Property Insurance Premiums — Florida’s Insurance Tempest

By Jay Hancock / Published August 2023

Having been in the insurance business, and more specifically the coastal property insurance business, since 1984, I have seen property insurance markets cycle through hard and soft market scenarios since Hurricane Andrew made landfall in 1992 and after Hurricane Opal followed in 1995. This provided me with my first experience in a hard market cycle from 1993 until around 1998. There was very little appetite in the private market for high-valued, coastally located properties at that time; and where there was, the deductibles for hurricane losses were $100,000 or more and were written as flat deductibles, which at the time was unheard of.

Shortly after that cycle we went through a period of a few years where there were several investors pouring capital into the market. Those investors had an appetite for coastal properties again, and the market became somewhat more competitive as the real estate market went through a boom and more high-valued, coastal properties were developed. Then came the storms of 2004 with Tropical Storm Bonnie and Hurricanes Charley, Frances, Ivan, and Jeanne; and in 2005 with Hurricanes Dennis, Katrina, and Rita all making landfall in the United States during those years.

That active period provided me with a second hard market cycle experience. At that time, which many of you may remember as well, the market of last resort in Florida, Citizens, became the only market available for writing high-valued, coastal properties in the State of Florida. From 2005 until 2009 there was virtually no private market insurer that would write these properties in Florida. No one could compete with the rates and terms being provided by Citizens. Around the rest of the southeastern United States, private market pricing continued to increase exponentially, and terms worsened to the point that many other states ventured into state-funded alternatives that could provide some form of wind coverage in their states. Some worked and some didn’t, but Citizens provided an alternative to the private market in Florida that no other states were willing to expose their taxpayers to.

Basically, Citizens was backed by all private policyholders in the state and by the policyholders within Citizens if they fell short in their financial ability to pay all their losses after any catastrophic loss. In this event all the policyholders with Citizens would be assessed first for an additional 45 percent of their current annual premiums, whether they incurred a loss on their property or not. Then all other policyholders would pay and participate in the shortfall thereafter via assessments to their policies. As you can imagine, this scenario would have been a fiscal nightmare for the state if the storm seasons of 2004–2005 had continued, or if the storm season we have experienced from 2016–2022 had occurred. Fortunately, we subsequently went from 2006–2016 without any significant storms making landfall in the state.

This period of no or low storm activity led to investors providing large amounts of capital in the property insurance market because of the return on investment they were experiencing. It also led to the softest insurance market cycle that I have ever seen for high-valued, coastal properties in the southeastern United States as insurers began competing for business. Coastal condominiums during the hard market cycle were paying rates per $100 of value/exposure of approximately $0.55 to $1.50 for property policies with hurricane deductibles at three percent of their total insured value, not including any ordinance and law coverage, without wind-driven rain coverage, and with very limited policy forms. During the soft market cycle those same facilities rates went all the way down to $0.16–$0.40, depending upon the individual construction characteristics of the property. Those policies also included one percent or two percent hurricane deductibles, ordinance and law coverage, wind-driven coverage, and much broader coverage forms in general than were previously available.

This is a traditional trend in the industry and nothing new for the property insurance market. Large profits lead to large returns for investors, which attracts more investors, which in turn leads to more competitive pricing and terms to compete for our clients’ business. The problem with this traditional trend is that it leads to big fluctuations in the overall pricing and terms available to our clients. During the non-active and soft market years, our clients see the savings and the broader terms provided during that period and budget for those types of costs. During the active and hard market years, our clients see the high costs and more limited terms provided during that period and must figure out how to budget accordingly.

I am not sure what insurers are thinking when they produce their own “modeling” that shows that eventually there will be hurricanes that make landfall and there will be large losses because of those hurricanes. It seems, because of those models, that they would understand that allowing the insurance market to enter a soft market cycle by reducing their premiums, increasing their terms to provide broader coverage, and driving their deductibles lower would be detrimental to their profitability and cause losses for their investors. There is a cost/premium that can be paid annually by every high-valued, coastal property that is somewhere between where a hard market cycle cost is and where a soft market cycle cost is that will provide profitability for the insurer and an affordable cost for the insured without this undue volatility. You would think that insurers would strive to find that “middle ground.”

The volatility currently being experienced by all of us in the property insurance market is not a result of poor planning on behalf of us as consumers, nor solely based on the active storm seasons we have experienced since 2016, but is also indicative of a poor business model utilized in the insurance industry. When times are good, they chase each other to the bottom and cut each other’s throats to earn your business. When times are bad, they chase each other to the top to keep from going bankrupt, or they flee the market completely. If you add to that the fact that our economy is currently not allowing them to earn any investment income from outside sources, you begin to see that they have placed themselves in a position where they either charge exorbitantly higher prices for their product or they close their doors altogether.

Had insurers chosen to charge somewhat higher prices through the non-active storm seasons and placed those additional premiums they received into reserves that earned investment income during that period, we wouldn’t be experiencing as drastic of a hard market as we find ourselves in currently.

However, having done this most of my life, I see no end to the insanity of our industry and its folly as it relates to hard and soft market cycles. Likely all we can do is enjoy the soft market cycles and simply try to survive through the hard market cycles. It all eventually averages out to a cost that is between the two periods, and I can complain all I want about it, but it will never change anything.

So, at the end of the day, it is incumbent upon condominium association boards to elect to do business with an agent who understands these hard and soft market cycles we all must deal with. They can better help your owners understand these cycles and the types of programs that can better help the association manage these ups and downs that affect your budget so drastically.
The bottom line is that all associations are in the same boat as it relates to the property insurance industry currently, and the best lifeline to any association during this hard market is an agent that has been through these cycles before.

Jay Hancock, Account Executive Condominium Specialist/Hert Claims Supervisor

Claims GPS

Jay Hancock is an account Executive Condominium Specialist / HERT Claims Supervisor in Panama City, Florida. For more information call 850-896-5740 or email Jay.Hancock@acentria.com.