Why This Senator Thinks Florida's Insurance Crisis Is Even Worse Than It Looks

For the past several years, the Florida home insurance crisis has been growing in scope and potential danger to the economy. Despite those concerns, Rhode Island Sen. Sheldon Whitehouse (D) argues that both the state and federal government may not fully understand the extent of the risk faced by the Sunshine State. He fears a combination of climate change-driven natural disasters and underfunded insurers could cause significant economic disruption in the coming years.

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Although the dangers are interconnected, natural disasters are the main factor driving the crisis. Florida's geography and topography have always put it at an elevated risk of extreme weather events such as hurricanes or tropical storms. It's a peninsula with very little high ground and a long coastline on the Atlantic Ocean and Gulf of Mexico. Climate scientists report that water surface temperatures for both bodies of water are dangerously high.

Many scientists believe those high-water surface temperatures are influenced by climate change. They also think those high-water surface temperatures make hurricanes or extreme weather events more powerful and frequent. This could explain why several powerful hurricanes have made landfall in Florida in the last four years.

 The total cost of hurricane damage can be in the billions. The climate around Florida has become so volatile that it no longer takes a hurricane to cause catastrophic damage. Last month, parts of Florida were deluged by one month's worth of rain in one day, causing millions of dollars in damages. The cost of covering disaster-related claims has led many insurers to decide that Florida isn't worth the risk.

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This is where Sen. Whitehouse's second concern comes from. During a speech on the Senate floor, Whitehouse referenced a case study by Harvard Business School Finance Professor Dr. Ishita Sen. The study's conclusions are alarming. According to Dr. Sen, the exodus of Florida insurers has been mainly led by larger, nationally recognized companies with significant financial resources.

Dr. Sen says the large carriers are being replaced mainly by smaller companies with fewer resources to cover the natural disasters Florida is at risk of suffering. Dr. Sen's study revealed another concern. According to her research, many small to medium-sized insurance companies writing policies in Florida have had their financial bona fides verified by a small, relatively unknown rating agency called Demotech.

However, Dr. Sen's research also showed that 20% of the insurance companies rated by Demotech between 1999 and 2022 have gone under. Whitehouse further notes that many policies written by Demotech-rated companies are insuring homes financed through Fannie Mae or Freddie Mac. Taxpayers could be responsible for the financial fallout if a natural disaster hits Florida and several Demotech-rated companies go under due to claims costs.

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Sen. Whitehouse believes the potential damage and risk from such a scenario is comparable to the financial crisis 2008. Even if Sen. Whitehouse is overestimating the threat, the risk is real. A financial crisis that is only half as bad as 2008 would have significant repercussions in America and worldwide.

NOAA estimates that Hurricane Idalia did $3.6 billion in damage to Florida, Georgia, and the Carolinas in 2023. Fannie Mae and Freddie Mac holding mortgages on thousands of destroyed homes in Florida after several "rated" insurers get bankrupted by the cost of claims or claims-related litigation is a scenario that is cause for concern.

The potential danger to Florida's home insurance market is significant and warrants attention.

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