The high spiraling, inflated property insurance policy premiums in Southwest Florida were set into motion long before Hurricane Ian formed in September. Many months prior to Sept. 28, insurance market forces began churning, much like how warm waters fuel hurricanes, said Brian Chapman, the owner of Chapman Insurance Group.
“In the past, for every dollar you spent on insurance, about 25 cents went to what’s called reinsurance,” Chapman says, explaining that insurance companies carry insurance themselves in the event of a natural disaster striking. It’s the reinsurance, not the insurance, that pays for most of the damages. “That cost alone has just about doubled. Now, when you spend a dollar on insurance, 40 to 50 cents goes to reinsurance.”
The cost of reinsurance has been passed on to homeowners. The rising costs also have driven many insurance carriers out of business. And in addition, those costs have prevented new carriers from taking the risky plunge of doing business in Florida and other battered coastal regions.
Most homeowner policies have spiked by 40% to 50% above a year ago, insurance experts said. Business owners are seeing even larger increases, said Chase Mayhugh, an associate broker at Mayhugh Commercial Advisors, based in Fort Myers.
“It’s not in a good position to be right now,” Mayhugh says of owning commercial property. “It’s a perfect storm of events that have caused this. We’re seeing anywhere between 50% and 100% increases on premiums.”
Mayhugh said he has been cautioning investors against buying certain properties, an irony given that his livelihood depends on the commissions he receives from selling them.
“There’s a lot of things happening,” Mayhugh says. “We’re more of a conservative office. We do watch all of these things. I talk more clients out of buying properties than of buying assets, because we work with people for life. We are concerned.
“We might have a major credit crunch. These are things we are all keeping a close eye on. It is Fed induced. It’s not like in 2008—the Fed is trying to stop inflation. The problem is, it takes a while for the train to get running. It’s going to take a lot of time to slow it down, too.”
Chapman and fellow insurance company owner Brian Culbertson each said they saw signs that there could be an end in sight to rising homeowners insurance premiums—eventually.
“There has to be,” Culbertson says. “The cost of property insurance in Florida right now isn’t sustainable. Florida has been an infamously unfriendly insurance environment for decades, dating back to pre-Hurricane Andrew (in 1992), but certainly worsening since that point. And again after the influx of major hurricanes in 2004. There isn’t one thing to blame; it’s a perfect storm, if you will, of problems.”
The abundance of the state-backed Citizens Property Insurance policies has almost doubled in the past two years.
“My agency had only a handful of our 10,000 homeowner policies with Citizens a year ago,” Culbertson says. “By the end of this month, more than 2,000 of our customers will be insured by Citizens, because we have no other options. Two of our largest carriers were declared insolvent in recent months.”
Chapman said there was only one way for the prices to stabilize, if not go down.
“The way it gets better is to have new carriers come into the market with no trail of losses,” he says. “They’re coming, because the opportunity is here, because the cost of insurance keeps going up. But I would say there’s going to be six to eight new carriers in the next two to three years.”
It’s going to take some time, he said.
“You can’t unwind five years in 12 months,” Chapman says of the market forces that created the current spike in premiums. “Competition is the No. 1 thing to bring pricing down.”
The commercial insurance increases have put some landlords into business binds, Mayhugh said.
“We talk about investment properties,” he says. “Your retail strip centers. Your industrial buildings. Gross and triple net leases. The tenant pays a set amount of rent every month. The landlord out of that amount pays all the operating expenses. In that case, when the premium goes up, the landlord takes the brunt, because they can’t pass that expense on to the tenants.”
Triple net leases favor the landlords, because the tenant is responsible for insurance, the rent and the upkeep of the property. With gross leases, the tenant only pays the rent, and the landlord takes care of the rest—including rising costs.
But because insurance costs continue to rise, landlords could be more inclined to grant gross leases … if that’s all they can get.
“In bad times, you see more gross leases,” Mayhugh said. “Because it’s more of a benefit for the tenant. When there’s a lot of supply and not a lot of demand, the tenants are going to be able to get gross leases.”
The forces of inflation are vast, the experts said, and they were not limited to the recent rash of named storms, including Ian last year and Hurricane Irma in 2017.
“Florida has 8% of the country’s property insurance but has 78% of the litigation,” Mayhugh says. “That’s another reason why these premiums are going up. So there’s a multitude of reasons. And it’s all happening at the same time. Inflation, storm events, litigation. People need to be protected. You don’t want to find out that you don’t have enough to build your building back.”
But it’s not all doom and gloom for the economy and for investors, Mayhugh said.
“This will also create a lot of opportunity for people who have cash,” he says. “There’s always an opportunity to strike—that happens with every crisis. Things are still moving. We’re busy.”
Car premiums climbing, too
A quick internet search will show the cost of auto insurance in Florida is among the highest in the nation, and many residents are facing substantial increases to their premiums. Reasons for higher rates in the Sunshine State include environmental factors and driver profiles, among a host of other contributing factors such as the state’s no-fault auto insurance laws.
Lee County resident Vicky Bowles said her six-month premium for two vehicles was $799.55. After retirement, she and her husband decided to downsize to one vehicle, and in less than three years, the six-month premium to insure one 2022 Hyundai Veloster was $812.14, slightly higher than she previously paid for two vehicles.
“We all know that there’s inflation and increased costs for everything, but that does seem really extreme,” she says. “I know that there are people out there with one car who are probably paying twice as much as we are because they don’t have the discounts available to them; I don’t know how they do it.”
Brian Chapman, CEO of Chapman Insurance Group, said he recommends a baseline of coverage to his clients, and it’s never the minimum required by the state.
“Most of our clients are buying the coverage that makes sense financially for them, not an expense or the cost, but to protect them financially,” he says. “Ultimately, when they buy that policy, they’re also paying for the people that are buying the minimum coverage or aren’t buying enough coverage.”
The litigious component is a huge factor in auto insurance rates, Chapman said. And the rising cost of auto insurance is one that affects the community as a whole. Ask Bowles, who has had two claims from incidents that she said were the other drivers’ faults, but they were uninsured.
More than 20% of drivers in Florida are on the road without coverage, which is one of the highest rates in the country, according to a 2021 report from the Insurance Research Council. Mississippi had the highest rate of uninsured drivers at 29.4%, New Jersey had the lowest at 3.1%.