the Insurance Information Institute, a group that represents the insurance industry. As more insurers have exited California's borders, the state's FAIR Plan Association, which was established for California homeowners who are not able to find insurance in the traditional marketplace, has seen enrollment numbers approximately double since 2019. 

Further, if that sounds like a lot, it's got nothing on Florida, where the average homeowner's insurance premium is now $6,000 — up 200% from 2019, according to data from the Insurance Information Institute. 

One insurance company still writing policies is the Citizens Property Insurance Corporation, Florida’s state-run plane funded by its customer's premiums. It now serves as the largest and fastest-growing insurer in the state—up to 1.4 million policies (up from 500,000 in 2019) serving 1-in-8 Florida households. 

So how did this happen? It comes down to climate risks and the cost of rebuilding homes. 

"When you have rising construction costs and then the potential for widespread losses, that’s what exacerbates problems in these areas," said David Blades, associate director for industry research and analytics at AM Best, a global credit agency and data group. 

For example, during and after the Covid-19 pandemic, supply chains were disrupted, real estate prices skyrocketed and interest rates surged. As a result, Blades said, construction costs soared 13.4% in 2021 and 9.3% the year after. 

"When you have economic factors amplifying risk-related factors, that's where you get insurance companies that don't want to make these decisions," Blades said. The calculus then shifts to whether it's worth it for the company to keep doing business in the state or "look at their bottom line and assess that their risk appetite needs to change," Blades added. 

As an example, Farmers Insurance has stopped writing new homeowners policies in Florida, according to the Wall Street Journalist. Farmers is one of a dozen who have decided to no longer write new policies in the Sunshine State, alongside six now-insolvent companies. 

"With catastrophe costs at historically high levels and reconstruction costs continuing to climb, we implemented a pause on writing new homeowners policies to more effectively manage our risk exposure," a Farmers spokesperson said in an email. 

Michael Peltier, Citizens' media relations manager, said that, at the moment, the company has enough financial cushion to absorb the new policies, assuming the rate increase is approved. But if enrollment growth continues, Peltier said Citizens may be forced to levy additional assessments not just on their own policyholders but also anyone with any kind of insurance in Florida, including auto. 

"It's not a healthy environment," Peltier said. "This growth we have is not sustainable." 

According to the study, it isn’t just cost increases in the state of Florida causing insurers to pull out, but also because of the state’s legal environment. 

“Until recently, homeowners could assign insurance claims to third-party contractors, like roofers. Some of those contractors would then pursue false damage claims against the insurer and sue them if they refused to pay,” the study said. “The scam left insurance companies on the hook for any legal costs, even if they ultimately won the case. The Insurance Information Institute estimates that just one month before the passage of a Florida state bill ending the practice, some 280,000 lawsuits were filed.” 

Others say the situation in Florida is more complex and directly tied to climate change. Amy Bach, executive director at the consumer advocacy group United Policyholders, said the bill designed to fix the "Florida roofing scam" problem "eviscerated people's ability to sue" their insurer. 

"So many people were not getting paid fairly," Bach said. "The industry says it’s the lawsuits, but as soon as they got what they wanted, rates did not come down. So clearly that wasn’t the whole story." 

In California, insurers are seeing huge losses. 

"It's only supposed to be a rare large-scale event that brings reinsurer dollars in," Bach said. "But because we've been having increasingly frequent and severe weather disasters like hurricanes and wildfires, insurers are tapping reinsurers more than in the past, and they don't like that." 

State Farm, as well as Allstate both recently announced they had stopped writing new policies in California. Insurance giant AIG has also started to curb home-insurance sales to affluent customers in approximately 200 ZIP codes across the U.S. that are at high risk for floods or wildfires, the Journal reported. 

“With the past five years of intense wildfires and large property losses incurred in California, the insurance industry has pretty much lost all of its underwriting profit in the state that was generated over the previous 20 years,” he said. 

All of this comes down to more homeowners going “naked” or without insurance, further exacerbating the affordability crisis. Florida's and California's insurance troubles are likely to prove particularly burdensome for retirees who had been counting on selling their homes to generate cash in their golden years. 

“We just don’t have a stable insurance market,” California State Sen. Bill Dodd, a Democrat from Napa, whose Northern California district has been charred by wildfires, told the Associated Press. “What’s happening is a lot of people in my district and frankly other districts are ... going naked—they have no insurance.”