Rebecca Blackwell/AP Photo
A scene outside the closed Kona Kai Motel on Sanibel Island, Florida, May 11, 2023, eight months after Hurricane Ian caused severe damage to the island
The reason the Obamacare exchanges have so many complicated regulations is that a lot of people require treatment that costs more money than they possess. To get a health insurance market to work, the government has to set up structures that group people into big risk pools that have systematic transfers from the young and the healthy to the old and the sick.
Home insurance, by contrast, is a lot simpler. You, the homeowner, pay individually what you are statistically expected to claim for repairs or replacement, plus a profit margin. So if conditions change such that the likelihood of your house being destroyed (or the price of replacing it) goes up, your insurance premiums will also go up—or the insurance company will simply refuse to offer you a policy.
Farmers Insurance Group and AIG recently made the latter decision in Florida—two of 16 home insurance companies that have pulled out of the state market over the last 18 months. Farmers was reportedly blindsided by Hurricane Ian last year, which caused some $60 billion in insured damages across the state. It also has been hit with the increasing costs of labor and materials for home replacement. That’s why Florida’s home insurance costs are up an estimated 57 percent since 2015, by far the biggest hike of any state.
Insurers are also pulling out of California, thanks mainly to wildfire risk.
The most obvious backstop here is for the state to step in and either subsidize private companies, or offer its own insurance policy of last resort. “Florida and California will need to offer state-backed reinsurance so that insurers can issue actuarially sound policies,” suggests one consumer advocate. Florida indeed does this with its Citizens Insurance program.
But this is not going to work over the long or probably even the short term. With increasing temperatures fueling ever more extreme weather, and especially sea levels rising near trillions of dollars’ worth of Florida coastal real estate, damages are going to keep rising, fast. As Hamilton Nolan points out on his Substack newsletter, no state has the budgetary capacity to shoulder a really sensational disaster. $60 billion from a single powerful hurricane (that narrowly missed the extremely vulnerable Tampa Bay area, by the way) is not far off the entire Florida state budget of $117 billion.
There are three clear options to avoid a complete implosion of the extant home insurance market in Florida and other vulnerable states. The green-energy transition could be dramatically accelerated around the world. Or nations could try to cut down global temperatures with some geoengineering scheme. Or the federal government could step in with enormous subsidies.
But one thing is clear: Without some major changes, great swaths of Florida’s cities will soon have to be abandoned.
