By Kate Stein, Greg Bloom and Wallis Greenslade
Many people know that Florida is built on limestone. But more of us should be thinking about another foundation, even less sexy, that everything here depends upon: property insurance.
Property insurance enables Florida residents and businesses to recover from hurricanes like Helene and Milton. It’s an imperfect system: expensive for homeowners and businesses, slow to pay out, prone to come up far short of full compensation for losses, and confusingly fragmented, since protection from flood losses requires a whole other policy. Yet as climate change continues to intensify hurricanes and other natural hazards, property insurance is more important than ever – an essential tool in our resilience toolkit.
Florida’s economy simply won’t work without a viable property insurance market. Property insurance reassures lenders that their loans will be repaid even in the event of a disaster. By “de-risking” this risky place, insurance keeps lenders and investors at the table to provide the mortgages, business loans and real estate capital that Florida’s economy relies on.
The crisis of property insurance affordability is rightfully drawing a lot of attention, both in Florida and nationally. A recent U.S. Senate Budget Committee report concluded that the impacts of climate risk on insurance prices, mortgage availability and property values could “present a systemic risk to the U.S. economy similar to what occurred during the 2007-2008 mortgage meltdown.” A national trade publication for mortgage professionals conveyed a similar warning.
As we consider our options to address Florida’s sky-high property insurance costs, we need to recognize that affordability of insurance is just one piece of a larger puzzle.
The cost of insurance reflects the risks that are being insured against. The more financial risk an insurer is asked to take on, the more they charge their customers. It’s that simple.
So as much as residents and businesses are hurting right now, we also need to consider what soaring property insurance costs are telling us about our future.
The insurance affordability crisis demands responses that first and foremost prioritize resilience – such that we collectively are not just able to afford insurance, but driven to take actions that can mitigate the underlying risks driving this crisis in the first place.
For insurance to remain affordable, we must become resilient
Recent analysis has outlined three scenarios for Florida’s future that starkly illustrate the nature of our predicament:
- Scenario 1: Business as usual makes insurance and climate resilience inaccessible luxuries. Currently, risk mitigation and climate adaptation efforts are scattered. Higher-income communities have more money to spend, so they’re better able to address their risk. This helps them keep their insurance affordable. Affordable insurance helps maintain a stable real estate market and property taxes that can be used for further adaptation. In contrast, lower-income communities have less money to spend on addressing risk. They face higher insurance costs and reduced ability to recover after disasters, as well as a lack of investment, real estate market instability and a lack of funding for climate adaptation. The overall result is a “checkerboard” of collapsed housing markets and inequality across the state.
- Scenario 2: Forcing insurers to reduce prices drives up government debt and leads to a statewide real estate bust. In this scenario, the state government implements laws to require lower property insurance costs. But nothing significant is done about the underlying risk. Forcing private insurers to lower insurance costs without addressing the underlying risks causes them to pull out of Florida completely. As a result, Citizens, Florida’s “insurer of last resort,” becomes the primary insurer. After a catastrophic storm, Citizens and two other state-backed insurance entities all need additional funding to help cover residents’ losses. Actions they take, such as imposing a “hurricane tax” on residents and going to the bond market en masse, scare off would-be investors and lenders. This impedes post-disaster recovery and leads to a real estate market slowdown as well as a significant shortfall of funding for adaptation. Florida enters a vicious cycle of increasing risk and decreasing investment, with low- and middle-income residents and communities hit hardest.
- Scenario 3: Resilience investment and a transition to risk-based pricing promote stability for all communities. The state allows insurance companies to increase insurance prices so they accurately reflect risk. But this is phased-in to prevent abrupt price swings in Florida’s real estate market. Simultaneously, the state adopts policies and programs to help Floridians prepare their homes and businesses for extreme weather, and provides local governments support with grant applications for additional funding. In response to these changes, development becomes more resilient and more concentrated in safer areas. This stabilizes the costs of insurance and real estate markets for at least the medium term.
Collaboration is key
These scenarios are hypothetical and complex. But they illustrate why becoming resilient to risk must be the goal, with lower insurance costs as a by-product.
The scenarios also highlight that an effective response to Florida’s insurability and risk challenges requires large-scale coordination and collaboration. Local governments, state government, Citizens, the insurance industry and communities on the frontlines are all part of this system, and must all work together.
This insight was the starting point for a first-of-its-kind property insurance forum in Miami in 2024. More than 70 representatives from across government, industry and Florida communities developed a set of coordinated recommendations to promote climate resilience, insurance affordability and affordable housing.
The recently published final report includes recommendations to reduce risk, incentivize investment and promote insurability through state and local policy, improvements to data and modeling, and smarter use of new and existing insurance products. Equity is a through-line, and participants are working to take these actions forward via a growing number of local, state, national and international partnerships.
Property insurance costs have risen as climate change impacts to Florida intensify. Without urgent, cross-sector action to reduce the underlying risks, insurance costs will continue to climb. This will inhibit post-disaster recovery, destabilize Florida’s real estate market and economy, and intensify inequality.
By working together to design coordinated responses and pilot proposed solutions, local governments and the state, Florida communities and the insurance industry can make bold progress toward harnessing the power of property insurance as a tool for equitable climate resilience.
Lower insurance costs will be an indicator of our success. But becoming resilient to risk is the goal we should aim for.
Kate Stein, Greg Bloom and Wallis Greenslade lead CRISP, the Climate-Resilient Insurance Strategy Project, which facilitates strategic coordination on climate and insurance challenges for communities across the U.S. and internationally. For more information, contact insurancestrategy@aspirationtech.org. Banner image: Flooding in Sarasota following Hurricane Debby (iStock image).
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