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Last Resort Property Insurance Is a Disaster for Homeowners

Insurance companies have a safety valve that can spare them some of the costs of disaster relief — but it comes at the expense of their customers.

Orange County firefighters battle Blue Ridge fire in Chino Hills
An air tanker drops fire retardant behind homes in Chino Hills, Calif.
Irfan Khan/TNS
In 2022, Veronica Solomon worried about a $1,300 hike in the annual cost of her home insurance. “Am I going to be able to afford my house?” the South Florida resident asked.

Her premiums continued to soar, doubling in four years. No relief was in sight and she was running out of money. In fact, every one of the dozens of people that the local NBC station asked was concerned about whether they’d be able to keep their homes because of the soaring insurance rates.

There’s been a lot of pressure on state governments, which regulate insurance companies, to do something — anything — to hold down costs. But Florida is finding itself squeezed not only by the costs of big storms but also by the rates charged by the mysterious yet critical “reinsurance companies” that backstop the system — and that are playing a growing role in the rising costs of property insurance in risk-prone areas.

It's not just a Florida story. State Farm told thousands of California homeowners this year that their policies wouldn’t be renewed. So did American National Insurance, along with two smaller companies. That meant more than 72,000 homeowners would lose coverage — on top of Allstate’s decision to stop writing policies in 2022 because of the state’s wildfires. For homeowners whose companies continued to provide insurance, the rates soared.

Residents of both states face similar problems with very few options. Both states are using reinsurers — insurers of last resort. These include Citizens Property Insurance, which now insures 1 in 8 Florida households, and the FAIR Plan in California, whose enrollment has doubled since 2019. In Florida, premiums have soared by 200 percent since 2019, to an average of $6,000 per home across the state.

These increasing costs have caused many residents of these states to drop their coverage. California state Sen. Bill Dodd has seen too many of his constituents’ homes burned by wildfires. “What’s happening is a lot of people in my district and frankly other districts are ... going naked — they have no insurance,” he said.

Even giant insurance companies like State Farm and Allstate can’t take big hits from mega-disasters. To avoid getting clobbered when huge claims roll in, they buy reinsurance from big, mostly global companies such as Munich Re and Hannover Re (based in Germany), Swiss Re, Canada Life Re, Scor (based in France), and the legendary Lloyd’s of London. In the U.S., there’s Berkshire Hathaway’s reinsurance division.

The process works like this: No individual insurance company wants to get stuck when big claims strike, so insurers share the risk with these global companies. In case of a big storm or megafire, for example, the first-line insurers cover part of their losses through the reinsurance they have bought from these reinsurance companies. The insurers pay for this reinsurance by paying premiums, just as individual homeowners pay for protection through fees the insurance companies charge.

The companies pay for the reinsurance premiums by passing the costs along to homeowners. The reinsurance companies make their money by charging insurance companies premiums based on the expected payouts, plus a healthy profit.

Reinsurance thus protects the giant insurance companies from going bust when big losses hit. It helps smaller companies provide coverage to homeowners. But the homeowners are getting stuck even further.

In Florida, the cost of homeowners insurance has doubled in the last three years. But that’s largely because the cost of reinsurance there has more than doubled, to $6.4 billion. And because of the huge damage from Hurricane Ian in 2023 and Hurricane Fiona in 2022, reinsurers became more wary, increasing premiums and reducing coverage, in a vicious cycle.

Over the years, California and Florida have used different strategies to rein in the increases. Blue-state California has tried to regulate rates, but that’s only squeezed private insurance companies and sent more people to the reinsurance pool. Red-state Florida has subsidized its last-resort reinsurer to try to keep a lid on increases.

Now the two states are moving toward a common strategy: Use a more market-driven approach to keep insurance companies in the state and pass on to consumers at least some share of the risks—from fires or hurricanes—that come with vulnerable property. This might slow the rate of increase from reinsurance costs, but it won’t stop it.

California is trying to rein in the insurance costs from wildfires. So are other states with exposure to big wildfire losses (Oregon and Hawaii) and hurricanes (Texas and Louisiana). States everywhere are encouraging more mitigation, including clearing brush around California homes, installing fire-resistant shingles, and retrofitting Florida homes to make them more storm-resistant. Then there’s the core strategy: Convincing people to move out of risk zones, even if that is the hardest step of all.

But there just aren’t a lot of great options. The reinsurers don’t have to sell reinsurance that they believe is too risky and that would lose them money. Insurance companies don’t have to do business in a state if they don’t think it’s good business. No private company will want to put up with state regulations that drain their wallets, and state governments don’t have an unlimited supply of tax dollars to use in subsidizing last-resort reinsurance programs.

As I discussed in a previous column, there are strongly centralizing forces at work here, with more disasters increasing the costs of recovery and challenging the ability of private market forces to respond. Red and blue states have found themselves struggling with the same problem, and the issue will inevitably rise to the attention of the federal government, with tough questions about whether the feds will need to play a stronger role backstopping the system as the costs for homeowners, states and taxpayers continue to rise.

These discussions are certain to get even more complicated. Untangling the complications begins by sorting out the role that reinsurance companies play in preventing the system from collapse when big events — and big losses — happen.
Donald F. Kettl is professor emeritus and former dean of the University of Maryland School of Public Policy. He is the co-author with William D. Eggers of Bridgebuilders: How Government Can Transcend Boundaries to Solve Big Problems.
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