Hurricane Helene isn’t just a threat to the safety of the people in its path. Depending on how much damage the storm causes, it could also threaten Florida’s insurance market — and recent research suggests that market is dangerously vulnerable.
Catastrophic storms have crippled Florida’s insurance market in the past, including after Hurricane Andrew struck near Miami in 1992, leaving about a dozen insurers insolvent and causing many national insurance companies to flee the state. Florida’s insurance market is now dominated by small insurers, which often have less money in the bank than big national carriers — making them more vulnerable to collapse in the face of too many insurance claims.
Last year, researchers at Columbia, Harvard and the U.S. Federal Reserve Board sounded the alarm about Florida and the home insurance industry. In a paper, they warned that the stability of Florida’s insurers was worse than it seemed, because those insurers appeared to be getting inflated scores from the company charged with evaluating their financial health.
“Our research shows that Florida’s property insurers are far more vulnerable than people might think, with insolvency potentially in the cards,” said Parinitha Sastry, an assistant professor of finance at Columbia Business School and one of the paper’s authors.
The researchers warned about a specific scenario: A big storm hits Florida, causing a tidal wave of insurance claims. Insurers that looked stable on paper start to fail, preventing them from paying out claims to homeowners. That in turn drives up the number of homeowners defaulting on their mortgages because they can’t afford to repair their homes.
At that point, what started as a Florida problem becomes a national problem. The organizations that buy most U.S. mortgages, Fannie Mae and Freddie Mac, are backed by the federal government. If Florida homeowners start defaulting on their mortgages, Fannie and Freddie stand to lose money — and those losses could get passed on to federal taxpayers.
“Our research shows that the financial costs of fragile insurers go well beyond the borders of Florida,” said Ishita Sen, an assistant professor at Harvard Business School and another of the paper’s authors. She said the insurance requirements imposed by Fannie and Freddie are poorly designed.
The stakes could be gigantic, Senator Sheldon Whitehouse, a Democrat and chairman of the Senate Budget Committee, warned this summer as he made a comparison to the 2008 financial crisis.
“Who will be left holding the bag?” Mr. Whitehouse said during a hearing in June on climate change and insurance markets. “The federal budget takes a hit because these insurers and their policies are accepted by Freddie Mac and Fannie Mae, who either own or guarantee a large part of our $12 trillion mortgage market.”
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