Today’s issue is on the state of Florida’s home insurance market, which has become incredibly expensive.
In 2024, the average premium for homeowners’ insurance in Florida reached nearly $11,000 per year — the highest in the US by far.
You may think that this crisis is caused by Florida’s massive exposure to hurricanes. After all, three separate hurricanes have already made landfall in the state this year — tying the record for most in a single season.
But as it turns out, hurricanes are only part of the story…
The fact is, much of this crisis is man-made. Poorly designed regulations have kept homeowners paying hefty premiums, while insurance companies actually struggle to turn a profit.
But thanks to new legislation, Florida’s insurance market could be on the mend — with bullish implications for the state’s insurance companies.
In today’s issue, you’ll find out:
- Why extreme weather is only partly to blame for this crisis
- Why Florida is responsible for 75% of America’s home insurance lawsuits
- How well-intentioned solutions made the problem even worse
- And best of all, how you can profit from the recovery of Florida’s insurance market
Note: The first half of this issue is free. But you’ll need the All-Access Pass to read the full thing.
Let’s go 👇
Brian Flaherty purchased his first mutual fund at 15. After graduating from UVA with a degree in Economics, he began advising institutions and high-net-worth investors as a strategist at a wealth management firm. Today, Brian helps investors uncover the best opportunities and make intelligent use of their capital. He recently wrote about investing in Silver, Uranium, and Lombard Loans. You can follow him on LinkedIn.
Table of Contents
This is about more than just hurricanes
There’s an intuitive and obvious reason that Florida’s property insurance rates are so high – hurricanes.
But as it turns out, hurricanes are just part of the story. Treating hurricanes as the sole explanation for high prices does not hold up to closer scrutiny.
Yes, the risk of hurricanes and other storm damage absolutely plays a role in Florida’s insurance rates (and climate change only worsens things).
But if this was all due to hurricanes, we’d expect nearby states to match Florida’s outsized costs. After all, storms don’t care about arbitrary state borders.
That’s not what we find. Annual insurance costs for a $300k home in the two states bordering Florida (Alabama & Georgia) are about $2,400, just a hair above the national average.
In comparison, Floridians pay about $5,500 on a $300k home — more than double what neighboring states pay.
In fact, between 1980 and 2024, both Alabama and Georgia have experienced more billion-dollar loss weather events than Florida.
And while hurricanes in Florida can be destructive, the state isn’t as much of an outlier as you might think in terms of weather risk.
One way we can measure the destructive impact of extreme weather events is by looking at how much federal aid needs to be distributed after such events.
We find that states like New York, Arkansas, and North Dakota actually rank ahead of Florida in terms of per capita disaster assistance doled out between 2011-2023.
And yet, all have significantly lower property insurance rates.
It’s not about corporate greed, either
Another common narrative is that Florida’s property insurance rates are the result of greedy corporate executives looking to pad their company’s bottom lines.
But it’s hard to square this explanation with the number of insurers voluntarily leaving the state.
In 2023, Farmers, AAA, and Lexington Insurance (a subsidiary of AIG) all withdrew from the Florida property insurance market.
In fact, prior to 2023, Florida’s domestic insurers did not turn a single profit for six straight years!
Moreover, seven Florida insurers actually went bankrupt between 2021 and 2022.
Yes, mismanagement and ill-advised dividend payouts have probably played a role in making the industry shakier than it needs to be. But if this were the driving cause, we’d expect insurers to have a much stronger track record of profitability, and they don’t.
Florida’s insurance litigation market
If neither hurricanes nor corporate greed are the driving forces behind Florida’s sky-high property insurance premiums, what is?
The answer will surprise you. (It sure surprised me.)
It’s insurance litigation.
Post-claim litigation is an esoteric, misunderstood part of the insurance process.
Here’s how it works:
- Someone files a claim with their insurance company
- The insurance company rejects the claim
- The person sues the insurance company to get them to pay the claim.
- The insurance company either fights the lawsuit or settles out of court.
And when it comes to homeowner’s insurance litigation, Florida is king. 👑
In 2022, Florida accounted for roughly:
- 6.5% of America’s population
- 15% of America’s homeowner’s insurance claims filed, but
- 71% of America’s homeowner’s insurance lawsuits filed!
Get this: In 2022, nearly three-quarters of all homeowner’s insurance lawsuits in the US happened just in Florida.
As a result, insurance companies in Florida had to shell out nearly $3 billion to either litigate (or more frequently settle) these lawsuits.
That same year, Florida domestic insurers posted a total net income loss of -$854 million.
It was the industry’s sixth straight year of losses, and three of those years didn’t even have hurricanes!
Now, there are robust rules surrounding insurance litigation — and these rules are essential to ensuring insurance companies actually pay the claims they’re supposed to.
After all, if insured parties didn’t have adequate rights in this process, insurance companies would just deny every claim and never have to make a payout.
But these insurance litigation figures don’t seem to be the result of insurance companies unfairly denying claims en masse.
Instead, they stem from rules that incentivize individuals to sue insurance companies — and incentivize those same insurance companies to settle as quickly as possible.
The Citizens fiasco
The problem of exorbitant property insurance rates in Florida has been known for a while now. But previous attempts to fix the problem have actually made it worse.
One of the most notorious of these ‘solutions’ is Citizens Property Insurance Corporation.
After the ultra-devastating Hurricane Andrew hit in 1992, some Florida citizens could not buy home insurance on the open market at any price.
In response, Florida’s state government created two state-sponsored non-profit insurance companies to fill the gap. In 2002, these companies merged to become Citizens.
Citizens was originally envisioned as the state’s insurer of last resort, designed only to cover the small share of Floridians who couldn’t get insurance elsewhere.
But since then, the company has almost become Florida’s insurer of first resort!
Yup, that’s right: With 16% of the state’s property insurance policies by volume and 15% by insured value, Citizens now has the highest market share in the state,
Florida residents are eligible for coverage by Citizens if:
- They can’t find insurance elsewhere (at any price), or
- Quoted premiums on the private market are a minimum of 20% higher.
In essence, Citizens functions like an automatic mechanism to undercut private market insurance rates — a stopgap solution to lowering rates without addressing the underlying issues.
Is it any wonder that Citizens has absorbed more and more of the market as private rates rise state-wide?
What’s more, as a state-backed entity, Citizens can afford to offer such low-priced insurance since it has unique mechanisms to raise revenue to cover any potential shortfall.
For example, if Citizens runs out of money to pay claims, the company can implement a 10% annual surcharge on all policyholders in the state until it raises enough cash to cover the deficit.
In other words, both Citizens’ and private-market policyholders could see their annual premiums rise up to 10% in perpetuity to raise cash for the company.
And not just on homeowners’ insurance, either! If losses are large enough, policyholders of renters, auto, boat, and pet insurance could also be forced to pay the surcharge.
Florida’s insurance market is finally improving
Between outsized litigation costs and competitive pressures from state-backed entities, Florida’s insurers have struggled.
However, today things are finally starting to look better for the industry.
In fact, the state’s domestic insurers turned a profit in 2023, something that hasn’t happened since 2016 (!)
Critically, this change appears to be linked to some underreported updates to Florida’s insurance litigation rules.
As a result, the state’s insurance companies have become a much more compelling investment opportunity.
You’ll learn:
- What these new insurance litigation laws are, and how they work
- The specific ways Florida’s market is starting to heal
- Four companies you should consider investing in
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