Interesting article provided by Brown & Brown Insurance Brokers in Fort Myers.

What is Florida’s ‘hurricane tax’?

By: ALEJANDRO DE LA GARZA

In Florida, it won’t just be those with homes and businesses hit by Hurricane Idalia who might be stuck picking up the pieces. Thanks to a broken home insurance market, a particularly bad hurricane could spread financial fallout throughout the state, leaving residents from Pensacola to Key West paying repair bills for years.

Beset by hurricanes made more severe and more frequent by climate change, as well as rampant fraud and tides of frivolous lawsuits, dozens of insurers in the state have close up shop or stopped selling new home insurance policies in in recent years. (Farmers became the most recent big insurer to pull out of the state in July). Residents have increasingly turned to Citizens Property Insurance Corporation, a public entity established by the Florida government as the state’s so-called “insurer of last resort” for people unable to find affordable rates from private insurers. But for many, Citizens is becoming the first and only option, especially for those with coastal homes at particular risk from hurricanes. In 2019, Citizens had about 400,000 home insurance policies on its books; today, it has more than 1.3 million, about twice as many as the state’s next-largest insurer.

With so many homeowners using Citizens policies, each hurricane season becomes a financial roll of the dice for almost every Floridian. When a normal insurance company takes big losses, it goes bankrupt. But if hurricane winds destroy too many homes covered by Citizens’ policies and the insurer faces bigger bills than it can afford to pay, the public company won’t go belly up. Instead, such an event can trigger what is known as an assessment, wherein state law mandates that Citizens imposes fees on private insurance policies across the state in order to cover its payouts. And it’s not just property insurance-policy holders that may have to pull out the checkbook. If you live in Florida and have auto insurance, but can’t afford to own a home, you can still be stuck contributing to funds that pay for homeowners to rebuild after a big storm. “We have many low-income households that are literally living paycheck to paycheck,” says Mark Friedlander, a spokesperson for the Insurance Information Institute, a trade group. “They can’t afford this.”

That situation last occurred after the storms of the 2004-05 hurricane season, which had Florida residents paying off Citizens’ $1.7 billion tab though 2015. Currently, the insurer has about $4.8 billion in the bank. It’s unlikely Idalia effects will break that budget. But months remain in the Atlantic hurricane season, and the increasingly warm water offshore that can serve as fuel for powerful storms. “We probably only need one or two more [hurricanes] to make landfall before Citizens has to do an assessment,” says Charles Nyce, a professor of risk management and insurance at Florida State University. “When you have 1.3 million policyholders, that $4.8 billion is going to go very quickly.”

There’s no easy solution. Laws passed in the Florida legislature last year have cut down on some of the fraud and excessive legal filings that had been choking the state’s private insurers, and Citizens is trying to offload some of its bloated policy roster to the private market. But other forces are pushing in the wrong direction.

One reason Citizens is flooded with policies is that it’s legally barred from raising rates fast enough to stay in line with the sharp increases on the private market. The Florida state government recently rejected a request from Citizens’ management to impose a 12.1% rate hike. That decision may keep prices lower for policyholders, but ultimately cost more residents in the longer term. As Freidlander puts it: “It’s a recipe for a hurricane tax that would be applied to all Florida consumers.”