Home is where the heart is, but lately, it seems like it’s also where the costs are climbing. The sting of rising insurance premiums has become all too familiar for many homeowners. Since 2017, two of the six costliest hurricanes in history have hit Florida, including Hurricane Ian. The 2022 hurricane caused around $50 billion in insured losses and between $10 and $17 billion in uninsured flood losses. While these weather-related events significantly drive up insurance costs, other factors impact the state’s residents’ premiums. When the industry complains that claims have increased, it never adjusts its data for inflation or population, masking that adjusted claims have been stable for decades.
Understanding Property Insurance Rates
Property and casualty insurance is one of the nation’s most important but least understood industries. Every person and business in America needs insurance. The unique accounting practices of the property & casualty insurance industry allow companies to identify “losses” that are not losses at all. To an insurance company, “loss” is short for “incurred loss.” When a company has an “incurred loss,” this does not mean the insurer has paid out this money. This figure includes estimates of future claims that they know about (reserves) and claims they do not even know about yet, called “incurred but not reported” (IBNR). Some of these claims may not even exist, and others may take years for a payout. It is this figure that insurers file with state insurance departments when seeking rate hikes.
How Do Insurers Make Money- By Investing the Premiums You Pay
Modern insurance companies are financial institutions seeking to maximize profits, just like banks and savings and loans. While the underwriting process is the principal source of revenue for insurance carriers, the income from investing those premiums is the primary source of profits for the industry.
Insurance rates reflect conditions in the financial marketplace as well as the assessment of risk. When interest rates increase, investment income from premiums produces a high return. Under these conditions, insurance companies reduce their prices and solicit and underwrite more significant risks to attract capital for investment. However, when interest rates are low and investment yields are correspondingly reduced, the industry increases premiums to maintain profit. This is known as the “insurance cycle.”
Factors Driving Up Florida Home Insurance Rates:
Property Insurance Premiums in Florida are set to go up by as much as 40% in June.
Homeowners’ insurance premium rates have risen significantly nationwide since the pandemic. According to S&P Global Market Intelligence data, much of the increase can be attributed to supply-chain issues and labor shortages, which have driven up the cost of home repairs and replacement.
Another part of the reason is the steady trend of people moving into risk-prone areas such as coastal Florida or the hills of California and Colorado, which means more costly damage when extreme events occur.
The insurance industry inflates losses by manipulating its claim reserves at critical moments to justify rate hikes, particularly as it is trying to trigger a challenging market, as is likely happening today. Raising reserves raises rates and lowers tax liabilities at times of significant profits.
What You Can Do About It:
Seven out of ten Americans believe their insurance company will pay for the total cost of rebuilding from a natural disaster or fire and would reimburse them for the total replacement cost of personal belongings. However, insurance companies “cap” the amount they will pay for a total loss and deduct it for depreciation when assessing damage to personal belongings.
The insurance industry has trillions of dollars in assets, enjoys average profits of over $30 billion annually, and pays its CEOs more than any other industry. However, insurance companies still engage in dirty tricks and unethical behavior to further boost their bottom line.
Many people are reluctant to make claims on their home insurance, fearing their insurance company will raise their premiums or refuse to renew their policy. Do not give up. Insurance policies are filled with legal jargon and complex clauses that can be challenging for the average homeowner to decipher.
As lawyers specializing in Florida property insurance claims, we’ll review your policy, interpret its terms, and help you understand your rights and obligations under the contract. We can also identify any potential coverage gaps or exclusions that the insurance company may try to exploit.
“Tort Reform” Campaigns Exposed as Fraudulent: Studies Show Premium Rates Do Not Decrease
For most Americans who do not pay close attention to insurance markets, it is easy to be misled by this industry when it tries to justify rate hikes after years of stable or decreasing premiums. The insurance industry has publicly attempted to cover up its mismanaged underwriting and accounting practices by blaming lawyers, juries, and the legal system. Insurers hide data that could disprove their position, yet lawmakers never demand to see this data before stripping away victims’ rights.
Excessive payouts to insurers’ affiliate companies have been repeatedly cited for insolvencies. Still, little attention has been paid to this aspect of Florida’s insurance market: Insurance executives lined their pockets for years instead of operating responsibly and building adequate reserves.
In December 2022, Florida lawmakers responded to growing property insurance market instability by passing Senate Bill 2A, a package of insurance reforms. One major part was a change that discouraged policyholders from suing insurers. Previously, Florida law let insured individuals recover attorney fees if they secured any amount through litigation against their insurer.
The topic of tort reform, especially in Florida, is highly contentious and often involves complex debates around the legal and insurance systems. Tort reform campaigns typically argue that changes in the legal system, such as limiting the ability to sue or capping damages, will result in lower insurance premiums for consumers. However, multiple studies and analyses have shown that these reforms do not always lead to the promised decrease in premium rates, and in some cases, they may not benefit consumers at all.
The Cato Institute also found that if there is a problem with rising litigation costs, the problem does not track back to the plaintiff’s lawyers but to the hourly billing practices of insurance industry lawyers as a key reason why insurance litigation costs are rising.
Key Points Exposing Tort Reform Campaigns as Fraudulent
Lack of Evidence Linking Tort Reform to Lower Premiums:
- Research Findings: Multiple studies have shown no direct correlation between tort reform measures and reduced insurance premiums. For example, a Consumer Federation of America study found that insurance companies did not pass savings from reduced litigation costs onto consumers through lower premiums.
- State Comparisons: States that enacted strict tort reform laws did not consistently experience lower insurance premiums than states without such laws. This suggests that market conditions and risk assessments play a more significant role in determining premium rates.
Insurance Industry Profits Remain High:
- Profit Margins: The insurance industry enjoys substantial profit margins despite tort reform measures. This indicates that any savings from reduced legal costs are not transferred to consumers but retained by the companies as profit.
- CEO Compensation: Insurance company executives’ high salaries and bonuses highlight the industry’s profitability, casting doubt on the claim that tort reform is necessary to control costs.
Manipulation of Data and Public Perception:
- Misleading Campaigns: Tort reform advocates often use anecdotal evidence or isolated cases to create a narrative of a “litigation crisis,” suggesting an abundance of frivolous lawsuits driving up costs. However, comprehensive data analysis does not support this claim.
- Lobbying Efforts: Insurance companies and large corporations have invested heavily in lobbying for tort reform. These efforts often include spreading misinformation or exaggerated claims about the impact of lawsuits on insurance premiums and overall economic health.
Impact on Policyholders and Access to Justice:
- Reduced Compensation: Tort reform measures, such as caps on non-economic damages, often limit the compensation that victims of negligence can receive, which disproportionately affects those who suffer the most, such as individuals with severe injuries or those who face lifelong disabilities.
- Barrier to Legal Recourse: By limiting the potential recovery, tort reform can discourage attorneys from taking on legitimate cases, thus restricting access to justice for many individuals who have been wronged or injured due to someone else’s negligence.
Counterproductive Effects:
- Increased Costs in Other Areas: Some studies suggest that while tort reform might reduce the number of lawsuits, it can lead to an increase in other costs, such as medical expenses because without the threat of litigation, providers have less incentive to maintain high safety standards.
Academic and Legal Critiques:
Criticism from Scholars and Legal Experts: Legal scholars and academics have criticized tort reform as a “solution in search of a problem.” They argue that the so-called “litigation explosion” is a myth and that the legal system has mechanisms to weed out frivolous lawsuits without undermining legitimate claims.
Florida Political Leaders Blame an “Insurance Crisis” on Lawsuits, But the Evidence is Thin.
Conclusion: The Complex Reality of Tort Reform and Insurance Premiums
The promise of tort reform reducing insurance premiums in Florida has largely not been realized. While reducing litigation costs might seem straightforward to lower insurance premiums, the reality is far more complex. Insurance premiums are influenced by various factors beyond litigation, particularly in a high-risk state like Florida. Natural disaster risk, reinsurance costs, and market stability play a much more significant role in determining insurance rates.