Property insurance costs could surge in 2021

Across the country, it seems as though natural disasters are wreaking havoc on a large scale once again this year. There was the derecho that decimated large swaths of the Midwest, multiple hurricanes and tropical storms making landfall in the Southeastern U.S., and massive wildfires up and down the West Coast. All of that is bad news for home and business owners in more ways than one.

Not only are these people being hit by disasters that force them from their homes and potentially even destroy their businesses, but after the fact, their property insurance cost can rise sharply. In Florida, for instance, the Atlantic hurricane season brought with it tropical storms and hurricanes that did varying amounts of damage, with greater frequency than usual, but it is previous difficulties that are leading to a surge in prices for homeowners there.

About 6.2 million households across the Sunshine State have increasingly expensive coverage, largely because most of the nation's biggest P&C carriers have stopped operating in the state due to high exposure, according to The Center Square. Now, the dozens of smaller insurers operating there are citing a number of issues that are leading to massive rate hikes; 10 of 60 are asking the state's Office of Insurance Regulation to approve increases north of 15%, and many more are just under that number. Underwriters say they are dealing with surging reinsurance costs stemming from major hurricanes making landfall and causing tens of billions in damage in both 2017 and 2018.

2020 brought another busy hurricane season for Florida.

A persistent problem
As all this is going on, Florida's state-run non-profit Citizens Property Insurance Corp. is seeing a sharp increase in interest among homeowners, which led to organization president and CEO Barry Gilway calling the private market there “unhealthy,” Florida Trend reported. The role of Citizens is to provide coverage as a stopgap, and keep enrollment on its own books as low as possible. It has been largely successful, cutting the number of homeowners receiving Citizens coverage from 1.5 million in 2012 to just 420,000 at the end of last year.

But now, Citizens estimates that number will rise to 540,000 as 2020 comes to an end (the first time clearing a half-million insured since 2015), and keep rising to 625,000 next year. Ideally, the state-run insurer says it wants to keep itself in the area of providing 4% of coverage statewide, but will likely hit 6% by the end of 2021. Gilway noted that this trend is likely to continue because of how much the market is changing; Citizens can only raise its rates by 10% annually, but there are technically no restrictions on private insurers.

Other problems
On the other side of the U.S., the size and number of massive and extremely damaging wildfires seems to be growing each year, and it's likewise creating a different problem for homeowners there. Reporting from The New York Times shows it's not that Golden State residents don't want private P&C coverage for their homes, it's that insurers often won't cover them. Last year, California had to pass regulations that stopped insurers from canceling existing policies, but those rules cannot be renewed. That means as many as 800,000 homeowners in higher-risk areas could be out of luck when it comes to finding insurance coverage.

That lack of coverage opportunity creates another problem for people up and down the West Coast: If homes can't be insured, banks often won't write mortgages for them, meaning that people can't buy homes and, of course, current owners typically can't sell them. That's still a separate issue from whether people want to buy homes in high-risk areas in the first place.

Even those who can get insurance typically do so through California's own state-run insurer; its FAIR Plans tend to be quite expensive and limited, but nonetheless, enrollment in these plans increased by more than half from the start of 2019 to mid-2020. And even there, rates could rise by as much as 15.6% for next year.

Businesses in dire straits?
Beyond homeowners, the effects of all these natural disasters is taking a toll on businesses as well, new data from Willis Towers Watson shows. Nationwide, commercial insurance prices rose 10% on an annual basis in the second quarter of the year, driven by increases in commercial auto coverage and property insurance costs. In the case of the former, premiums have increased by almost 10% (or more) for 11 straight quarters, and as it relates to the latter, prices have surged “well into the double digits” in each of the last four quarters, largely due to uncertainty in the marketplace. These trends are therefore likely to continue into 2021.

With all these issues in mind, insurers need to be open with consumers about why average rate increases of any size are being sought, and educate them about what they can do to help keep their own personal costs down. That kind of communication could give them a clearer picture of why changes happen and what it means for them, improving the insurer-policyholder relationship overall.