When Insurers Exit (2023) [pdf]
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Real estate properties in Florida are increasingly at risk due to climate change.
Established insurers ran their numbers and noped out of Florida quickly.
New low-quality insurers came in and filled the vacuum.
Established rating agencies looked at the new low-quality insurers and came to the conclusion that they are trash.
New low-quality rating agencies came in and declared those new low-quality insurers to be a-ok.
Lenders, fearful of being left holding the bag (from climate losses that are likely to bring down the low-quality insurers), sold mortgages in Florida to Freddie Mac and Fannie May (i.e., the GSEs, which are financial institutions that purchase mortgages en masse and implicitly backed by the US Government).
Freddie Mac and Fannie May bought those mortgages because the properties are insured by (low-quality) insurers declared a-ok by (low-quality) rating agencies.
As is usually the case, the government will be left holding the bag.
(v2 was covid.)
Mortgage loan rates in Florida probably ought to be in double-digits.
Students (people) are more likely to suffer from climate change and will have to fight it during their lifetime than those new low-quality insurers will have ever to, regardless of who hold the bags.
Let the fuckers hold the bag and give a fighting chance to the people rather than building our economy on the back of debt ridden slaves.
The taxpayers, really. We’re going to pay for stupid decisions by politicians voted in by Florida people.
This is where the logic breaks down - lenders are selling these mortgages irrespective of any other conditions.
The only loans that aren’t sold are unsaleable investor and boutique loans. These wouldn’t be offered to normal borrowers in the first instance (since the loans of a normal borrower would be targeted for resale)
So, what’s the play? I have to assume there is some smart money who has identified a way of discharging the liabilities while still collecting pay, but how does it work?
It is really easy to make money from an irresponsible insurance company if customers have confidence in you. You take in a large amount of money from people insuring their stuff, invest it, make lots of money in the stock market, distribute the money back to the company owners as profit. Good times.
Then the highly predictable crisis that "nobody" predicted happens, the insurance company goes bankrupt, the customers get no payouts and the company owners don't really lose anything because they got their profits out years ago. Sucks to be a customer.
Under modern theory there is a Phase 3 where the government steps in to pay the insurance company extra money and keep them ticking over. It is an optional step and depends on political connections.
The basic idea is that insurance companies are paid to assume risk. But if, when the risk materialises, it turns out that the risk was actually held by the customers or government then it is a bit like the insurance company was making free money in the intervening period.
First, insurance boards by each state set the rules of the game, and one of the rules is to have an asset coverage ratio for the risk. Its effectively a sort of liquidity measure. Another one is minimum capital etc. Both are traditionally paid by the original owners.
So, in effect, if the insurer goes belly up owners do lose some of the capital, and owners cannot loot the assets, either. But I agree that overall it is the customer who is most short changed because although they will get a partial payout in a crisis, it wont match their expectation - most of the missing funds will be gone as you have explained.
To be fair last-resort bag-holder is one of government’s primary jobs right behind monopolizing violence.
* People hate saving money, money in our hand now must be spent now. Buying High and Selling Low is in our DNA, quite literally. Nobody wants to save a buck a day for a potential externality when they can spend that buck on something right here right now. Mandatory insurance forces people to save a buck (the monthly premium) for the potential externality, forcing people to Buy Low and Sell High.
* People want wealth, some moreso than others. The secret sauce? Being the middleman has the biggest revenue compared to effort. You are literally moving money from Person A to Person C, and you as Person B can take some of it. This is textbook rent seeking.
If you just want a TL;DR, here: People are shit.
Meanwhile, responsibly run solvent programs like the California FAIR Plan for fire insurance have to fund it all from premiums and can survive major fires no problem.
[1] https://en.wikipedia.org/wiki/National_Flood_Insurance_Progr...
At this point its probably cheaper for an acreage owner to build natural barriers to fire vs getting fire insurance.
First, you cannot talk about this issue without talking about the 2017 Florida State Supreme Court case Joyce v. National Federated [1]. Basically, this made it much easier for policyholder plaintiffs to recover costs in insurance litigation, sometimes punitively so. If a court deems a case to have been likely to succeed from the outset, it can award up to 2.5 lodestar costs for attorney fees.
This is well-intentioned. It should encourage insurers to settle rather than go to court but it had the opposite effect because of how rife Flroida is for roofing scams and insurance fraud [2]. Basically, dodgy companies would offer to inspect your roof, find a fault and then file a claim to replace the roof. Nothing was really done to curb this fraud and, because of Joyce, it was unprofitable to fight these cases.
This compounds to Florida accounting for 76% of homeowner's insurance lawsuits but only boasts 9% of claims [3].
Third, the current Florida government has shown no interest in actually tackling this problem. One bill in recent years simply gave insurers $1 billion [4] for really nothing in return.
Fourth, a lot of issues are mistakenly attributed to climate change. Take the coastal erosion in Cape Cod [5]. People like to say "climate change" (to be clear, I 100% believe in man-made climate change) but really it's just a longstanding trend of coastal erosion that probably has almost nothing to do with climate change.
[1]: https://www.propertyinsurancecoveragelaw.com/blog/court-reaf...
[2]: https://www.nbcnews.com/news/us-news/roofing-scams-florida-p...
[3]: https://www.roofingcontractor.com/articles/97786-what-you-sh...
[4]: https://floridaphoenix.com/2022/12/16/desantis-signs-billion...
[5]: https://www.independent.co.uk/climate-change/news/cape-cod-h...
> the true cause of energy inflation, which was Trump's 2020 OPEC deal for them to cut the global oil supply by 10%
Wow, I missed this [1].
[1] https://www.nytimes.com/2020/04/12/business/energy-environme...
Tort reform in Florida is a bandaid. The state-run insurer is creating serious market distortions by undercharging for the risk, accumulating very large proportions of the state homeowners insurance policies (since no one else will), and then offloading the policies to undercapitalized insurers while looking the other way about their poor financial condition. When Citizen's claims are in excess of its reserves, the legislature steps in and taxes the rest of the state to cover the shortfall. I'm guessing when the other insurers become insolvent, the shortfall is offload to the state guarantee fund (possibly on the taxpayers dime). This is all covered in the paper.
>> Using Florida as a case study, we show that traditional insurers are exiting high risk areas, and new lower quality insurers are entering and filling the gap. These new insurers service the riskiest areas, are less diversified, hold less capital, and 20 percent of them become insolvent. We trace their growth to a lax insurance regulatory environment.
>> We find that these new insurers would not meet [government-sponsored enterprise] eligibility thresholds if subjected to traditional rating agencies’ methodologies. We then examine the implications of these dynamics for mortgage markets. We show that lenders respond to the decline in insurance quality by selling a large portion of exposed loans to the GSEs.
As a former resident, this is comically on-brand for Florida (and granted, some other regulatory-captured states): allow business to do as it will, ignoring systemic problems, and then when the risk dice finally come up snake eyes exclaim "No one could have possibly seen this coming!"
If a big storm hits the insurers collapse, borrowers default and Fannie & Freddie have a mess on their hands. The only missing piece is a depository institution (or someone levered by one) with a bunch of Florida mortgages with Demotech-rated insurance, but I’m sure that’s squirreled away somewhere in Florida’s financial system. No doubt each of the small insurers, Demotech, and the mortgage originators will be incredibly sorry about the state of affairs, an apology they will have to regrettably deliver from a yacht moored off Saint Croix.
As viable, sound insurance is made unaffordable and inaccessible by radical increases in both costs and risks, jeopardizing the ability to buy or sell insured property at all, you can kick the can down the road and protect your next candidacy by quietly easing up on "sound". The catastrophic consequences won't come until later, but the underlying market gets to keep floating and stay liquid in the meantime. Whether it's in their long-term interests or not, voters want that, don't they?
Individual voters (who own property) would very much like to avoid any additional costs.
Aggregate all voters presumably don't feel great about the costs of subsequent bail-outs (especially considering states can't run deficits).