MIAMI - Many property owners along the U.S. coast can expect to see 20% increase in insurance premiums this June at the start of the hurricane season due to increased risk in the market due to projected stormy weather and financial fallout from the coronavirus pandemic.
“This comes on the heels of a number of years of elevated catastrophe losses across the country and globally,” said Robert Hartwig, professor of Risk Management and Insurance at the University of South Carolina.
After a decade of weak storm activity, the summer hurricane season has grown more active in recent years beginning in 2016, and including three major storms in 2017 - Irma and Maria that hit Puerto Rico and Florida in and Harvey which flooded Houston. In 2018 Michael caused widespread damage in the Florida Panhandle while Dorian devastated the northeastern Bahamas last year.
Natural disasters have also struck in other parts of the world, such as the wildfires in California and Australia.
Much of the price increase is being driven by the reinsurance market, the big multinational corporations that provide insurance to the smaller property insurers all over the world.
“There is a very strong trickle-down effect,” said Hartwig, especially in Florida, which has billions of dollars of highly vulnerable property concentrated along its coastline.
“What people have to recognize is that because Florida is the largest market for reinsurance in the world, to the extent that there are impacts in the rest of the world that simply means that there is competition for capital arising from risks in places like California or Asia and Western Europe,” he explained.
One of the world’s biggest reinsurers, Lloyd’s of London, last year cut back in Florida, and elsewhere on its property exposures.
The biggest impact is being felt in the private insurance market, compared to Florida’s state-run Citizens Property Insurance, one of the largest insurers in the state, which is not allowed by law to raise premiums by more than 10% a year.
The Covid effect
Reinsurers were more risk averse this year in part because of the coronavirus, opting to keep their money in other investments, or just hold onto their cash, rather than underwriting the insurance industry.
As a result of covid-19, insurance companies are being hit with “business interruption” claims, prompting insurers to established reserve s in case they need to make large payouts.
Lloyd’s of London revealed it will pay claims in the range of $3 billion to $4.3 billion as a result of the pandemic. That’s on a par with the Sept. 11 2001 terrorist attacks, which cost the Lloyd’s market $4.7 billion, and the combined impact of hurricanes Harvey, Irma and Maria in 2017, which had price tag for Lloyd’s of $4.8 billion.
Overall, the industry is facing historic losses estimated at $203 billion, Lloyd’s said in a press release last month.
A "tsunami of class action lawsuits"
The Covid-19 pandemic has drastically disrupted the entire global economy. The disruption “has led to a tsunami of class actions lawsuits directly related to the pandemic with more on their way,” says William Klein, a Chicago-based business law expert. The lawsuits vary from business forced to close, to consumers seeking refunds due to covid-19 cancellations for airline travel, vacations, sports and music events.
A Miami Beach salon, Atma Beauty, sued an insurer for rejecting its coronavirus claim alleging that Lloyd’s of London promised to cover losses incurred as a result of the salon suspending its operations, but failed to do so, breaching its contract.
IT! Italy Ristorante Café & Bar in downtown Fort Lauderdale filed a lawsuit alleging Chubb Limited, the largest commercial property insurer in the country, alleging that it failed to honor its agreement to pay its business insurance claim after Florida Governor Ron DeSantis ordered all restaurants to close March 17 due to the pandemic.
Lloyd’s is defending itself in a similar lawsuit by a Tampa restaurant, Prime Time Sports Grill, arguing that the decision by the Florida governor does not meet the necessary standard to make a claim for direct physical loss.
The knock-on effect is also being felt by state officials who manage Florida’s special reserve fund for hurricanes. For the first time in many years, the state-run Florida Hurricane Catastrophe Fund did not purchase reinsurance for the upcoming hurricane season due to a lack of affordable capital in the bond market. The 'Cat Fund' operates as a pot of money to guarantee home-owners insurance if there is a major catastrophe that overwhelms the insurance market.
Prior to the beginning of each hurricane season, usually goes out to the global financial risk market to top up the fund to make sure it can meet its claims-paying capacity.
Despite capital being “less abundant than in prior years,” John Kuczwanski, who is a member of the board that oversees the fund, that it was adequately capitalized for the upcoming season. “The [fund] is in a strong financial position with $12.3 billion in liquid resources available to pay claims for the upcoming hurricane season,” he added.
Florida’s state-run insurer, Citizens Property, which has 450,000 policies covering more than $100 billion in risk, also slashed its usual spending for additional coverage to boost its surplus because of what it called “irrational” pricing in the capital markets.
“We just couldn’t justify the price,” said Michael Peltier, a spokesman for Citizens, who added that its reserves remained in good shape. “We feel we are in a pretty financially strong position. We’ll go back to the market next years and hopefully it will be a little more rational,” he said.
What if Dorian hit Florida?
In the end, homeowners can only pray for good luck with the weather this year.
“ Last year we were incredibly lucky. We were in line for two Category 5 storms,” said Gavin Magor, a senior analyst at Weiss Inc, an insurance ratings agency, who lives in South Florida.
While Florida’s insurers are in relatively strong shape, they would still struggle to meet losses if more than one major storm hits the state. “All bets are off if there is a Cat 5, or back-to-back storms,” he said.
If Dorian had hit Miami, instead of turning north after pounding the Bahamas, it would have caused havoc with older condominiums on the coast built in the 1980s before building codes were tightened after Hurricane Andrew hit Miami in 1992.
“If we have a Cat 5 the federal authorities will have to bail us out. Or we will have future policy surcharges will be unaffordable for many,” said Magor.