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Why are Florida insurance premiums rising despite six hurricane-free years?

This week marked the end of hurricane season and six years without a direct hurricane hit for Florida. But many home insurance premiums in the state are still rising.

What gives?

"Insurers know the cycle won’t last and that the costs associated with a hurricane’s long tail require building up the reserves to pay those damages," according to the Insurance Information Institute, an insurance industry research and trade group.

Check out the graph above from the institute and you’ll see the profit on shareholders’ investment, called return on net worth, is higher in Florida most years than it is for the rest of the country. But the devastating storm seasons of 2004 and 2005 wiped out insurers’ reserves, triggering 183 percent and 53 percent decreases in profit during the two years.

insurersprofitchartsoutheast.jpgThat means the average profit on shareholders investment for insurers in Florida from 2000 to 2009 was 0.5 percent, while it was 4.7 percent for the rest of the country, according to the Institute.

It’s unclear how much the gap would narrow if you add 2010 and 2011. The federal government declared more than 85 major disasters this year, surpassing the previous annual record of 81 in 2010. None were in Florida.

Critics say Florida insurers could bolster their claims-paying reserves during hurricane-free years if they spent less of the premiums they collect on contractors, sometimes affiliated companies, to manage daily operations; if they lowered other overhead costs such as advertising; or issued smaller dividends.

While insurers were somewhat profitable in Florida over the ten years, that was not the case for some states such as Georgia, Alabama and Louisiana, according to the institute.

Still, the institute notes that more hurricanes strike Florida than any other state, a total of 110 storms since 1851 so insurance rates have to account for that.


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