As of early October, Hurricane Ian has landed on the shores of Florida in the US, causing significant property damage in addition to the unfortunate loss of over 100 lives. Hurricane Ian is estimated to have caused USD$60 billion in private insured losses, placing it as the second largest catastrophe event after Hurricane Katrina. This has led to significant pressure on Florida’s home insurance market, which has already been exposed to affordability and sustainability issues.
This article will examine Florida’s position and compare it against the home insurance market in Australia, which has also experienced hardening conditions over the past years.
Issues facing Florida’s home insurance industry
Over the past decade, Florida’s home insurance market has experienced significant turbulence. Growing uncertainties toward the frequency and severity of natural catastrophes are exacerbated by untimely laws and court rulings, which incubate a growing litigious environment with significant costs for insurers. These led to questions of affordability as private market capacity decreases and premium rates continue to rise.
Compared to other US states, Florida’s cost of providing home cover is higher and such costs are also reflected through five consecutive years of underwriting losses. Given so, insurers are passing on their increasing expenses to policyholders that resulted in a 25-30% premium increase in 2020 alone. By 2021, Florida’s average insurance cost per property is USD$866 higher than other US states.
Such phenomenon is partially attributable to adverse public policies which encourage litigation and provide an environment for fraud. In particular, section 627.70132 of the Florida Statutes specifies that insureds have a three-year window to file a first notice of loss. Together with the decision on Sebo v. American Home Assurance Co 208 So. 3d 694, which had allowed damages from covered causes of loss to be combined with non-covered causes, Florida’s public policies unintentionally opened a floodgate for significant moral hazard. That is, homeowners are incentivised to defer maintenance and/or fixing damaged property until a future storm takes place, to claim on their insurance.
Furthermore, section 627.428 of the Florida Statutes requires insurers to bear full litigation costs if the claimant prevailed by USD$1, but not vice versa. This led to further moral hazards for both claimants and plaintiff lawyers, resulting in exponential increases in litigation frequency since 2016. Claims severity also continued to grow upon widened judicial discretion on damage awards in Joyce v. Federated Nat’l Ins. Co 228 So. 3d 1122. Extensive court rulings caused uncertainties for the insurers’ liability, which would contribute to premium increases and/or capacity reductions to compensate for such risks and superimposed inflation.
This is exacerbated by uncertainties in natural catastrophe exposures that increase with Florida’s population growth. Wider geospatial spread of residence and coastal developments render the modelling of windstorm risks a difficult task and add uncertainties to the insurers’ business models which involve home insurance. Moreover, there has been increasing storm activities in Florida, with USD$19.84 billion property losses from hurricanes in 2016 to 2018 and a further 28 storms, including 10 hurricanes, in 2020 across the US. The ongoing Hurricane Ian is yet another example of this phenomenon.
Insurer of last resort
Florida’s government has established a residual home insurer in 2002, which provides coverage of This entity is known as Citizens Property Insurance Corporation (‘Citizens’).
Citizens operates alongside private insurers, which are predominantly domestic to Florida, but also include several larger national players. Initially in 2004, Citizen’s market share was 15%, but has since reached a peak in 2011 with 1.47 million policies, or 23% of Florida’s entire home insurance market for wind coverage.
This trend did not fit well with Citizens’ role as the insurer of last resort, which is not to compete with private insurers, but rather fulfilling a social role to protect property owners who cannot otherwise afford insurance. As such, several exposure reduction programs were introduced to transfer policyholders back to the private market.
In 2019, Citizen’s policy count dropped topolicies to arrive at 4% of Florida’s market share. However, with the number of home insurers in Florida declining from 290 in 1995 to 165 in 2019, and an ever-increasing population, Citizen’s market exposure has again exceeded 1 million policyholders as of August 2022.
Despite its own issues with sustainability, Citizens has recently assumed additional responsibilities under the OIR Temporary Stabilization Agreement, which renders it a backup funding source for insurers whose financial stability ratings are downgraded. This means that if a weather event causes property damages, and the lower rated companies become insolvent, Citizens will pay for all claims above USD$500,000, whilst the Florida Insurance Guarantee Association (‘FIGA’) pays for anything up to USD$500,000.
Citizens will need to draw on its USD$6.7 billion surplus and USD$13.4 billion of reinsurance for such storm events. However, Citizens’ Spokesperson noted that if 1 million residents all claim for property damages after a storm, Citizens’ risk of loss would be USD$346 billion, far exceeding its capacity. This additional obligation significantly challenges Citizens’ already questionable sustainability through its primary role as Florida’s insurer of last resort.
Florida vs Australia’s home insurance market
As explained above, the combination of laws and court rulings in Florida saw unintended impacts on the home insurance industry. In comparison, Australia’s public policies are less in the foreground of the hardening market. For one, causation is much more restricted.
The NSW Court of Appeal ruled in Bakerland Pty Ltd v Coleridge  NSWCA 30 that claimants suffer no loss from catastrophic events if their property was already in poor condition beforehand and post-catastrophe costs to improve the damaged building cannot be recovered from the insurer if increases in property value exceeded that cost. Furthermore, there is a limitation period for home insurance claims, which was ruled to begin when the property damage occurs rather than when the insurer declines indemnity. This restricts the time window during which claims can be brought, as in the case of Globe Church Incorporated v Allianz Australia Insurance Ltd  NSWCA 27. There is also no equivalent legislation which specifies that only insurers shall bear full litigation costs as the losing party.
In Australia, courts have discretion to make costs orders on either party, and the amount may be determined by agreement between the parties or via formal cost assessments. Thus, the level of incentive or moral hazard to litigate property claims is much lower in Australia.
Nevertheless, there are lessons to be learnt from Florida because Australia does experience increasing uncertainties in weather events and natural catastrophes is the main contributor to affordability concerns in the home insurance market.
Since 2019, the Insurance Council has declared 11 extreme weather events (including floods and hurricanes) as natural catastrophes, with a total of AUD$13 billion being paid for losses arising therefrom. In 2021-2022 alone, the insurance industry has received 380,760 claims which total to AUD$6.41 billion in incurred loss. By 2050, extreme weather-related costs are expected to reach AUD$35.2 billion per year, especially in light of recent storms and flooding in NSW and Queensland. In the same period between , extreme weather events in Florida are estimated to have costed USD$5 to 10 billion (AUD$7.4 to 14.8 billion), most of which are severe storms and tropic cyclones.
In light of such increasing insurance dilemmas, governments from both jurisdictions have intervened in the catastrophe-related home insurance market. Florida’s insurer of last resort, which participates in the direct insurance market, has been discussed above.
The Australian intervention is in the reinsurance market, which is insurance that covers for risks faced by direct insurers. The cyclone reinsurance pool has commenced operations in July 2022. It operates across Australia, but predominantly targets cyclone-prone areas in northern Australia to improve insurance affordability. It is backed by an AUD$10 billion government guarantee, but in the long term, it is intended to be fully funded through premiums paid by insurers with household, residential strata and small business property policies, whose participation will be mandatory by the end of 2024.
Both approaches represent the governments’ effort to exert control over the affordability of property insurance in light of increasing uncertainties with extreme weather events and in the case of Florida, adverse public policies.
Evidently, the home insurance market in both Florida and Australia are facing challenges in terms of affordability, insurer sustainability as well as the role for governments to effectively intervene. This is definitely an area to watch out for as extreme weather events hit the shores of both jurisdictions, with Hurricane Ian continuing to cause damage in Florida and Australia experiencing heavy rainfalls over the past few months.
 Note: this is an aggregate figure, unadjusted for insured policies, due to accessibility of data.
 Fraker, G. (2021). Florida’s P&C Insurance Market: Spiralling Toward Collapse. Insurance Journal. p.5.
 Born, P., Cole, C., and Nyce, C. (2021). Citizens and the Florida Residential Property Market: How to Return to an Insurer of Last Resort. Journal of Insurance Regulation, 40(6). p.14.
 Insurance Council of Australia (2022). Insurance Catastrophe Resilience Report 2021-22. Insurance Council of Australia. p.8.
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