With loss estimates placing Major Hurricane Ian as one of the costliest hurricanes to ever hit the U.S., a question arises around who will pay to repair and reconstruct the tens of thousands of affected Florida properties and compensate businesses for lost income. And just how long will this recovery take?

RMS®, a Moody’s Analytics company, has supported the (re)insurance industry with physical climate risk impact models for over 30 years. Through our partnership with insurers, we have a deep understanding of the extent of insurance coverage across perils including wind, flood, wildfire, and earthquake.

With our extensive data and sophisticated risk models, we can assess the financial impact of climate risk, both with and without the protection of insurance, and assess how market dynamics may change insurance provision in the future, in a landscape of changing climate risk.

For Hurricane Ian, the spotlight on who pays naturally shines on insurers, and our insurance market intelligence shows that lenders and investors in Florida should be carefully watching developments in the state’s insurance market. Insurance market dynamics have significant implications when considering investment allocations, credit risk, and financial resilience.

Ian arrived when the Florida insurance market was already in a precarious state, following a recent spate of insurance company insolvencies over the last couple of years. Prior to Hurricane Ian, six Florida property insurers were declared insolvent in 2022 amid widespread financial problems in the industry.

Insurers have been hit with a combination of factors. With an uptick in landfalling tropical cyclone activity in the last six years, after a previous 11-year hiatus, insurers have seen the return of major storm events such as Irma in 2017 and Michael in 2018.

Reinsurance is also becoming more costly, with many insurers unable to buy as much reinsurance in advance of this year’s hurricane season as in previous years, leaving them vulnerable in the face of significant claims.

Tightening Insurance Market

Florida householders are navigating a tightening insurance market that’s delivering rising premiums and reduced availability, in part as a result of litigation changes during the hiatus of landfalling tropical cyclones. These changes include Florida state’s “25 percent roof replacement” rule that saw partially storm-damaged roofs being rebuilt to new building codes, increases in litigation, and rising fraud and social inflation in the state.

The ability of homeowners in Florida to purchase insurance against wind damage is becoming increasingly challenging. The location of a property, the year it was built, and its wind mitigation features are now the biggest factors driving rates and insurability.

Increasingly, wind policies include a very high wind deductible, meaning that more of the cost of repair falls on the homeowners themselves, and insurance premiums are increasing as reconstruction costs grow.

For flood, much of the losses from Ian will not be covered by insurance at all, as flooding extended well outside the National Flood Insurance Program (NFIP) defined areas. Uninsured losses will fall to homeowners and businesses to bear the financial burden in its entirety.

In terms of reconstruction, costs in Florida have rapidly increased in recent years due to a combination of growing demand for new houses, labor shortages, and high global inflation causing costs of construction materials to rise. These inflationary pressures have been inflamed by Hurricane Ian.

Demand for materials and labor will outstrip supply, pushing up repair and reconstruction costs even further. If homeowners and businesses have to find alternative living arrangements over an extended period, this will also increase the financial burden falling on them, in an already-stressed economic situation.

Increased Pressure on Citizens Property Insurance Corporation

As private-market insurance becomes more challenging to obtain, the state-owned insurer of last resort, Citizens, is taking on more and more policyholders. In turn, the company is finding it harder to obtain sufficient reinsurance cover due to increased reinsurance costs.

At the same time, insurance rate increases are currently subject to an 11 percent cap in Florida. Should Citizens’ reserves become exhausted, Florida law will see both Citizens and non-Citizens policyholders charged an extra assessment, in addition to their regular policy premiums, until any deficits are eliminated, thereby increasing Floridians’ liability for paying for the damage.

The picture of who pays for the damage caused by Ian’s extensive storm surge and inland flooding is even more concerning. Water damage is not typically included in a standard homeowner’s policy.

The NFIP, managed by the Federal Emergency Management Agency (FEMA), provides flood insurance to property owners, renters, and businesses. Properties in high-risk flood areas that have a mortgage from a government-backed lender are mandated to have flood insurance.

However, while Florida has the most NFIP policies in force of any state (over 1.6 million as of August 2022), there remains significant underinsurance. Coastal NFIP take-up rates are as high as 30 to 50 percent, but inland where significant rainfall and flooding from Ian occurred, take-up rates drop to less than 5 percent.

Therefore, at a time when household finances are already under pressure, a significant proportion of the repair and reconstruction costs from the storm surge and inland flooding will be borne by homeowners themselves, as happened in Texas after Hurricane Harvey in 2017.

Contact Moody's RMS to help you make better decisions now and in the future through our unique combination of best-in-class physical climate risk models and insurance market intelligence.

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About The Author

Claire Souch

Claire Souch

Vice President, Global Models and Climate Risk

Claire has extensive experience delivering climate and catastrophe risk modeling solutions globally for 20+ years. She is responsible for Moody's RMS’ global climate risk models across insurance and non-insurance applications.

Claire has held previous positions as a Disaster Risk Finance consultant for climate risk, as head of global R&D at AgRisk focusing on agriculture risk solutions across Asia, as global head of Catastrophe Model Evaluation at SCOR, and 15 years previously at Moody's RMS leading global Model Product Strategy. She has served on multiple industry task forces and contributes regularly to conferences, working groups, and publications.

Claire holds a BSc in Environmental Science and a Ph.D. studying drought impacts on renewable energy crops from Cranfield University.

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