Hurricane Milton would have done more damage if it had made landfall a few dozen miles farther north. The southern side of the hurricane, with its Category 3 winds spiraling counterclockwise, would have driven a wall of seawater into downtown Tampa. Instead, Tampa Bay got hit by the northern side of the hurricane, whose winds traveling from east to west pushed water from the bay out to sea. It was what meteorologists call a “negative surge.”
It was Florida’s fourth stroke of (relatively) good luck. Property damage from Hurricanes Idalia last year and Debby and Helene this year was also less than it might have been because they hit hardest in the lightly populated Big Bend, where the panhandle meets the peninsula.
Still, the Florida peninsula sticks out like a sore thumb into waters that keep getting warmer, brewing up fiercer and fiercer hurricanes. It’s only a matter of time until a monster storm does hit Tampa-St. Petersburg or Miami or another major metro area dead-on.
Getting insurance right in Florida isn’t the whole solution, but it’s a big one. When the insurance market is working correctly, losses are shared. Nobody gets financially wiped out. Also, the premiums people pay are based on the risks they face. This gets incentives right: People are motivated to harden their homes against storms or move out of harm’s way, which obviously helps them but also reduces costs for society as a whole.
But getting there isn’t easy. Climate change has made living in Florida riskier, but when insurance companies try to charge actuarially fair premiums, they receive strong pushback. Nationally, the flood insurance market is so dysfunctional that the federal government has had to take over most of it. And that’s not working, either. Rates are still subsidized, though less than before, so taxpayers who live high and dry are potentially on the hook for losses by people who get flooded out, in some cases repeatedly.
So, what to do? While Florida can’t control the weather, there are things that it can do to reduce the economic damage that storms cause. It has done some of them, but there are still weaknesses in the system — and according to one recent study, a devastating hurricane in Florida could ripple all the way to the mortgage finance giants Fannie Mae and Freddie Mac.
First the improvements: In 2019 and 2022, the State Legislature enacted laws that cracked down on insurance fraud and abuse. It was common in Florida for someone with an insurance claim to sell it for instant cash to a third party such as a roofer or a water extraction company. The new owner of the claim would sometimes do overpriced or shoddy work and then sue to get fully paid by the insurer. The reduction in so-called assignment of benefits insurance fraud and abuse has sharply slowed the rate of premium increases and allowed 15 companies to reduce their rates this year.
Under Gov. Ron DeSantis, Florida has given grants totaling $250 million in the past year or so to help make homes hurricane-resistant. I don’t know if that’s sufficient, but it helps. A little money spent for protection can save a lot more when a storm hits.
There’s also been some progress on the issue of under-insurance, particularly against the risk of floods. People are required to have flood insurance to qualify for a federally regulated or insured mortgage only if where they live is estimated to have a 1 percent or higher chance of getting flooded in any given year. One carrier, Olympus Insurance, estimated that more than 850,000 Floridians in high-risk flood areas — presumably without such mortgages — don’t have flood insurance, whether they realize it or not.
This year Florida’s state-run insurer of last resort, Citizens Property Insurance Corporation, began requiring all homes in high-risk areas valued at $600,000 or more to carry either federal or private flood insurance, regardless of their mortgage type. The requirement will be phased in for homes valued below $600,000 between now and 2027. That’s another step in the right direction because experience shows that people often don’t do what’s in their own best interest — get insured — unless required to do so.
People go without flood insurance even though it’s subsidized by the federal government to keep it affordable. The National Flood Insurance Program is run by the Federal Emergency Management Agency. If its funds run out, it can tap the Treasury Department for about $10 billion, but if even that runs out, it has to go to Congress for more. Because of this year’s hurricanes, that could happen this fiscal year.
It’s not just flood insurance that people go without. Some homeowners skip wind insurance as well if they don’t have a mortgage, or they manage to opt out from their lender’s insurance requirement.
Another remaining risk is the health of the insurers themselves. A study this year by researchers from Columbia Business School, Harvard Business School and the Federal Reserve found that “traditional insurers are exiting high-risk areas, and new, lower-quality insurers are entering and filling the gap.”
“Our research shows that Florida’s property insurers are far more vulnerable than people might think, with insolvency potentially in the cards,” one author, Parinitha Sastry, an assistant professor of finance at Columbia Business School, told The Times last month.
Citizens, which was once the fastest-growing insurer in the state, has made a major effort to “depopulate,” dropping many policyholders who end up getting covered by smaller, often Florida-only carriers. The problem is that these carriers lack the risk-reducing diversification that a national insurer has, which may leave the weakest of them more vulnerable to collapse.
Many of these small, state-only insurers, the researchers argued, also receive unrealistic financial strength ratings from Demotech, an Ohio-based company that competes with larger rating agencies such as A.M. Best. According to data from the National Association of Insurance Commissioners cited in the research, 18.7 percent of the insurers underwriting Florida homeowner insurers that had Demotech ratings were liquidated between 2009 and 2022. In contrast, there were no liquidations of insurers selling personal residential homeowners insurance that had ratings only from A.M. Best.
Homeowners whose insurance companies fail to pay claims, and aren’t made whole by the state guaranty fund, are more likely to default on their mortgages. Many of those mortgages are owned or guaranteed by Fannie Mae or Freddie Mac, the researchers found. Both companies accept loans that are insured by companies rated by Demotech. Defaults in Florida could consequently cut into the profits that Fannie and Freddie pay the federal government.
In a statement to me, Fannie Mae said the decision of which ratings companies to accept “reflects a balance of the risk of insurer insolvency and potential impacts to borrowers.” Freddie Mac said it “regularly reviews insurance rating requirements to make sure they align with our policies.”
To illustrate the systemic risk they believe has been created in the system, the researchers told the story of the property insurer Magnolia Incorporated: It began its Florida operations in April 2008 with a financial stability rating of “A” (exceptional) from Demotech. Magnolia took over more than 100,000 policies that Citizens was getting off its books, disproportionately ones in coastal counties, the researchers found. Yet in April 2010 it failed and was liquidated.
I interviewed Joseph Petrelli, the president and a co-founder of Demotech, about the authors’ claims. He said that Demotech’s ratings methodology is as stringent as that of A.M. Best and others, based on a comparison of average cumulative impairment rates. He added that seven or eight insurers rated by Demotech that failed in 2021 and 2022 had been brought down by insurance opportunism, not financial vulnerability related to climate change. As for Magnolia, he said he relied for his rating on an unfulfilled assurance from a financial backer that the company would get a capital infusion.
According to Moody’s, the credit rating service, the insurers most exposed to Hurricane Milton were ones with at least three-quarters of their homeowner and commercial property premiums written in the state. But Petrelli said about half of the insurance industry nationally consists of companies that operate in one state or one line of business, and he doesn’t worry about the lack of diversification. “We believe in specialization,” he told me.
State regulators also expressed confidence. In a statement to me, the Florida Office of Insurance Regulation said the state “relies on a robust set of financial regulation tools in order to evaluate the companies in its market.” In a news release issued Thursday, the office noted that major insurers including State Farm, Progressive and USAA are expanding in the state. USAA was quoted as saying that it “is very encouraged to see the progress toward a healthy insurance marketplace in Florida.” That seemed to be mainly a reference to the anti-fraud legislation.
I agree that Florida has done a lot of things right, but it’s up against a big problem, which is global warming. A 2023 article in the journal Nature Climate Change found that homes in Florida were collectively overvalued by more than $50 billion because of unpriced flood risk.
Jeff Waters, the director for North American models at Moody’s, told me that the effects of Helene and Milton “are going to be talked about for quite some time.” He added, “If the Florida insurance market wasn’t on alert before, it very well should be.”
The Readers Write
It’s a tad pessimistic of you to say that the low quit rate indicates people are pessimistic about their chances of getting another job if they leave the one they’re in. It could be that after Covid, they are content to stay in their current job. Changing jobs is stressful. As for the low hiring rate: If the nation is at full employment, or close to it, and people aren’t quitting, where are you going to find those extra workers?
Erdwing Coronado
Ann Arbor, Mich.
If you’re in your late 50s or older and want to continue in a career-related job (i.e., not what you did in high school), the chance of getting a job is extremely low. Age bias is real.
V. Marissa Kjenstad
New Hope, Pa.
When I started work as a lowly scientific assistant at the U.K. Atomic Energy Authority’s Culham Center for Fusion Energy in 1962, it was thought that fusion reactors should be feasible within a decade. It’s nice to see private funding going into fusion research after more than 60 years of public funding. I doubt that it will be any more successful, though.
William Holman
Nepean, Ontario
As someone who worked as a foreign exchange analyst and international economist, I was always skeptical about the impact of exchange rate changes on trade flows. Many Latin American countries have weak currencies but very often run large trade and current account deficits.
Very often growth differentials are a greater determinant of trade imbalances than exchange rates. The United States has a growing trade deficit because its growth rate is outpacing that of many other major countries. To significantly reduce the trade deficit, the government would have to take significant steps to suppress domestic demand. The United States should prioritize exports, but it simply does not have the manufacturing capacity to substantially reduce the trade deficit.
Steven E. Cerier
Forest Hills, N.Y.
The dollar is the world’s reserve currency. The only way to earn these dollars is to sell goods and services to the United States, without any countervailing purchases of goods and services produced by the United States. The solution to this problem is to use a basket of currencies of major industrial nations to settle international trades. This would reduce the value of the dollar, which would improve the livelihood of workers who do not have college degrees and work in the manufacturing sector. It is the dissatisfaction of such workers that is principally responsible for the success of nihilistic political candidates such as Donald Trump.
S.K. Gupta
Metuchen, N.J.
Quote of the Day
“Money is like an iron ring we’ve put through our noses. We’ve forgotten that we designed it, and it’s now leading us around. I think it’s time to figure out where we want to go — in my opinion, toward sustainability and community — and then design a money system that gets us there.”
— Bernard Lietaer, quoted in “Beyond Greed and Scarcity” in Yes! A Journal of Positive Futures (Spring 1997)
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